BOARDROOM BEST PRACTICES

Overcoming Barriers to Successful Board Evaluations

Board Evaluations tend to fail because most board members, including independent directors, are part of a small group that often works together in one context or another. Too many board members have had working relationships at a previous time or in a previous context. The result is that board evaluations tend to be too ‘soft,’ and the results don’t lead to improved board performance or effectiveness. A board evaluation tool as part of a board portal can help to mitigate this situation by providing improved conditions for board evaluations and enabling a secure environment in which peer evaluations can take place.

Why UK Board Evaluations fail

The most basic issue with UK board evaluations is that all the directors, even the independent ones, are too closely linked to provide a fair judgement on their peers. ‘Cronyism’ is the word used by several experts:

“A leading factor, is the ‘cronyism’ that pervades the groups making the decisions,” writes the UK Centre for Household Asset Management. Directors form “closed shops of vested interests,” and senior executives from major companies are sitting as non-executive directors where they are already well-positioned. There is hard evidence that nearly half of all FTSE-350 company board members have some kind of previous working relationship or have been connected in the past.

With a small group of ‘insiders’ present on a large number of boards at major companies, board evaluations wind up being too ‘soft,’ deprived of any real effort to boost performance. Everyone simply gives a good review to everyone else, and so there is little that results in improved board performance or effectiveness.

External evaluation, required for FTSE-listed companies and large private companies every three years, can be a solution to this challenge, but the influence of the board that hires the evaluators can also take the edge off even an evaluation by outsiders.

Asking the right questions

However, whether the evaluation is internal or external, a board evaluation will not be effective if the right questions are not asked. Too often, when the questionnaires are prepared, the major issues are not brought forward.

Board evaluations should explore in some depth, for example, how effective the chairman is. This means looking closely at the chairman’s leadership, ability to drive decision-making and relationship with management, just to name a few important issues.

Board members are, naturally, reluctant to make negative statements about the chairman who played a key role in engaging them. Some, of course, will have worked for the chairman in other contexts.

So it is up to the company secretary and the administrator to see that tough questions are asked about the chairman, and that they receive answers.

The same issues arise when directors evaluate their peers. “Many companies have reservations where peer evaluations are concerned,” writes Deloitte in a recent study.

“Board members should evaluate each other in terms of contributions to strategic thinking, leadership and commitment of the director, participation in board and committee meetings, communication and interpersonal skills of the director, ethical issues and dilemmas faced by the director and relationship of the director with the senior management,” the study shows.

Getting the right questions also means balancing the quantitative and qualitative parts of the evaluation, based on interviews with individual directors. At many companies, questionnaires are circulated, answers are compiled and the result is a cursory report to the shareholders that satisfies no one, the study shows.

Then there is the even more challenging issue of integrating management into the review of directors and the chairman. It is too easy for companies to allow management to do a superficial and overly sympathetic job of this. The means has to be provided to allow management to make critical observations without inciting hostility from the board members under review. In this regard, a board evaluation tool like a board portal can be particularly useful in allowing anonymous commenting that is protected in a secure environment.

Surprisingly, once the evaluation process has been completed properly, directors have said that much of the boardroom dynamics improved sharply. Directors said that after they initiated board evaluations, their meetings went more smoothly, they got better information, they acquired greater influence and they paid more attention to long-term corporate strategy, according to a Harvard Business School report:

“Done properly, board appraisals may also improve the working relationship between a company’s board and its management — a powerful argument in itself for doing them. Directors have told us that the evaluation process encouraged greater candour in their dealings with the CEO and other senior managers. Formal appraisals of the board as a whole, and also of individual board members and the CEO, help ensure a healthy balance of power between the board and the chief executive. Furthermore, once in place, the appraisal process is difficult to dismantle. Thus an institutionalized review process makes it harder for a new CEO to dominate a board or avoid being held accountable for poor performance,” the report shows.

These results can be fruitfully supported by a board evaluation tool as part of a board portal. Distributing the right questions in the appropriate way becomes much easier; evaluating the answers becomes rapid and the results are worthwhile; bringing directors together for peer reviews and involving management can all be facilitated by a secure environment which operates in real time.

Diligent Evaluations enables high-quality performance reviews

To ensure effective boardroom consideration of all issues, including succession (refreshment), Diligent Evaluations provides the ideal environment.

Board evaluations and reporting have never been so easy. Robust analysis tools generate board assessment reports with just a few clicks. Multiple report formats share information in the way that best serves the company secretary, the administrator and the board.

There are powerful assessment creation tools, with multiple question types, innovative solutions for glossaries and supplemental information, and e-signature sign-off. Diligent Evaluations also supports safe and secure recordkeeping. It’s possible to view past evaluation results with just a few clicks. Directors and administrators can also count on 24/7/365 access to award-winning support. Contact us to learn more about how to digitise your governance needs in the boardroom and how our ecosystem of technology can help meet your board’s needs.

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