13 February 2015
People are more important than process for an effective board
In January 2003, the eponymous Higgs Review was published. It was commissioned in 2002 by the then Labour government to look into the role and the effectiveness of non-executive directors. In his letter to the Chancellor of the Exchequer and the Secretary of State for Trade and Industry, presented with the report, Derek Higgs wrote ‘when corporate strategies fail or governance lapses, attention rightly focuses on the contribution of the non-executive director’.
This statement invites us to question the role of the non-executive director (NED). He or she, together with colleagues, is part of a team – the board – which sits at the top of the organisational pyramid and is responsible for the success or failure of that company or body. Within that team, each member has a part to play. The better they perform their respective roles, the greater the overall success of the team.
The responsibility of the CEO is the day-to-day running of the company and the responsibility of the chairman is to run the board. This is pivotal in creating the conditions for overall and individual director effectiveness, both inside and outside the boardroom.
A chairman who has a strong relationship with the chief executive and the board members is a central element of an effective board. A culture of openness and constructive dialogue in an environment of trust and mutual respect is also a prerequisite. The chairman must endeavour to build a team that includes a blend of NEDs, who collectively have the skills, knowledge, independence, diversity and experience to deal effectively with issues.
The role of the NED is frequently described as having two principal components; monitoring executive activity and contributing to the development of strategy. For a NED to carry the role effectively, it needs his or her total commitment. A NED’s letter of appointment, which is a contract for services and not a contract of employment, should state clearly what is expected from them in terms of time commitment, duties, induction, site visits etc. Failure to do this thoroughly can result in misunderstandings.
Prior to the implementation of the revised Combined Code on Corporate Governance, for reporting years beginning on or after 1 November 2003, few UK companies had carried out an evaluation of the performance of their board, although the idea had been promulgated in the 1998 Hampel Report. The requirement to carry out evaluation was met with some resentment initially but has now become accepted. It is seen by the enlightened companies as a beneficial exercise and one that can, if conducted positively, improve performance.
Board evaluation breaks down into two basic areas – people factors and process factors. As people factors tend to be far more important of the two in establishing effectiveness, this is where the evaluation needs to concentrate. Consider whether the chairman is a good leader, too domineering and/or inclined to bully. Look at how the directors work as a team, if they all contribute and how committed and robust they are in making and adhering to difficult decisions. Are decisions reached by the whole board taking account of shareholders’ views? Evaluate whether the CEO engages constructively with the board and how much attention the executive pays to the views of all NEDs. Finally, examine the relationship between the company secretary and the board.
The responsibilities of directors, whether executive or non-executive, are becoming increasingly onerous with ever increasing regulation, particularly in the assessment and management of risk. In the unitary board structure, executive and non-executive directors share responsibility for the direction and control of the company. Evaluating their performance is best achieved by communicating face to face with the board members and asking them individually how they think they and their colleagues perform as a board in seven key areas:
Before conducting a board evaluation it is helpful to obtain the low down on the characters involved and to enquire if there are any particular sensitivities. The person from whom to seek this information is invariably the company secretary, who attends innumerable meetings and knows the players well. Also, it is important to seek the chairman’s view as to what he would like the evaluation to achieve – are there any areas of the board over which he may have some concerns or which are not working well?
Interviews, normally lasting about two hours with each board member, should take the form of a structured conversation. It is important that the meetings are not interrupted and are conducted in an appropriate environment – not in an airport lounge, area or restaurant. During the meeting, the evaluator can ask the director his or her views on a number of areas in each of the seven topics referred to above.
The evaluator needs to be able to gain the confidence of the board member early in the meeting, so that he or she can elicit good responses to each question. Should the board member express dissatisfaction with any area or process, the evaluator can probe further and invite the director to elaborate or suggest how the matter could be changed and/or improved. Of course the ability to go back for this second bite is not available when using a questionnaire. At the conclusion of the discussion on each of the seven sections, the board member is invited to give an indicative score on a scale of poor to excellent as to how he feels he and his colleagues perform as a board on that section.
Following the interview, the evaluator will type up his notes of the meeting, forward them to the board member asking him to amend them if necessary, sign them off as an accurate record of the discussion and return them. Once the evaluator has received all the notes, and they have been signed off, he can start to produce a draft report.
When the evaluator looks at all the notes collectively, the issues can become apparent. Invariably there will be a disagreement among directors on certain topics, some of them factual, which is a concern. A thorough, robust evaluation will highlight if there are any relationship issues between the executive directors and the NEDs. This could relate to commitment and contribution to the board and the level of challenge given to the executive. Consider whether there is a ‘them and us’ atmosphere or if the board is truly independent and cohesive. There are inevitably comments about the size of the board pack and the timings and number of meetings, not to mention the composition of the board.
The ICSA Board Evaluation team has, for some 12 years, used a process whereby two members work on each assignment, one as the evaluator, the other as the moderator. The evaluator passes his draft report to the moderator who critiques it before passing it to the client’s company secretary. We have found that the use of unattributed quotations in reports an invaluable way of getting a message across, as opposed to the evaluator appearing to criticise – something that one or two boards are reluctant to accept.
Reports should not be long and the recommendations for change constructive and supportive. It is surprising how often a chairman is unable to see – or deal with – something that may have been right under his nose and is apparent to board colleagues. The robust, thoughtful evaluation can be the catalyst for change but it needs to be presented tactfully, remembering that it deals with people. That is where the moderator is invaluable and two heads are always better than one.
Once the accuracy of the final draft has been agreed with the company secretary, a meeting is held with the chairman, attended by the company secretary, to give him an opportunity to consider the recommendations before the report goes to the board as a whole. The evaluator and moderator then attend the board meeting to present the report. This method ensures security as we are aware that some facilitators have been encouraged by a bullying chairman to redact unfavourable comments.
The aim of a good evaluator should be to help, not hinder the board, in its wish to improve its performance. The intent is also to leave the chairman and the company secretary with a set of constructive recommendations that will help bring that improvement about.
Geoffrey Shepheard is Head of ICSA Board Evaluation