Evaluation of the board of directors: challenges and trends
Traditionally the board of directors is seen as a the pivotal organ in corporate governance and from the beginning, an evaluation of its functioning is included in the recommendations. The basic idea being that if you dedicate a role and entrust responsibilities, one should also assess on whether these are fulfilled properly.
Also in our own corporate governance codes, the Belgian Corporate Governance Code for Listed Companies (2009) and the Belgian Corporate Governance Code for Non-Listed Companies (Code Buysse III, 2017) a regular assessment of the board of directors is seen as a corner stone for a professional and efficient functioning. Whereas the codes do rely on a comply and explain principle, the mandatory obligation of evaluation is stricter in the financial sector cf. the Bank Act.
Trends and lessons learned in board evaluation
GUBERNA has developed its own unique Board Effectiveness tool and over the years built up experience in carrying out board evaluations. Both from academic literature and our observations in the field we see the following evolutions:
1. From ‘threshold’ to ‘investment in trust building’
Whereas board evaluation initially was a threshold for many decision makers and sometimes even seen as a threat, many boards have recognized that it is a very useful instrument that holds a mirror for introspection, gives room for expression of (individual) ideas and insights, helps to canalise emotions and detect potential hurdles. Next to the concrete actions for improvement that result from the exercise, a board evaluation is a collective effort of a group lifting itself to a higher level and functions as an effective investment in trust building towards all parties involved.
2. From ‘checking the box’ to ‘agile strategic trump’
Whereas board evaluation initially was focused on curtailing agency problems from a control perspective, in the actual quickly evolving business climate characterized by uncertainties, much more focus is on the added value the board can bring. Agile environments do need a more agile governance. This has an impact on the board profiles needed, the terms of the mandates and the concrete functioning and decision making of the board. Every individual board member is expected to add value to the board.
3. From ‘board members only’ to ‘management inclusiveness’
Whereas a board evaluation was initially a pure board matter, more and more boards do actively seek the view of the management on their added value. A recent Harvard study on International Practice of Board Evaluation (November 2018) points out that “innovative companies have integrated a diverse range of individuals on their boards in the expectation that they will work in collaboration with the board’s CEO and other senior managers in developing new business strategies. These directors can help a firm stay relevant via the inclusion of diverse perspectives.“
“A well-balanced board can be a competitive advantage for a company looking to create value and build its capacity for delivering innovation”. (‘Board Evaluation: International Practice’, Harvard Law School Forum on Corporate Governance, November 2018)
A board of directors is effective when it delivers value to the organisation. In the coming years, we expect board evaluation to become a vital tool to maximise the potential and ensure the relevance of the company.
What are the building blocks of an effective board evaluation?
A board of directors is effective when it delivers added value to the organisation. A board evaluation is merely an exercise for optimising and canalising the energy of a board of directors.
The “how” includes all ingredients of an effective board of directors. Important herewith is that the board evaluation is not limited to a number of structural ‘usual suspect’ components such as the composition, information, committees etc. Equal attention has to be given to more ‘behavioural’ and/or ‘soft’ elements such as board dynamics, board member behaviour, decision-making (conflicts of interest). Also task division between the board and the management (doing things right and doing the right things) and the role of the chairman are key components. An effective board evaluation carries out a “gap”-analysis between “what is” and “what should be”, taking into account the ambitions, strategic objectives and the life-cycle of the company.
Put like this, it is obvious that, you can not apply a ‘one size fits all’ approach. The more it is tailored to the specific needs and challenges of the company and the board, the more effective the board evaluation will be.
It is clear that board evaluations which include individual interviews are a far more important time investment, but the implication of the board members and the quality of the findings are of a proportionate higher level than exercises which consist solely of a written questionnaire.
Finally, it goes without saying that the quality of the board evaluation is highly correlated to the quality of the executor. The robustness of the evaluation framework and the methodology, as well as the circumspection in the interpretation and analysis of the findings are key. Having the board evaluation carried out by a professional external party objectifies the exercise and helps to save time. A quality service provider is trained to avoid biases, is able to provide benchmarks and upholds discretion as a key value in the process. Board evaluations carried out by an external party are a strong signal to the internal and external stakeholders of the organisation that the process is taken seriously
Carried out on a regular basis, a board evaluation becomes a true instrument for continuous improvement at the highest level, ranging from collecting the low hanging fruit, over the introduction of incremental improvements, to radical changes.
