It has long been recognized that independent board evaluations can – if done properly – provide real insights that can help boards improve their effectiveness. Over the last ten to fifteen years a growing and flourishing market has developed – in 2017/18 over thirty different board reviewers were used by FTSE 350 companies alone.
Questions are now being asked about whether independent evaluations are indeed being “done properly”. In a feedback statement following the ’Insolvency and Corporate Governance’ consultation paper last year, the Government reported concerns among investors and others about the alleged variable quality of independent board reviews in the listed sector.
The Government asked ICSA: The Governance Institute to review how the quality and effectiveness of board evaluations might be improved, and whether there was a need for some sort of code of practice.
The first phase of that review has now been completed, and we are currently consulting on our findings and on what, if any, action is needed. The consultation runs until 5 July, and we will be giving some early feedback on what we have heard at the ICSA’s annual conference, being held at Excel London on 9-10 July.
The consultation paper starts by asking what may seem an unnecessary question, which is “what is the purpose of an independent board evaluation?”. You might think the answer is obvious, but there are at least two schools of thought, which may have a different view of how well independent reviews are working.
The first view is that the purpose of evaluation is to inform a continual process of self-improvement, recognising that even the best boards are always work in progress. The second is that board evaluation should provide an objective assessment of whether the board is or is not effective, in either absolute or relative terms.
Under the UK Corporate Governance Code, listed companies are required to disclose information about the process and outcomes of their evaluation in their annual reports – requirements that were strengthened in the 2018 Code.
The self-improvement school of thought believes the purpose of disclosure is to reassure shareholders and others that the board is trying to carry out its responsibilities to the best of its ability; the other view is that disclosure should provide formal assurance about the current and future performance of the board and company.
The ICSA view – and the view of most members of the Steering Group that has been assisting us in the review – is that it would be dangerous to assume that the process of evaluation can ever result in a ‘100% effective’ board. Most of all this is dangerous for boards themselves if it leads them to become complacent. Equally, it would be dangerous for shareholders to assume that the findings of the evaluation can be relied on as some sort of guarantee or prediction of the board’s effectiveness in the future. Even the most robust evaluation is at best a snapshot of how the board performs at a particular point in time.
If the concerns about the effectiveness of independent board reviews are well-founded – and anecdotally it does seem that the quality is very variable – then ICSA is strongly of the view that they cannot be resolved by targeting the reviewers alone. Companies are as much, if not more, responsible for ensuring that the evaluation is robust, and they have the primary responsibility for making sure that necessary action is taken as a result.
In the consultation document we are therefore seeking views on a package of measures that, taken together with the enhanced provisions in the 2018 Code, might incentivise both service providers and boards to ensure that high standards are met.
The first part of the package might be a voluntary code of practice for the providers of independent board evaluation services, possibly supported by some form of accreditation and oversight. This code would cover the reviewers’ competence and capacity – in other words, can they demonstrate that they have the expertise and resources to undertake thorough board evaluations – and set standards of independence and integrity to which signatories would be expected to commit.
We are also consulting on whether to develop voluntary principles for listed companies to follow when engaging external reviewers to undertake board evaluations; and if more guidance for companies on disclosure would be useful in the light of the changes in the 2018 Code.
Nothing has been decided, and we are keen to hear from board reviewers, companies and investors. We would particularly appeal to ICSA members to share their experience and views. Company secretaries have a birds-eye view of boards in action and are often closely involved in the evaluation process. Your insights on the purpose of board evaluation and whether it is being met will be invaluable.
|Chris Hodge, ICSA Policy Advisor is speaking about how to improve board evaluation at the ICSA Annual Conference in July.|