13 December 2016 by Karl George
Comprehensive reviews of the board and corporate governance are essential
Undertaking board evaluation or appraisal and other reviews are cited in various codes of governance as being an essential part of best practice. The UK Corporate Governance Code recommends that boards should undertake formal and rigorous annual evaluations of its own performance, including committees and individual directors.
But how effective are appraisal processes? Do they really make a difference to performance of the board or is it just a tick-box exercise?
In theory, having well documented procedures for a governance review process allows an organisation to understand the skills that they have on the board. Setting and monitoring objectives for the board and its members ensure it is competent, confident to execute its duties and that it offers the right level of strategic oversight. Assessing board member skills and implementing an appraisal process could be some of the most important exercises that a board facilitates.
Although recognising that having these procedures in place is important, knowing how to undertake them or what good processes look like is essential for achieving successful outcomes. There are a number of pitfalls when examining standard appraisal and evaluation methods and processes.
Many organisations do not have documented procedures or policies around their appraisal process. This leads to haphazard and uncoordinated appraisals. Skills audit forms are often basic, requesting only confirmation of skills in common areas, but there is no evidence of experience to verify how the skill has or can be applied.
There is also an issue relating to cohesive deadlines with appropriate time constraints. These are often not agreed, resulting in drawn out and sometimes incomplete processes. Alongside this, forms and questions are frequently standardised and do not take into account the needs, culture or desired output of the organisation, rendering the findings irrelevant to moving it forward.
Boards are not always clear about what success looks like and what they expect the end result of the process to be – nor do they have tools for measurement.
If monitoring mechanisms are not implemented to ensure board members are completing the process at appropriate times in the review cycle, or if appraisals are implemented at short notice without proper preparation, they are not robust and become ineffective. The appraisals for the chair and chief executive must reflect the objectives set in the corporate plan so that assessments are based on the skills outlined in the respective role descriptions.
The solutions to any issue highlighted through the appraisal process can be generic and the support provided, if any, does not always meet the needs of individual members. Alongside this, boards do not or are unable to interpret the evidence from the appraisal process, nor do they seek outside professional advice and/or there are disagreements about what the evidence suggests.
Frequently, there is an issue as the appraisal report or action plan is not completed following an appraisal; therefore findings are not implemented. Finally, there is often no integration between appraisal results and training needs where personal development has been identified.
There are certain expectations of what is involved in a governance review. Boards should be made aware that they need to carry out an annual review of their governance, even if they think they are effective and operating efficiently. They should also have a comprehensive governance review – externally facilitated where possible – including a robust documentation review and board observation every two to three years.
An essential part of the appraisal process is the skills audit and a board observation. It is important to note, however, that although both are key elements of the review, they do not form a comprehensive board appraisal in themselves.
Undertake a preliminary document review that includes a brief discussion about the frequency and nature of board meetings and the size, expertise and composition of the board. The minutes and terms of reference for the board and committees should also be reviewed.
The review should consider the board agenda and papers submitted for board consideration with a view to determining the sufficiency of information in order to aid decision making and the balance of time spent on strategic matters. Non-executives are expected to undertake their role with due care, skill and diligence but to do so will need timely, accurate and comprehensive, though not too detailed, information.
To ensure your organisation is effectively governed, board members’ conduct in meetings and compliance with best practice must be looked at. To do this, a basic skills audit should be carried out and once complete, a more detailed review should be conducted to ensure that the core competences are in place and the diversity of background skills and experience is being utilised collectively by the board.
The evaluation should aim to tease out the ability of the board members to challenge appropriately with enough depth, without getting steeped in operational detail.
It is also at this stage that the board should be asked to consider how the information it receives and the format of agendas allows or hinders it to undertake its role effectively. The timing, attendance and frequency of board meetings should all be reviewed at this stage.
To determine how well an organisation is performing against governance criteria, it is useful to do a diagnostic review against the provisions of a suitable governance code. Identifying evidence to support compliance with the principles and provisions of the code, and highlighting any actions where the organisation could benefit from best practice would be useful.
The process of appraisal and evaluation should be planned well in advance. The board should outline the desired outcomes and how it will maximise the relatively limited time resources of board members when conducting the review.
The capacity, competence and performance of the board should also be determined. It must be considered whether the board is able to steer the organisation in the right direction and if it can put the brakes on when required. How resilient the organisation is to the internal and external influences on performance, sustainability and achievement of objectives should also be scrutinised.
Board members should have annual appraisals of their performance and the results used to ensure that they have collective feedback where training or development needs are identified in order to improve their performance.
Board members should also contribute to a robust appraisal of the performance of the rest of the board and committees. The discussion could be initiated with questionnaires, a workshop or a mixture of the two. It is important that the results of the discussion form an action plan that the board can work towards achieving.
The final stage of the governance review should also seek to get assurance that the board is carrying out its role effectively. An organisation may have all the right documentation, have regular meetings and be fully compliant with the codes of governance but a lack of assurance could leave them wanting.
The process should include a qualitative review of certain documentation. To get a feel for the content and decision-making processes, three or four sets of board minutes should be reviewed and there should be at least one board and one committee observation. In a three-year cycle, some element of stakeholder feedback would also be beneficial, as would tracking of the risk and corporate plans in relation to the attitudes, comprehension and behaviour of the board.
The steps highlighted above follow a framework to help guide the process of appraisal, evaluation and review. The framework contains three components: resources (documentation), competency (board composition, skills and development) and execution (board scrutiny and challenge). These are the compliance drivers. The essence of good corporate governance lies in the functioning of these three areas and therefore evaluation and appraisal of their workings will lead to more effective boards.
None of these functions can work alone and it is the collective attention to the compliance drivers of resources, competency and execution, coupled with attention to the performance drivers − i.e. transparency (open and integrated reporting), impact (measurement of sustainability, value for money and outcomes for stakeholders) and behaviour.
Behaviour is the most important performance driver. Positive boardroom behaviour can be the difference between a good and a high-performing board, yet poor boardroom behaviour can render a good board dysfunctional.