98% of S&P 500 companies revealed they conducted an evaluation in 2020, even though it wasn’t mandated. In other markets, evaluations are mandatory. Here are a few examples:
In the UK and Ireland, the Financial Reporting Council (FRC) demands “a formal and rigorous annual evaluation of the performance of the board, its committees, the chair and individual directors”
The New York Stock Exchange (NYSE) makes it an obligation for listed companies to evaluate their boards.
The Bank of Italy has issued guidance for Italian banks, recommending they conduct periodic board evaluations.
What makes measuring board effectiveness so challenging is the fact that there are no clear guidelines even when board evaluations are mandatory. For example, it is required by law in the UK, but there is very little information about how it should be done. The only hint of guidance comes from the FRC, which states that the evaluation process of FTSE 350 companies should be conducted by an external party at least every three years.
Thankfully, the digital revolution means that there are tools available to really dig into the issues in the board and to help create a roadmap to drive the board’s performance in a way that benefits the business and its shareholders. Read this article to find out how to measure board effectiveness successfully and create the best board evaluations digitally.
WHY BOARD PERFORMANCE IS A GROWING ISSUE
The board represents the highest level of accountability in a business, which means that shareholders will keep a keen eye on its performance. Whereas once it might have been enough to satisfy investors that the business was profitable, non-financial metrics are of growing interest.
Today’s investors care about the environment, particularly climate change and how issuers plan to combat that in their products and processes. They are interested in social factors, such as diversity and inclusion, and governance topics like remuneration and corruption. These elements, grouped together as ESG (environment, social and corporate governance), are not as easy to quantify and evaluate as profitability, so require a more nuanced and in-depth evaluation of the board.
With research by OnePlanetCapital suggesting nine out of ten investors are actively seeking greener investments, it is easy to see why being able to measure your effectiveness in this area is beneficial to your business.
HOW TO CARRY OUT AN EFFECTIVE BOARD EVALUATION ONLINE
There are a host of ways to carry out an effective board evaluation offline, but a more cost-effective and practical approach is to conduct them online. With remote working being more popular than ever, it seems old fashioned to expect board members to clear a window in their day that aligns with the chair or whoever leads the process and to travel to answer the questions required.
Here are the steps to move toward performing online board evaluations.
Choose your method
Self-created online surveys
Simple to create and to fill inEasy to compare responses year-on-yearCost-effective to create
Unable to provide nuance with multiple choice answersEasy to dismiss as a simple box-checking exercise rather than a genuine attempt to explore issues
Using a digital evaluation tool
Provides templates for questions designed to elicit the most useful responses Allows you to benchmark directors in the same company as well as the sector to give context to resultsCreates intuitive reports on the wider picture as well as for drilling down in certain areas
More expensive than creating your own online survey
Appoint a leader
There are a number of differing views over who should lead the online board evaluation process. The Organisation for Economic Co-Operation and Development (OECD) states that:
“Either the chair, lead independent board, or board committee (usually the nominating committee), should be explicitly made responsible for the process. They should drive the process, involve the right people (including third party consultants, if necessary), and ensure that their colleague-directors are actively engaged.”
Often it is the chair and the company secretary that take the lead. You will also find that the lead non-executive director will complete the evaluation of the chair as well as taking on other roles.
The choice of leader will depend on your company and its unique needs. It should be someone who can extract the best quality information from their colleagues and use the findings to drive the board forwards.
Ask the right questions
Whether it’s a self-assessment or some other type of questionnaire, it’s crucial to ask the right questions — the ones that provide valuable insight and help to inform the future workings of the board. They should also be worthy of the time directors take out of their day to answer them. For example, asking senior executives how often they attend meetings is unnecessary, as you should already have that information at hand. It provides no value whatsoever.
Finding out directors’ opinions on the size of the board, the diversity of skills, the positioning to face future risks and trends is what’s important. Such questions help you understand the actions you need to take to increase board effectiveness going forwards.
Questions with a yes or no answer are a little limiting, so try to ask for opinions or reasons behind the responses. Alternatively, offer a sliding scale of answers to choose from. For example, ‘completely agree’ to ‘completely disagree’.
Example board evaluation questions
Your board evaluations questions will relate to your company and industry, but there are a host of basic questions that you could ask as part of the procedure. Here are some examples that you can use or adapt as per your needs:
How well do you understand the board’s role in the company?
How effective are board meetings?
