The various Codes of Corporate Governance provide that Boards should undertake an annual appraisal of the performance of the Board, Board Committees and of individual Directors. The Report of this assessment is in some cases required to be sent to the industry regulator and presented to the shareholders at a general meeting. Many Boards have taken the attitude that this is yet another compliance requirement and have not fully embraced the inherent value derivable from the process. A Board can easily fulfil the requirements of the applicable Corporate Governance Code or other regulation by checking off the boxes on a “template” and have a report generated to fulfil all righteousness. Clearly, minimum compliance with the technical requirements of good governance does not do much to improve Board effectiveness.
An effective assessment of the performance of the Board provides an opportunity for Boards and individual Directors to monitor progress and renew their commitment to performing their oversight responsibilities. If done badly, it can very well turn into a “mechanical exercise that tests the board’s patience and adds little or no value” – Beverly A. Behan. The focus of the Board assessment should be to identify areas of improvement in Board performance rather than giving the Board a Report Card.
Assessing performance is a first step in achieving Board effectiveness, however it will achieve the intended purpose only if the Board is prepared to spend substantial time reviewing the findings, addressing the issues raised that impact on its performance and paying heed to recommendations made.
Three main methodologies are employed when conducting a Board assessment – viz – Review and Analysis of relevant Board related documentation (mainly minutes of Board and Committee meetings, charters, policies, disclosures, etc.); Questionnaires and Structured Interviews. The review of Board and Committee minutes seeks to get a sense of how the Board goes about taking decisions and following up on the implementation of such decisions. It also gives a sense of what matters the Board concerns itself with – strategy monitoring as opposed to micromanagement. Policies around risk management, internal controls, ethical conduct, etc are reviewed to determine how the Board performs its oversight of those matters within its purview.
Questionnaires are administered which seek to rate the performance of the Board in seven key areas – Board Structure and Composition – What is the process of appointing Directors? Is there a transparent and fair process? Diversity? ; Strategy and Planning – How involved is the Board with strategy setting and monitoring? ; Board Operations and Effectiveness – Do Directors receive Board papers in good time to engender effective participation and decision making? Are Board Committees superfluous or really effective? ; Measuring and Monitoring of Performance – How and to what extent does the Board monitor Management Performance? Any KPIs?; Risk Management and Compliance – How effective is Board oversight of Risk Management; compliance and internal control?; Corporate Citizenship – Sustainability issues, ethical conduct ; and Transparency and Disclosure – How does the Board deal with conflicts of interest and related party transactions, etc.
Director responses are collated and assist in determining areas that are of concern to Directors. To be useful, responses have to be frank and provide qualitative feedback.
One-on-one interviews are conducted in person or by telephone depending on accessibility of individual directors. Directors have the opportunity to raise areas of concern not covered by the questionnaire and the interviews allow for probes and follow-ups. They also provide an opportunity for individual directors to provide candid feedback particularly with respect to the Chair and CEO. Directors are invariably more candid when talking to third parties and more apt to bring up unpleasant but unspoken issues.
A report is then generated indicating the key findings and recommendations. The most critical aspect of the performance appraisal exercise is an engaged discussion of the assessment results by the full Board that leads to a prioritization of key issues and an action plan to addresses them. The plan should then be reviewed periodically to monitor progress. Also critical, is the feedback the appraiser provides to the Chair and the CEO or indeed to any other Director that needs to be given some feedback.
Sadly, only a small percentage of Boards fully engage with the process. More often than not, Directors consider the appraisal process a chore that must be undertaken to fulfil compliance requirements. However, increasingly, Directors are beginning to appreciate the utility of the exercise.
If properly done, a Board performance appraisal has the potential to be transformational. Taking a snapshot with a comprehensive assessment allows the Board see clearly its strength and areas requiring improvement. Investing the necessary time and effort for continuous improvement is the hallmark of an effective Board.