Spoken Word

  • Date:01 Sep 2007
  • Type:CompanyDirectorMagazine
John Story provides some tips on how to get the most out of a board evaluation.

How to test your board


Performance evaluation is no longer a controversial issue and it is regarded as standard practice. The science of performance evaluation has also evolved and the process should no longer be seen as confronting or threatening. We all appreciate recognition and praise when we have done well. We may find criticism difficult, but generally we recognise the need to identify the areas where we could do better, to understand how we might improve in those areas and to accept help along the way. I believe that we do recognise that effective performance evaluation is a constructive exercise that we all may profit by.

The board is accountable to the shareholders. In theory, the annual general meeting is the event that provides the opportunity for the shareholders to evaluate the performance of the board. The chairman’s address represents the base statement of the board’s performance, with shareholders provided the opportunity to interrogate and assess the board. Individual directors may be seen as being separately assessed pursuant to the process of re-election by rotation. In practice, of course, the annual general meeting is a very blunt instrument to apply to such a complex and nuanced task and it is entirely inadequate for the purpose.

The reality, therefore, is that the board of a listed company is in the unusual position in which substantive and effective evaluation of its performance is a process which only the board itself can undertake. In these circumstances, therefore, it is incumbent upon a board that this process, which it initiates, should be rigorous, demanding and ultimately effective. Equally importantly, the board should be in the position to demonstrate to its shareholders that this is the case and it should, as a matter of course, report to its shareholders about the evaluation mechanisms that are followed and attest to their integrity. For a number of reasons, disclosure of individual score cards would not be a constructive exercise, but it is accepted that a director standing for re-election by rotation should be supported by the board’s endorsement based upon a rigorous evaluation process.

Review of the board

There are two components to a board evaluation – firstly, a review of the performance of the board and secondly, a review of the performance of each member of the board including, of course, the chairman.

In my experience, the involvement of an effective external facilitator will provide a level of rigour and integrity that is not necessarily present when a review is done internally. Also, the wider the range of feedback that can be introduced into the process, the more effective it will be. In particular, where the extent of interface between the board and senior management is sufficient to justify it, the contribution of the views of management is extraordinarily valuable.

The objective of evaluation is to improve the performance of the board, upon the assumption, which I trust is not misplaced, that there is a relationship between the performance of the board and the performance of the company.

In a good company, the functioning of the board will be characterised by a mutual respect of views, a willingness to express strong views combined with a willingness to consider other views and to move with collegiality to a consensus position. The board’s debate may be characterised by passion, but not at the expense of reason. All of this should be based upon transparency, honesty and accountability. If that prevails in the board, there is a fair chance that it will flow through to the company.

An assessment of the board culture is therefore an essential part of the evaluation. In summary, I would see the core issues to be evaluated as those relating to the development of strategy, the oversight of operational performance, the effectiveness of the decision making processes and the development of the right board culture. I am not saying that this list is exhaustive. There is no doubt that the board’s exercise of its responsibility with respect to many other matters such as compliance and the management of risk must also be covered and in our highly regulated environment I would not wish to detract from their significance. If, however, you are focussed on board performance as it affects company performance, I would regard my core issues as fundamental.

Individual director review

The evaluation process should incorporate a performance review of each individual director. This should not necessarily be seen as either confronting or threatening, but should be structured on a constructive basis. In the case of major listed companies, it is reasonable to expect that those who have made it to the board should not, by any stretch of the imagination, be regarded as bunnies, but there are still some very relevant questions to ask:

  • Is the director able and willing to speak out?
  • Has the individual director demonstrated that they have done their homework and are well and truly across the issues in advance of the board meeting?
  • Does an individual director have too many bright ideas and is he or she too eager to seek the limelight at the expense of the efficiency of the board meeting?
  • Is the director too dogmatic, too fixed on their views and too reluctant to move to a consensus position?
  • Is the individual director too focussed on the minutia and too anxious to engage in micro-management, in each case at the expense of the broader conceptual issues?
  • Is the individual director too compliant, too comfortable with management and missing that spirit of challenge that is the underlying characteristic of a director who is truly independent of mind?

Again, those questions are indicative and not exhaustive. The outcome should be a fair and balanced appraisal of each individual, stressing the strengths but indicating the areas for improvement and added focus.

Implementation of the review

My hope is that if the evaluation is a review that is genuinely focussed on the substance of what constitutes good performance of both the board as a whole and of each individual director, the outcome itself will be a report of substance, that focuses on the strengths but identifies the weaknesses, in a constructive and positive manner. The production of the report, however, is not the end game. The evaluation process is not undertaken simply to engender a warm feeling that the board is doing a terrific job. It is about improvement, whether that is improvement of an incremental nature or, in some cases, of major dimension. It is the clear responsibility of the chairman to receive the report, to communicate openly and transparently as to the outcomes and thereafter to work with the board as a whole and with each individual director to implement the recommendations.

This may, of course, be easier said than done. There are instances where the evaluation process may come up with the conclusion that the continued presence of a director, for whatever reason, is incompatible with the effective functioning of the board, or that the demands of the position are simply beyond the range of skills and experience of the director. In all probability that conclusion will come as no surprise, but the benefit of the evaluation process is that it formalises that conclusion in such a way that it must be addressed.

These circumstances are not easy and some feel inhibited by the absence of a formal power on the part of the chairman to hire and fire. It may, perhaps, be my experience as a partner of a professional firm where the formal procedures of expulsion are rarely, if ever, used whereas the moral forces of persuasion are often exercised. But I do not see the absence of formal powers as such an inhibiting factor.

The chairman does speak with considerable authority and must be prepared to exercise that authority. If issues are addressed with fairness, transparency and on a basis of respect, it is remarkable what can be achieved.

Risks

An effective board operates on a basis of collegiality, collegiality that accommodates divergent views and the resolution of that divergence by constructive debate. Mutual respect is essential. Evaluation that is badly handled has the potential to destroy that collegiality. The need for both chairman and the external facilitator to address difficult issues with sensitivity is paramount. That does not, of course, mean that the difficult issues should not be addressed, but the risks should be recognised and accommodated.

The other risk is not to address the issue of the chairman. If a board is not functioning well, the problem most likely will be the chairman. It is always desirable to have a senior director, perhaps the chairman of the audit committee, designated in advance, as the person to communicate and review the outcome of the chairman’s evaluation. That increases the likelihood of coming to grips with the real issues.

This is an edited version of a speech given at a recent AICD luncheon in Sydney.


How to improve your board’s performance

AICD’S guide Evaluating Board Performance - A Guide for Company Directors provides information on how to report on the evaluation in a way that gives assurance to shareholders and investors that appropriate processes are in place which are consistent with good corporate governance. The book can be obtained from the bookshop at: www.companydirectors.com.au
Also refer to Board Evaluation Connect under Member Services on AICD’s website.


John Story is chairman of AICD and Suncorp-Metway.