Blog Board Effectiveness Reviews: How do you evaluate a board of directors?

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Increasingly, corporate governance codes set out that a board of directors is expected to evaluate its effectiveness annually.  The FRC Code, for example, expects boards to conduct a board evaluation annually, with an externally facilitated review at least every third year (external reviews are an expectation for the FTSE 350, on a comply or explain basis, and a recommendation for others).

Why boards need to evaluate themselves

Self-evaluation is important for a board as a mechanism to improve its effectiveness and as a signal to shareholders (and other stakeholders) that it takes its performance seriously.  A manager keeps their team’s performance under review, a CEO evaluates the senior team, and the Board reviews the CEO, but the Board answers to the shareholders who, in a listed company context at least, are too remote to provide direct feedback on the board’s workings.

While a shareholder would not typically be given access to the full results of a board evaluation, the Board has an opportunity to give them confidence by demonstrating what they have done.  The Board can report on the process – whether they used questionnaires or interviews, and if there was an external facilitator – and the Board can set out some of the outcomes – perhaps some recommendations about succession planning or meeting organisation.

How to do a board evaluation

The Chair is expected to take overall ownership of the board evaluation process.  They should aim to collect the views of all directors and others, such as managers and the auditors, who have regular interaction with the Board.  This is normally achieved through questionnaires or individual interviews.  At the end of the process, the Board should receive the full report, and take the opportunity to discuss the outputs so that an action plan can be taken forward.

The secretariat typically plays an important role in facilitating board evaluations.  They will often be tasked with drafting questionnaires and analysing responses, as well as managing the action tracker.  A lot of the practical actions from a board evaluation will fall to them as part of their role in supporting the Board.

What a board evaluation should include

A board evaluation should cover composition, skills and succession planning; key relationships and how the board works together, including the level of challenge and debate; the board’s leadership around purpose, direction and values; the clarity of the roles and Chair and SID, and how well they are fulfilled; the contributions of individual directors; the work of the committees; the support provided by management and the secretariat; the quality of board information and board papers; the Board’s strategic input and oversight of performance; the Board’s role in identifying risks and reviewing the risk management approach; and communication with stakeholders and other key shareholders.

This is an extensive list but not an exhaustive one.  It is important that a board evaluation is bespoke, and the Chair plays an important role in determining the scope and focus to make sure the Board gets value.

What constitutes an externally facilitated board evaluation?

An external board evaluation is conducted by a third party which is otherwise independent of the organisation.  For this reason, large consultancies, auditors, lawyers and head hunters tend to be excluded, and board evaluation firms tend to be small, specialist organisations.

The FRC’s Guidance on Board Effectiveness has suggested a questionnaire-based approach is not sufficient for an external review as they cannot properly explore board dynamics.  From our experience, the PRA also expects regulated firms to follow a more rigorous process.  For this reason, externally-facilitated board effectiveness reviews are increasingly tending to include individual interviews with directors, observation of the Board, and a document review.

Chair and Individual Director evaluation

Although a board evaluation will reflect on individual and collective performance, most find it helpful to separate out the process of individual evaluation.

The Chair is responsible for evaluating the performance of individual directors.  Most hold an annual meeting, sometimes after collecting the views of others on the board, to discuss their contribution.  It is also an opportunity for the Director to highlight any training needs and to set out to the Chair how they could contribute more, both in and outside board meetings.

The Senior Independent Director (SID) evaluates the Chair.  A SID is an important check and balance on the power of the Chair, so where a Board has no SID, it is important someone is nominated for this process.  They will normally lead a closed session of the Board with only the NEDs present, excluding the Chair, and will also ask the CEO and possibly other senior managers for their views.  They then have a one-on-one session with the Chair to provide feedback.