Why board evaluations are not report cards

How a company evaluates its board has become an increasingly important process. Companies in developed countries have adopted this process as a norm but NZ private companies have been slow to move their feet on this. This column highlights how board assessments should be done.

Companies, and the boards that govern them, are facing increasingly complex challenges. These range from the rapid increase in technological innovation to dealing with the changing face of regulation (e.g. health & safety). To deal with these challenges, the need for an effective board of the highest quality has become even more important.

The board needs to provide leadership and oversight of the company within a framework of effective controls that enables risk to be assessed and managed. The board also needs to develop and promote their collective vision of the company’s purpose, its culture, and the behaviours they wish to promote in conducting their business. Central to this is the ability to challenge internal and external assumptions and ideas, and at the same time, work as a team.

Evaluation tool

Corporate boards today are expected to be more engaged, more knowledgeable and more effective than in the past. One tool that a growing number of boards are using to examine and improve their effectiveness is the board evaluation.

Annual board evaluations are the norm for boards in many countries, with nearly all listed companies in Canada, France, United Kingdom and United States conducting some sort of assessment each year. The practice is just starting to gain attention in New Zealand, where the issue of board effectiveness is gaining prominence on the corporate governance agenda. 

In the public sector for example, the board assessment is voluntary. On the other hand most public companies listed on the NZX conduct an annual board review. Rarely in the case of private companies.

Not just a mechanism to identify failures

Despite their growing adoption, board assessments are falling short of their promise of enhancing board effectiveness in some cases. Boards that take a compliance-oriented approach — or structure the process in a way that prevents a true examination of the impediments to board effectiveness — lose the opportunity to gain valuable shared insight into the operation of the board and ways to improve its composition, processes and relationships.

Board evaluation has been found to be an effective way to keep behaviours in check, both for the collective board and individual members. It is not a negative mechanism for identifying failings, but a positive tool to encourage development and further improvement. For instance, it provides the board with an opportunity to review the balance of skills, experience and diversity both of gender and perspective. Additionally, from a succession planning perspective, it provides the board with an opportunity to openly discuss whether the plans in place are adequate for the long-term success of the company. On top of these issues, it also allows the board to evaluate the processes of board support and decision making.

Confidentiality and poor disclosures

In my conversations with companies on corporate governance issues, I have found that most are concerned that they may reveal confidential information when reporting their evaluation outcomes. I believe that this, in part, is the reason the majority of companies use boiler-plate statements to describe their evaluation outcomes. These statements fail to provide a real insight into the board’s agenda looking forward or how the board is evolving and becoming more effective.

However, it is also possible that the poor disclosure reflects the poor average quality of current board evaluations. It is therefore imperative companies take the opportunity to prove their processes are robust, and to offer reporting that allows for engagement and communicates relevant insight into the operation of the board and its processes.

What useful disclosures look like

The most useful disclosures on evaluation are those that discuss the outcomes
in one year and follow up in the next years report. This year-on-year progression provides a meaningful assessment of the challenges the board faces as it evolves and provides an insight into how well the board is responding to those challenges over time. This allows shareholders to understand the board’s agenda for the year ahead. It is also a useful starting point in the engagement process for shareholders and the companies in which they invest.

The primary benefit of carrying out a Board Effectiveness Review is to improve the performance of the board and in turn improve the organisation's performance.  When done effectively, board evaluations provide a forum for directors to review and reinforce appropriate board and management roles and ensure that issues that may lie below the surface are identified and addressed promptly. In short, done properly, a board assessment is not a report card for the board as a whole or for individual directors. Instead, it should be viewed as a tool for continuous improvement and learning.

Henri Eliot is chief executive of Board Dynamics, a consultancy which provides strategic advice to directors and boards throughout New Zealand and Australia.