Boards can benefit greatly from evaluation
Companies, and the boards that govern them, are facing increasingly complex challenges. These range from the rapid increase in technological innovation to dealing with the changing face of regulation following the global financial crisis.
To deal with these challenges, the need for an effective board of the highest quality has become even more important.
The board needs to provide leadership and oversight of the company within a framework of effective controls that enables risk to be assessed and managed.
The board also needs to develop and promote its collective vision of the company's purpose, its culture, and the behaviours it wishes to promote in conducting its business. Central to this is the ability to challenge internal and external assumptions and ideas, and at the same time, work as a team.
Corporate boards today are expected to be more engaged, more knowledgeable and more effective than in the past.
One tool that a growing number of boards are using to examine and improve their effectiveness is the board evaluation. Annual board evaluations are the norm for boards in many countries, with nearly all listed companies in Canada, France, Britain and United States conducting some sort of assessment each year.
The practice is just starting to gain attention in New Zealand, where the issue of board effectiveness is moving up on the corporate governance agenda.
In the public sector, for example, the board assessment is voluntary, according to the Crown Ownership Monitoring Unit (COMU) in Wellington, which is responsible for monitoring the performance of about 60 state-owned enterprise boards. On the other hand, most public companies listed on the NZX conduct an annual board review. This rarely happens in private companies.
Despite their growing adoption, in some cases board assessments are falling short of delivering enhanced board effectiveness.
Boards that take a compliance-oriented approach - or structure the process in a way that prevents a true examination of the impediments to board effectiveness - lose the opportunity to gain valuable shared insight into the operation of the board and ways to improve its composition, processes and relationships.
Board evaluation has been found to be an effective way to keep behaviours in check both for the collective board and individual members. It is not a negative mechanism for identifying failings, but a positive tool to encourage development and further improvement. For instance, it provides the board with an opportunity to review the balance of skills, experience and diversity both of gender and perspective.
Additionally, from a succession planning perspective, it provides the board with an opportunity to openly discuss whether the plans in place are adequate for the long-term success of the company.
On top of these issues, it also allows the board to evaluate the processes of board support and decision-making.
In my conversations with companies on corporate governance issues, I have found that most are concerned that they may reveal confidential information when reporting their evaluation outcomes. I believe that this, in part, is the reason the majority of companies use boiler-plate statements to describe their evaluation outcomes. These statements fail to provide a real insight into the board's agenda looking forward or how the board is evolving and becoming more effective.
However, it is also possible that the poor disclosure reflects the poor average quality of current board evaluations. It is therefore imperative companies take the opportunity to prove their processes are robust and to offer reporting that allows for engagement and communicates relevant insight into the operation of the board and its processes.
The most useful disclosures on evaluation are those that discuss the outcomes in one year and follow up in the next year's report.
This year-on-year progression provides a meaningful assessment of the challenges the board faces as it evolves and provides an insight into how well the board is responding to those challenges over time. This allows shareholders to understand the board's agenda for the year ahead.
Henri Eliot is chief executive of Board Dynamics, a consultancy which provides strategic advice to directors and boards throughout New Zealand and Australia. email@example.com.
Sunday Star Times