The demands and expectations on board members are changing dramatically with a clear focus on how boards are responding to issues such as technology disruption, climate change and articulating their contribution to wider society. But are board performance evaluations keeping pace with these changes? Is the performance of the board being really challenged? And if the answer is yes, are boards being bold enough with the results of their assessments in the annual report for investors and other stakeholders to see the effectiveness of the review?
Board performance evaluations have been part of regular governance processes for around fifteen years now, since they were first introduced into what was then the UK’s Combined Code of Corporate Governance, but there has been very little guidance produced on what an effective board performance evaluation should actually involve. In particular, the concept of the externally facilitated board performance evaluation (required for a FTSE 350 company at least once every three years under the UK Corporate Governance Code) is interpreted widely.
A review of the annual reports of the FTSE 250 for the 2017/18 reporting season, revealed that for the 76 companies which reported that they had undertaken an external board performance evaluation during the period, 19 of these involved no more than the administration of an online survey and a further 19 provided no description at all of the nature of the process. Where a description was provided, the full spectrum of procedures involved in these “external” evaluations were as follows:
| Questionnaire only | 19 |
| Interviews only | 16 |
| Questionnaire and interviews | 10 |
| Interviews, observation and document review | 4 |
| Questionnaire, interviews and observation | 3 |
| Interviews and observation | 2 |
| Questionnaire and workshop to discuss case study | 1 |
| Interviews, observation, roundtable facilitated discussion and document review | 1 |
| Questionnaire, observation, interviews and document review | 1 |
So it is very clear that there is no standardised view of what an external evaluation involves and there is a strong possibility that stakeholder expectations are not being met. In the 2018 edition of the UK Corporate Governance Code, the FRC has sought to address this issue by adding a disclosure requirement (Code Provision 23) in relation to “the nature and extent of an external evaluator’s contact with the board and individual directors”. In addition, in its recent response to the Insolvency and Corporate Governance consultation, BEIS has invited the ICSA to convene a group to identify further ways of improving the quality and effectiveness of board evaluations.
The Deloitte view is that a robust external board performance evaluation should involve a document review of items such as board and committee agendas, papers, presentations, minutes and terms of reference. The board skills matrix should be discussed and reviewed against director biographies and views solicited and tested during interviews with each directors. We support the use of online questionnaires but with a view to directing the content of these one-to-one interviews rather than as a stand-alone element of the review. Observation of meetings can be useful but can be rather artificial and also reflective of just one point in time. Our preference would be to supplement the review with a case study or case studies on particular key decisions during the year – this can provide a much more realistic view of the performance of the board. In addition, to make a positive difference, we would stress the importance of the following characteristics for an effective external board performance evaluation:
| Tailored | A board effectiveness review should not impose a rigid framework. Every company and its board are different and the review should be based on a strong understanding of the business, its strategy, the current environment in which it is operating and the activities which have been, and continue to be, a significant part of the board agenda. |
| Interactive | The FRC’s Guidance on Board Effectiveness has made it clear that “questionnaire-based external evaluations are unlikely to get underneath the dynamics in the boardroom”. Ideally there needs to be contact with the individual directors, and selected members of the executive team who present to the board. |
| Focused on outcomes | The review should apply a wide angle lens to the board so that it understands the real outcomes of its activities and the impact on all key stakeholders. A review should not just be focused on what the board thinks of itself – an understanding of the views of other stakeholders is important to understand board impact. There needs to be an external perspective. |
| Challenging | The review should not be afraid to ask difficult questions and to give difficult feedback. If a reviewer is not getting satisfactory responses or input, this should be called out. |
| About learning & improvement | Ultimately, this exercise should be embraced as an opportunity to confirm that all directors feel engaged and heard on key board matters, current and future, helping the board to function more effectively and openly. |
| Resource effective | Boards, and those who support them, are busy people and their time is valuable. With careful planning, the process can be effective and enjoyable which has significant benefit for the quality of the outputs and for the directors, the quality of the experience. |
Tracy Gordon – Director, Deloitte Centre for Corporate Governance
