Elevating Your Board’s Performance through Board and Directors’ Assessments
– What should Board Chairs and Senior Independent Directors Consider?
We have almost always spoke of performance evaluations with regards to Management or more precisely Executive Management. Now the spotlight has shifted. The recently launched 2017 Malaysian Code on Corporate Governance requires boards to undertake a formal and objective annual evaluation to determine the effectiveness of (i) the Board, (ii) its committees and (iii) each individual director.
The Code leaves it to each company to determine how the assessment ought to be carried out. However, for large companies (defined as either those in the FTSE Bursa Malaysia Top 100 Index or with market capitalization above RM2 billion), independent experts should be engaged periodically to facilitate objective and candid board evaluation.
What makes a Board “Effective”?
While boards have the option of performing to the “bare minimum,” particularly in family run PLCs where non-executive directors, even if they have niche expertise, may second guess themselves for fear of asking questions that belie a lack of business operational knowledge or not wanting to “rock the boat”, doing so misses an opportunity to enhance performance and transform a good board into a great one. Here, boards would typically focus on compliance, ensuring that they are doing what is required in terms of legal and regulatory requirements.
An “effective board” on the other hand, works together dynamically and are deeply involved with company’s strategy setting process and strategy execution. Such boards are more results-oriented, and set annual and longer-term objectives in line with its strategy.
Even more “progressive” boards use performance evaluation tools to not only assess their own performance against defined criteria and identify areas of improvement — but also to benchmark their performance against leading practice.
What is involved in a Board evaluation?
In the past, board evaluations were relatively straightforward, looking at if board members had the right skills and experience. Today, high quality board evaluations have progressed to determine how effective board members are in working together as a collective whole as they fulfill their core responsibilities. This includes strategy design and execution, investment decisions, performance monitoring, risk oversight, succession planning and capital allocation.
Here are key elements of board effectiveness that Boards who desire to become “Progressive” should consider:
- Board Structure, Composition and Capabilities
- Boardroom Dynamics, Quality of Information Architecture,
- Interactions and communication with CEO and senior executives
- Succession planning with respect to Board and C-suite members
- Board’s activity and role in Strategy & Operations
- Oversight of robustness of financial reporting and disclosure
- Oversight of risk management and control functions
- Oversight of other governance related functions, e.g. Compliance, Ethics, Integrity, Whistleblowing mechanisms, etc.
Strategic benefits of a high quality Board evaluation
If the Board of an organization is high performing, the tone that it sets for Management often sets the pace and substance of its performance and operational excellence. A board evaluation done with candour (which often necessitates the use of external independent experts) and rigour therefore has wide substantive benefits. These include:
- Clear understanding of roles and competencies – at individual director level and the board as a whole. And ensuring that these are aligned with medium to long term corporate priorities and stakeholders’ major concerns
- Identifying changes to board composition to bring about fresh perspectives while retaining institutional knowledge. These may be particularly relevant for businesses with fast-paced changes in technology and regulations, business operations across multiple countries and other major risks
- How individual directors can strengthen their understanding of business operations, industry dynamics and inter-relationships, competitive threats, customer experience and people management practices
- Bolster succession planning by identifying gaps in the perspectives and specialized skills necessary to a company’s changing needs.
- Simple yet effective process improvements with regards to board preparation, communication and meeting management
- Having a clear annual calendar agenda which focuses on priority areas based on the company’s strategy, performance and key focus areas.
For public listed companies which either has or aims to attract institutional investors (which may include in the Malaysian context, the sizeable asset management industry), it should be appreciated that institutional investors are paying close attention to board effectiveness regardless of whether they are represented in the boardroom. These investors regard the quality of Boards as fundamental to its investment decisions and hence tend to view assessments as critical contributors to board and director effectiveness.
Board evaluations – Different approaches and considerations
Given the time spent by Boards on an evaluation, they should look to get most value from it. This is where real, meaningful evaluations are an opportunity for Board members individually and collectively to use the process in an introspective and thought-provoking manner.
Many boards have traditionally followed a checklist approach to self-assessments, but this procedure carries with it, limitations. For example, many directors are likely to be reticent about putting a number to rate or rank a fellow board member. Even if they felt a person to be a “2” (with 1 being the lowest and 5 the highest), they are likely to push that up to a “3”. Partly because they might feel that they are too harsh and .. partly for fear that such information may reach the director(s) concerned. Thus a critical factor for board evaluations to be successful is full candor during the assessment process, which is why Boards who wish to be progressive and high performing, particularly in light of the 2017 Malaysian Code on Corporate Governance, should consider the use of third party experts.
Before a Board decides on the type of evaluation to be carried out, here are a number of significant factors to consider:
- Who is evaluated — board, individual directors, committees, board and committee leaders?
- What is being measured — objectives and competencies that the board wishes to assess?
- Who conducts the evaluation — an independent board or committee leader, management representative who supports the board (such as the general counsel) or external third party?
- Who participates in the process — directors, management (CEO, CFO etc.) and, others who regularly interact with the board (namely heads of internal audit, human resources, etc.)?
- How the evaluation is conducted — electronic survey tool, hard copy questionnaire, face to face individual interviews, etc.?
- How often should the evaluation be conducted — annually for board and individual directors, once in two years for committees, once in three years for third-party assessments?
- How the board discusses and addresses the results — who is responsible for taking action based on the assessment findings, facilitating discussion among directors and developing an implementation plan for changes
After the board assessment
A key component of an effective evaluation process is the follow-up. It is important that the Senior Independent Director or an independent board member take ownership and lead the process from beginning to end — even if an external party is used. The appointed leader of the board assessment process, with support from the external party, should then identify common themes and notable differences, create an anonymous summary of the main findings and schedule a board session — and individual director conversations as needed — to discuss the results. Board members should discuss, agree upon and assign any necessary action items based on evaluation results and recommendations. It is also important to establish target dates for completion or additional discussion.
With the fast pace and interconnectedness of business conditions and operations, globally and regionally, Boards who want their organizations to be high performance or indeed even sustain for the long term should ask if they have the right Board in place for these enormous challenges. In particular, third party evaluations if carried out by people with deep expertise, help to create the impetus for change and propel Boards towards high performance and function as it should – not just for good corporate governance but as the strategic asset which adds real value to their organization.