Under the microscope

  • Date:01 Oct 2013
  • Type:Company Director Magazine
Domini Stuart provides some tips on how to maximise a board evaluation so that everyone walks away committed and uplifted, and the board’s future potential is maximised.

Every functional area of management requires planning, implementation and review. Yet, as recently as 10 or 15 years ago, reviews of the board were practically unheard of.

“It’s something of an irony that the most critical body of the company, its board of directors, isn’t always subject to the same process,” says Professor Thomas Clarke, director of the Centre for Corporate Governance at the University of Technology, Sydney.

Fortunately, things have changed.

“These days, this discrepancy is increasingly considered to be undermining confidence in the capacity and efficiency of boards,” continues Clarke. “We’re seeing an increasing inclination towards having board reviews, particularly among larger listed corporations. And, as they’re seen to contribute to higher-quality boards, the fear of evaluation is subsiding.”

Some directors may still believe their achievements speak for themselves; who could question the judgement of those at the proven peak of their powers? But their performance in the boardroom can be affected by factors beyond their skills, knowledge and experience. This is where feedback is critical.

“We know our contribution to different boards is not always equal,” says Lynn Ralph FAICD, a company director and co-founder of board evaluation firm CameronRalph Navigator.

“Our fellow directors, how they react to our personal style and what’s going on in the company at the time all have an effect. A review isn’t comparing you with some mythical ideal director, but assessing your input to a particular board at a particular time.”

A regular meeting is rarely the place to discuss sensitive or interpersonal issues.  A review provides time for these kinds of conversations as well as permission to be self-critical.

“Complex decision-making isn’t always easy in a group situation, but it’s one of the primary ways a board adds value,” continues Ralph. “A good review will examine the process and show how it could be improved. It can help to ensure the board is spending time on the right things. Many boards also use a review to ensure they have the right people around the table and a good succession plan in place. This is always a sensitive conversation and if you don’t have an agreed process, it won’t happen.”

While the review process may not necessarily be comfortable, Robert Gordon GAICD believes it should always leave the directors feeling reinvigorated, more purposeful, more committed and more capable.

“A good review will be a shared experience that re-energises the people around the table,” says Gordon, founder and director of programs at Board Accord. “That’s why it’s critical to get buy-in from all participants, for the process itself and for following up on the recommendations.”

The board should also collaborate on setting the focus and scope of the review.

“I always begin by asking why we are sitting around the table,” says Gordon. “When we can articulate our purpose and how we can set about achieving our goals, we can review the effectiveness of people, behaviour, processes and outcomes.” 

A common mistake is to treat a review as something to be endured for compliance purposes. 

“If you’re ticking a box for the sake of ticking a box, the review has already failed,” says Dr Vince Murdoch, leader of the board services practice at Egan Associates. “Reviews are less about compliance than making the most of the board’s potential.”

It’s also a mistake to disseminate the results without appropriate care. 

“Results can be discussed in a confidential session with the chairman, who then takes specific issues to the board or individuals,” says Murdoch. “They can be used to create a report that is tabled at a board meeting. They can also be used to create individual feedback reports for each director, including the chairman. But whatever method you use, you should never take a ‘gloves are off’ approach.

“It’s good to embrace change, but you must also remember a board is made up of highly intelligent, experienced and capable people. If feedback isn’t delivered with respect and sensitivity, it can create more problems than it solves by triggering ill will, infighting and dysfunction.”

John Barrington FAICD, chairman of Anglicare WA and managing director of Barrington Consulting Group, encourages directors to develop their own action plan to address the major issues.

“This ensures a higher level of understanding and commitment to change than if you simply present a set of recommendations,” he says.

Getting started
Leading a review is one of the accepted roles of the chairman, but not all do it and in some cases, the chairman is the problem.

“Company secretaries or even the CEO or another senior independent director can be good agents for prompting the chairman into action,” says Steven Cole FAICD, deputy chairman of Reed Resources.

Each review needs to be tailored to the size and nature of the organisation and should take the board’s experience of evaluation into account.

“A company will often start with an internal review completed by the chairman using a paper-based set of questions,” says Barrington. “From there, it might progress to a whole-of-board independent review and then a whole-of-board evaluation with individual director reviews. We recommend establishing a chairman-led steering committee to decide the most appropriate approach at that point in the board’s lifecycle.”

The effectiveness of an internal review can be hampered by a lack of specialised skills or inherent bias if, for example, the chairman speaks privately to each director.

“Many boards understand these limitations and regard an external review as a proactive governance activity,” says James Beck GAICD, managing director of Effective Governance. “Unfortunately, others wait until they have a crisis before they bring in an independent third party.”

An external facilitator with experience across many boards can be a useful source of advice and act as a mediator if conflict should arise. Directors are also more likely to speak candidly to someone from outside the organisation.

“There’s absolutely no question that people are more frank when they believe their input is genuinely confidential,” says Ralph.

But it’s not a question of “either/or”.

“A full evaluation can take some time and boards need the opportunity to implement the recommendations,” says Kerryn Newton FAICD, managing director of Directors Australia. “We believe that having an externally facilitated evaluation every second or third year with an internal evaluation in the interim years is a good approach.”

