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Maximise the impact of board performance reviews

Changes to regulations on corporate governance in recent years mean that the boards of all FTSE 350 companies are now expected to conduct annual evaluation of their performance.

Our just-published study - Evaluating Board Effectiveness (March 2012) - indicates that boards are recognising the role of board reviews in assisting the drive for optimum performance, but that many of them are unclear as to what constitutes 'best practice' when conducting a review.

After a slow start, an increasing number of boards are opting to have their performance reviewed by independent external evaluators at least every three years, as recommended in the UK Corporate Governance Code 2010.

However, the relative youth of evaluation procedures, particularly external evaluation, means there's a shortage of information on how to conduct a board review to ensure maximum benefit. In short, if it's 'garbage in', it will be 'garbage out'. Our report - involving detailed interviews with chairmen, NEDs and board performance consultants - goes some way to addressing this issue.

The report includes a number of interesting findings:

  • One third of a sample 75 of the UK's largest companies had used external consultants in 2011; a marked increase on previous years.
  • Effectiveness can be improved even in well-performing boards -evaluation often reveals different perspectives on situations and facts of which chairmen were previously unaware.
  • Both internal and external evaluation have their uses.
  • Evaluating board dynamics and behaviour is the hardest part of an effectiveness review, but offers the greatest potential for improvement.
  • External rather than internal evaluation is more likely to be successful where a board is not functioning well, particularly where a board members' behaviour is the root of the problem.
  • There was no general agreement on whether board performance could or should be linked to company performance.
  • The quality of the reviewer, whether internal or external, is critical.

So how should boards approach evaluation and what is the best way to go about it?

In the early days, such exercises tended to concentrate on the low hanging fruit - tweaking processes, procedures and structures. But other less tangible aspects of the board's operation have a greater impact on its performance.

These include how well the board provides leadership and makes decisions, whether its composition provides the most effective mix of capabilities and experience and, crucially, whether board dynamics and behaviour are working to best effect. It is here that the independence and objectivity of an external consultant is most useful, as board members are more likely to speak frankly to an experienced, but disinterested, outsider.

Given the early stages of the evaluation market, it is arguably too soon to identify best practice, but a number of principles have emerged:

  • The evaluation exercise, including scope and process, should be led by the chairman and supported and understood by the whole board from the outset.
  • It should be seen as a means of making real improvements in board effectiveness, not just as part of compliance or an opportunity to benchmark.
  • It should be designed to fit the company's particular identity and focus on current performance and future needs.
  • It should cover both collective and individual effectiveness and address behavioural issues as well as process and procedure.
  • One-to-one interviews are the most effective way to extract quality information and should be kept anonymous to encourage board members to talk freely.
  • Crucially, the evaluation process should include feedback and debate by the whole board and lead to an action plan with periodic follow-up. Without this, change will not happen.

Finally, observation at board and committee meetings will provide valuable understanding of how the board makes decisions and challenges management, and how members interact and communicate both among themselves and with other stakeholders.

In all this, the independence and integrity of the evaluator is fundamental. Companies need to have confidence that outside agencies will treat all information arising from the evaluation as confidential. In addition, the FRC has stressed the need to avoid conflicts of interest in the appointment of external consultants. The use of a truly independent external evaluator should also offer reassurance to shareholders that the review has been carried out objectively and thus presents a true picture of the board's performance.

Helen Pitcher (pictured), chief executive of board effectiveness consultancy IDDAS