Feature: Putting the board under the microscope

Evaluations are much more than an exercise in compliance. They help the board to improve continuously. Domini Stuart reports on how to get the most out of your review.

The ASX Corporate Governance Council recommends that listed entities should periodically evaluate the performance of the board, its committees and individual directors. Some boards simply look for the cheapest and least-intrusive review package, tick the box and forget about it for another year. But good boards know that an evaluation is much more than an exercise in compliance.

“A team of high-performing directors, high-functioning committees and boards is central to effective corporate governance,” says Jane Stuchberry MAICD, principal of consulting and information services firm Guerdon Associates.

“Candid feedback gathered through an effective board evaluation process is a powerful way of strengthening the board’s performance.”

Regular board evaluations can help to reassure stakeholders, and particularly shareholders, that the board is committed to continuous improvement.

Robert Gordon GAICD, director of programs at corporate consultancy firm Board Accord, also believes board evaluations can build leadership capability.

“Today’s world of complexity, uncertainty, volatility and disruptive change has led Harvard’s Robert Kegan to suggest that leadership worldwide ‘is in over our heads’,” he says.

“A staggering 75 per cent of employees who took part in a Melbourne University Centre for Workplace Leadership survey found that Australian workplaces need better managers and leaders. Clearly leadership development should be a significant component of a board review.”

Choosing the right type of evaluation

The choice of evaluation and what exactly is assessed should be tailored to the board’s circumstances. “There are certain core elements that form the basis of most evaluations, such as the appropriateness of existing board size and composition, board dynamics, quality of information the board receives, how board meetings are conducted and the nature of board deliberations and decision-making,” says Mark Blair GAICD, manager, governance analysis and board reviews at Company Directors.

“However, evaluations can vary in terms of their complexity and the balance between self-assessment and external evaluation, whether they’re written and verbal, whether there is structured questioning or informal discussion and whether an online survey tool is used.”

Evaluations often take place alongside individual director performance evaluations and sometimes as part of a broader governance review.

“Company Directors, for instance, offers the Governance Analysis Tool, an online self-assessment tool that can either be used as the basis for a board review or a broader governance review,” says Blair.

“In terms of timing, some organisations opt to have a formal board evaluation or wider governance review every two or three years and, in the interim, may conduct board committee evaluations or skills/experience audits.”

Gordon recommends a balance of qualitative and quantitative parameters, online assessment metrics and personal interviews.

“The diagnostic tools should be forensic, concise and user-friendly,” he says. “Leaders don’t want to be bogged down in ‘analysis paralysis’.”

He also believes that the chairman, the CEO and anyone else who actively participates in board meetings should be included in the review.

“The evaluation requires buy-in from all who are involved but, most importantly, it needs the leadership team to set an example by embracing the process, confronting the outcomes and implementing the recommendations,” he says.

Objectivity

Sometimes, a disgruntled CEO will initiate a board review. “A CEO who is concerned about
an under-performing or dysfunctional board might suggest a review in the hope that the directors will glean some insights,” says Steven Cole FAICD, non-executive director of Matrix Composites & Engineering and managing director of the consultancy Cole Corporate.

Some company secretaries instigate the process, but more commonly, it is done by the chairman, although this can be a problem if the evaluation is critical of his or her performance.

“I’ve experienced the cancellation of a board review by the company because the chairman refused to continue in the face of criticism,” says Cole.

“The situation would be even more difficult to navigate where the review was an internal process.”

For directors, a review can be a welcome opportunity to speak out.

“Some chairmen say that the directors can speak up any time they like but, in a group situation, they often don’t,” says Cole.

“And, of course, they’re far more likely to be frank if they’re sure they’re speaking in confidence. It’s easy not to put names to the comments, but a good facilitator will endeavour to ensure that a particular voice can’t be recognised by the rest of the board.”

It can be a challenge to find a balance between staying constructive and the need to put what could be sensitive issues on the table.

“When you commit to this process, you
have to accept that you might hear things you don’t agree with and you need to be mature in dealing with that,” says Cole.

“There’s nothing wrong with a certain level of disagreement – if an evaluation showed that the board was very closely aligned you would have to suspect groupthink.

“However, too many diverse and opposing opinions make it very difficult to reach consensus. And it’s important to be aware that a poorly-handled review can actually aggravate this situation by polarising views and increasing factionalism.”

Gordon suggests that the cultural dynamic of the boardroom is challenging, often poorly understood and a major causative factor of unaligned or dysfunctional boards.

“We’re seeing increasing recognition of the importance of emotional intelligence (EQ) and psychological and behavioural typologies,” he says. “In response to this, Board Accord has incorporated a Sociometric Network Analysis into our evaluations to profile interpersonal dynamics around the table and inform one-on-one coaching to realign directors and management.”

What do you do with the results?

Evaluation professionals often hear that the quality of information directors receive from management, the composition of the board and the lack of a regular and properly structured board review or evaluation process are in need of improvement.

“Another common concern is that there’s not enough follow-up to previous board reviews,” says Blair.

“This is where most board evaluations fall down,” says Gordon.

“The follow-up is just as important as the evaluation, but too often the board either sees the evaluation process as a box-ticking exercise or considers itself to be too busy to engage seriously with the recommendations. We only work with boards that commit to engaging with the recommendations.”

Stuchberry believes that boards will benefit from holding a planning workshop to discuss the results and then developing an action plan to address key issues identified in the review.

“An external facilitator can be of great help in discussing the results and resolving issues,” she says. “Sensitive issues, such as board renewal or the relationship between the CEO and the chairman, are best handled one-on-one rather than in a whole-of-board forum. It is also important that the chairman meets with the executive team to provide feedback on decisions made by the board at the planning workshop.”

What should be disclosed to external stakeholders is a murkier issue.

“The ASX Corporate Governance Council recently introduced guidance which says that when disclosing whether a performance evaluation has taken place, a listed entity should, where appropriate, also disclose any insights it has gained from the evaluation and any governance changes it has made as a result,” says Blair.

“This needs to be assessed on a case-by-case basis. On the one hand, disclosing evaluation outcomes and resultant actions can help to give external stakeholders a line of sight into board performance but, on the other hand, sensitive issues may well arise during evaluations. Disclosure of all evaluation outcomes and actions may be counterproductive in that it could cause boards to be more ‘sanitised’ in their findings.”

Grey areas

Anyone looking to a board evaluation for a quick fix will be disappointed.
“The intention is to affirm what’s working, identify where the challenges lie and plot and support continuous improvement of personnel and processes,” says Gordon. “A genuine evaluation will challenge individuals, like elite athletes, to reflect seriously on their current performance and how it might improve.”

Getting the most from a review

Guerdon Associates’ Jane Stuchberry says a review should:

• Be customised to focus on each board’s specific issues.
• Use confidential, off-the-record conversations with both directors and management to flush out the most important issues.
• Ensure that sensitive issues are handled appropriately.
• Use continuous assessment rather than a snapshot of a particular point in time. 
• Result in an action plan which addresses key issues and barriers to effectiveness
• Ensure the actions and outcomes agreed by the board are also communicated to the senior executive team.
• Company Directors’ Mark Blair warns that the following could cause reviews to break down:
• Lack of interest or commitment from directors.
• Unwillingness to address constructive feedback.
• Lack of trust among board members.
• The wrong set of questions.
• Getting caught up in the minutiae.
• Jumping into an external evaluation when a guided self-assessment might be a better place to start.
• The wrong choice of external consultant.
• Failure to convert agreed outcomes into actions.