Online tools
At their most basic, online evaluation tools do no more than collect data, collate it and feed it back. Others, such as the Australian Institute of Company Directors’ Governance Analysis Tool (GAT) – created from the collective input of a cross-section of experienced directors – are far more sophisticated.

“One of the most important issues with online surveys is whether you’re asking questions just to get answers or whether they’re framed to include information on how you might improve,” says Cole, a recent client of GAT. “GAT was designed to be self-reflective, so it’s very efficient, very comprehensive and very educative at the same time. There’s an opportunity to provide comment and it’s the richness of the comments that provides much of the most valuable information. GAT also incorporates a facilitation process. When the responses have been analysed, a facilitator delivers the results to the whole board.”

There is always a danger that respondents to any survey have a distorted opinion of their abilities. While a thorough and expert analysis will usually expose any tendency towards self-delusion, this possibility strengthens the argument for
doing internal and external reviews over time. 

“From my board’s perspective, a self-reflective process can provide a greater depth of knowledge and perform a more educative function,” says Cole. “An external review can test the objectivity of the data.”

There’s a debate as to whether benchmarking can add value to a review. Some argue that every board is unique and therefore unable to be benchmarked.

Nicholas Barnett, CEO of Insync Surveys, believes benchmarking has the potential to enhance and expedite the process.

“We ask probing question about every aspect of board effectiveness and as they aren’t industry, size or sector specific, we can ask the same questions of every director,” he says. “Benchmarking the responses against more than a thousand others in our database gives us greater insight into their significance.

“For example, for a survey with a 1-7 scale, an average of 5.5 can be a good or a bad result depending on the question. When we ask whether a company has a comprehensive description of the chairman’s role, we find most directors in this country say ‘not really’. In this case, 5.5 is a good score; it’s in the top 20 percentile of companies ever asked that question. But when we ask whether the chairman has a high level of integrity, 5.5 would be in the bottom five percentile. While it sounds quite good, it indicates a very serious problem. By flushing out these kinds of issues, benchmarking helps us to get straight to the hot spots in our discussions and make more meaningful recommendations.”

Feedback from management
Good governance requires the board to oversee and work effectively with management. So should management have an opportunity to comment on how well they’re doing the job?

“Performance reviews of individuals often involve 360 degree feedback, so why shouldn’t a similar approach apply to board evaluations?” asks Newton. “Seeking the views of executives who regularly interact with the board can also bring out suggested improvements in a constructive and, if necessary, de-identified way.”

Not all have appropriate experience.

“General managers who present to the board once or twice a year may think they understand board operations. They don’t,” says Barrington. “If executives are going to make a valid contribution, they must be regularly interfacing with the board inside the boardroom and possibly with the chairman and other directors outside the boardroom when it’s ‘business as usual’ and also in times of heightened activity or crisis.”

Running the race
A poorly executed review can have wide-ranging consequences.

“In addition to causing discontent on the board being reviewed, it can have an effect on all  the other boards the directors sit on,” says Beck. “Another serious risk is that any recommendations for improvement will be ignored or agreed to and then left to gather dust as the board moves on to something else on its agenda.”

A review is a commitment to a process of continual improvement.

“The biggest mistake is seeing the results as the end of the exercise,” adds Cole. “At this stage, you’re no further than the starting blocks. You now know what you need to do but you still have to run the race.”

But, in the end, the most critical aspects of every review are integrity and discretion.

“If a board review isn’t done in accordance with the highest principles, its purpose is vitiated,” says Clarke.

Twitter: @DominiStuart

Questions to ask before starting a board review:

  • What are the aims and objectives of the appraisal?
  • Who will be evaluated?
  • What will be evaluated?
  • How will the evaluation be done?
  • Who will be asked for input?
  • What evaluation techniques will be used?
  • How frequently will evaluations be done?

Reviews of government boards

The benefits of a review apply to boards of all types and sizes. In government, for example, a good board review can sharpen governance, strategic direction and relationships with executives, all of which can help achieve better service outcomes.

“It’s a useful discipline where many boards seem to be born overnight for a very limited purpose,” says Ruth Shean FAICD, director general of the Department of Training and Workforce Development. “But during my 15 years as a government CEO, I have seen many reviews achieve nothing but a sense of false reassurance.”

Within government, the impetus for a review can come from many sources other than the chairman. 

“The minister of the day may wish for a review, the relevant Act may require a review or public comment might suggest the board needs some re-assessment,” says Shean. “Sometimes, the chairman and the CEO are of the view that the agency is progressing well, but the funding authorities may have a different opinion.”

One of the strongest indications that a review is needed is stakeholder or shareholder disquiet.

“An unhappy user base or membership points to a problem somewhere in the agency and a board review is an essential starting point for addressing concerns,” says Shean.

In 2007, while she was Commissioner for Public Sector Standards in Western Australia, Shean led the development of a good governance guide.

“This helped good agencies to see where and how they could become better agencies, but the biggest problems I saw were often of a much larger scale,” she says. “At the time, many of the major transgressions within the public sector didn’t require toolkits to identify them, but a sense of integrity and accountability.”