Are board papers delivered in a timely manner?
How would you describe the dynamics of the board in meetings?
How well do you understand the role of the committees?
How well has the board identified the skills it needs to face future challenges?
How well informed are directors about the sector in which the business works?
How diverse is the board?
How confident are you in the board’s crisis management plan?
Does the board dedicate enough time to discussing risk?
Does the board dedicate enough time to discussing strategy?
How strong is the relationship between the board and management?
How strong is the relationship between the board and the CEO?
How effective is the chair?
How effectively does the chair encourage an atmosphere of collaboration and trust?
How effectively does the chair manage dissent in the boardroom?
You can find industry and sector-related questions by using Boardclic’s digital board evaluation platform. We have developed templates for many different industries and formats for all manner of different company structures too. You can use these as they are or customise them for your business.
Compare to the industry benchmarks
Gathering a huge amount of data from directors can be helpful but only if you make sense of it. Analysing this data is what will provide the necessary context.
Your board may have made gains in terms of the skill sets acquired, but understanding how it stands compared to industry benchmarks allows you to see your real-world progress.
Are you the industry leader or do you still need to catch up with the competition?
In order to be competitive, you have to measure the responses against peers as well as against your own historical performance.
One way to do this is by using Boardclic for your digital evaluations. This will give you access to a wealth of industry data to allow you to pinpoint your critical challenges and turn them into action points.
BEST PRACTICES TO EVALUATE BOARD EFFECTIVENESS
Plan the evaluation process
Careful planning will allow you to make the most of the evaluation process. Carefully plot the questions that provide the best insight whilst also ensuring there are no wasted queries. Decide who will take the lead and who will collate the data, analyse it and plan what to do with that information to ensure the smooth running of the process.
If it is to be a worthwhile undertaking, a board evaluation requires more planning than simply throwing together a simple questionnaire to tick a box. Investors require much more scrutiny.
Who evaluates and how?
Evaluating individual directors is a useful tool for analysing the composition of the board. You can uncover what each director brings to the group and how they have contributed to the strategic thinking of the board.
You might consider a mixture of three main methods of evaluation – self-evaluation, peer evaluation and external evaluation.
Peer reviews are often avoided as they can lead to tension between board members. When directors give anonymous feedback, it can often become acrimonious and arouse suspicions between members. You should gain consensus from the board before pursuing this route, and ensure there is an existing environment of trust and transparency.
Prioritise evaluation topics
You must consider the opinions of shareholders and other stakeholders before you decide on the priority topics for your evaluations. It is not possible to cover absolutely everything, so creating an order of importance is key.
At the top of many lists will be ESG considerations. With ESG funds collecting double the amount of new money in 2020 than in 2019, this topic is increasingly important in the minds of investors. So, your board needs to ensure it is doing everything it can to improve its performance when it comes to environmental, social and corporate governance factors.
Board structure and composition is another major topic for investors. They want to know that they are represented in terms of ethnicity, gender, age, geography, independence, as well as skills, expertise and experience.
How the board works together is also a concern. As the body charged with driving strategy, it is essential that the board works collaboratively and in the interests of the company at all times. Board dynamics should be analysed and discussed during the evaluation.
You might also look at succession planning, risk management, executive remuneration and more.
Analyse evaluation results and create an action plan
Once you have your results, you need to drill down into the data to understand exactly what they mean. This is how you gain a competitive advantage over your peers. Simply compare your performance against theirs and you can develop an action plan to adjust your strategy and hit the points you need for success.
Speaking of this, Boardclic’s board evaluation tool creates intuitive reports that you can view on the platform or download. They allow you to access an overview of the evaluation, but also to drill down into the data and truly understand where your board is and where it needs to be. You can see which skills you need to add, which metrics you should concentrate on and assess your risk strategy, for example.
What makes a board effective?
An effective board has a collaborative culture, cultivates honesty and is willing to change and improve for the good of the company. It is transparent and future-facing, whilst being keen to measure itself against the industry and striving to align its strategy with the goals of the key stakeholders.
How can a board of directors improve performance?
Improving performance is related to understanding what makes for good performance. Whether it is compared with historic performance within the organisation or by comparing the board against industry benchmarks. Evaluating performance regularly in an honest, open and collaborative way helps to formulate action plans to drive the board forwards.
A performance evaluation is essential internally for the board itself and externally for the key stakeholders. They show that the company is keen to move ahead and evolve in a way that brings value.
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