Why it is necessary
for a company’s board to be evaluated
When faced with assessment of any kind, people come up with a wide range of responses. The enlightened few welcome the idea, others shy away from it, find reasons not to do it or say "do I have to?"
Boards, when faced with the thought of evaluation, tend to put their heads in the sand and hope it would go away. Some now are realizing that they should consider it and some are even doing it.
Let us look at why the board should be evaluated.
It is highly unusual for a company not to review periodically the performance of its key contributors, whether they are individuals, work teams, business units or senior managers. There is widespread scrutiny by shareholders of aspects of the board's performance: through numerous corporate governance codes and detailed reports on such as risk management processes, corporate social responsibility and directors' remuneration.
It is therefore strange that the board, which can control huge resources, employ large numbers of people and be responsible for very complex organizations, is not scrutinized.
The perfect board will endeavor to make timely decisions in the long- term interest of the company, based on the optimum level of information, through smooth processes, by people with the right skills mix, in a constructive environment. An evaluation, if done properly, will help boards towards that ideal.
For the information to be effective, it is essential that the evaluation be seen as being helpful, so the board must understand and be happy with the process to be used. The evaluation itself needs to bring out good practice as well as identify where improvements can be made; it must be seen as a process that is supportive of the board. If directors feel uncomfortable, vulnerable or, even, threatened, it is not possible to get a clear picture of how the board is functioning.
The evaluation process does, however, need to be rigorous, so that it has the best chance of being truly comprehensive. It also needs to be even-handed, with each director, including the chairman, going through the same process. Most important is the question of confidentiality.
Each director needs to be sure that information that he provides will be included in the evaluation report in a non-attributable form. In addition, the board as a whole needs to know that the evaluation, or its findings, will remain entirely confidential. Having gone through the process, the whole board then needs to identify how it is going to resolve those areas where improvements are needed and ensure that the necessary actions are carried out.
We can then turn to how to approach board evaluation.
The way that is currently most often used is one of self -evaluation, normally done by the chairman. Directors may view this approach the least uncomfortable, being done among themselves. It does, though, have inherent problems.
It is very difficult to be objective when discussing performance with people who are fellow-directors, since there is a natural inclination to make allowances for known quirks and even shortcomings. There can be a lack of openness in expressing thoughts in case it is taken as criticism.
There is certainly great difficulty if the problem is the chairman, for example if he is too dictatorial, too weak or likes to work with a clique. "Doing it yourself' also means that it is being done in isolation, without comparing with other companies. It must, however, be said that self-evaluation is better than no evaluation.
Board performance evaluation can also be carried out by an external organization. For this to be effective, the organization must have recognized standing, and relevant knowledge and experience. Most important-Iy, the persons carrying out the evaluation must have practical knowledge of the operation of boards and of corporate governance requirements. They need to be able to display independence from the company and have professional standing in their own right, together with integrity. Over and above all that, they must have considerable tact and diplomacy.
Most boards of big companies know that they ought to have their performance evaluated, but don't, as yet, feel pressured to do it. However , with the spotlight on the recent corporate scandals, pressures are now building. Boards who wish to be seen as progressive would be well advised to organise an evaluation, and then they will see just how helpful the process is.