The Organisation for Economic Co-operation and Development (OECD) suggests that many corporate governance frameworks are outdated and, although they purport to concentrate on checks and balances in issuers, they have done little to avert issues such as the ENRON scandal. However, both national regulators and boards themselves have begun to understand the role of the board evaluation in improving their performance. Indeed, a board evaluation policy is increasingly more common for forward-thinking directors.
As one chair told the International Finance Corporation’s (IFC) Board Evaluations report,
“If the chair and the board perceive board evaluation as an opportunity to get the board to think smarter and work more effectively, board evaluation can achieve great things!”
From leadership and culture to teamwork and decision-making, board evaluations provide multiple benefits to an organisation, and a board evaluation policy helps to make them happen in a consistent and effective manner.
Read below to learn about what a board evaluation policy is, what it should include and why it is important for your business.
What is a board evaluation policy?
A board evaluation policy is your company’s formal commitment to performance assessments. It should detail all of the relevant information about your evaluations to create a transparent process for conducting them, and would generally include:
- The frequency with which you hold evaluations
- What elements of the board’s attributes you will evaluate – balance of skills, experience, independence, communication, effectiveness of board meetings, diversity of ethnicity, gender, experience, skills and so on
- Who you will evaluate – the entire board, individual board members, committees or all three
- How you will evaluate them – the methodology for assessing, whether it is a survey, an interview, using a board evaluation tool or any other way
- An action plan for using the results and recommendations of the evaluation to make a positive change
- How you will disclose the outcomes of the evaluation.
Why do you need an evaluation policy?
There are many reasons to create an evaluation policy for your business. Here are the main driving forces behind it:
In some countries, it is a legal requirement to formulate a board evaluation policy. For example, under India’s Companies Act 2013 and the rules created by Securities and Exchange Board of India (SEBI), it is stated that “every listed company … should include in the report by its Board of Directors, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors.”
Creating an evaluation policy offers a chance for investors and other stakeholders to hold the board accountable. This is incredibly important for building confidence in the board. If all parties have clarity on the assessment process, including what it entails and how often it occurs, they can easily assess the progress of the board and its success or otherwise.
Modern shareholders want to know what is going on with the board. They want it to operate in a transparent manner so they can better understand whether the company is acting in their best interest. Board self-evaluation shows a willingness to improve and is an indicator of the ethics of the board.
In the words of Emma Andrews of Grant Thornton, “Open, clear and honest reporting will help an entity build relationships with stakeholders including customers, employees and investors.”
Clarity over the evaluation process and the plans for acting on its outcomes also benefit directors themselves. This helps them gain insight into how they can best contribute to the board’s success. It also sets out how they will be given an opportunity to help shape the future of the board and organisation.
This can boost confidence in the process and lead to added satisfaction in their role.
6 steps to creating a board evaluation policy
It is a good idea to discuss your performance evaluation with your board. Together, you can decide on what you want to achieve, how you will do it and what you will do with the information you gather.
1. Define evaluation objectives
Your evaluation objectives might be a mixture of macro and micro topics. For example, there are many overarching board issues, such as board diversity, composition and succession strategies. But you might also want to pick up on areas specific to your board.
Think about the areas of governance and board activity that are most pressing and of concern to stakeholders. These will form the basis of your board evaluation policy. Your objectives could include:
- Refining strategies for succession
- Assessing leadership effectiveness and efficiency
- Understanding directors’ independence
- Defining the roles of committees
- Refreshing the board to better prepare it for the future
- Consolidating the relationship between the board and the management of the company
- Understanding participation in board meetings.
The exact objectives will be unique to your organisation and should be documented in your policy.
2. Document who you will evaluate
Your policy should detail who you will assess during your board performance evaluation. Once again, this will be an individual decision for your board, based on their needs and preferences. Here are the general entities that can be subject to evaluation:
- The board in general, detailing its operations and effectiveness. Looking at the roles and work of both executive and non-executive directors in relation to the board’s performance, risk management and other areas.
- Board committees, such as the nomination and remuneration committee, including how they fulfil their mandates and serve the requirements of the board itself.
- Individual directors, either through self-assessment or peer evaluation. This is in accordance with rules from regulatory bodies in many countries, including France, Italy, Luxembourg, the Netherlands and the United Kingdom. However, even if it is not the law where you are, you might still choose to assess the performance of individual directors. In order to ensure people speak their minds and the evaluation has the highest level of integrity, you might want to guarantee confidentiality when referring to individuals.
- The CEO, to ensure their priorities and goals are aligned with the board and that they are leading effectively.
- The chair. This is seen as a necessity in the UK and France, particularly, given the special role of the chairperson of the company. This part of the evaluation of performance is often carried out by the independent directors.
- Independent directors of the company may also be evaluated to help you get a clear, 360-degree view of board performance. For some companies, it may even be a part of their post-listing obligations.
3. Detail evaluation methodology
You should also set out in your policy how you will carry out the evaluation of the performance of the board. Below are some of the popular forms of evaluation methodology for eliciting responses and understanding board effectiveness:
- Surveys or questionnaires – these could be generic questionnaires taken from the internet, or generated by a digital evaluation platform like BoardClic, which allows you to benchmark directors in the same company as well as the sector to give context to the results. It also creates intuitive reports on the wider picture with the ability to zoom in to certain areas.
- Interviews – directors sit with the chair and answer questions, discussing important topics relating to the board and its performance, giving their opinion in a conversational format.
- External evaluation – a third-party assessor takes control of the evaluation process to offer an objective eye on the workings of the board. In the UK, FTSE 350 companies must use an external evaluator at least every three years. The EU corporate governance framework green paper also suggested member states adopt a similar approach. This provides an independent audit of the board.
- Group evaluation – directors discuss openly the performance of the board and its success or otherwise in achieving its aims and objectives.
4. List evaluation criteria
Your evaluation policy should provide insight into a range of criteria relating to the board. This might include topics relating to the duties of the board, how it is structured and the processes in place that determine how it operates.
You might want to look into how long the board takes to consider matters, compliance issues, diversity, independence and more. Whatever you decide, make sure you share it in your evaluation policy so stakeholders can learn what to expect from the assessments.
5. Determine evaluation frequency
Some countries have minimum standards for the frequency of board evaluations within their jurisdiction. For example, the Netherlands and Italy require issuers to conduct an annual board evaluation, whereas, in Luxembourg, this could be done every two years.
You should also decide how often to undertake internal evaluations, external evaluations or a mixture of both. The cost implications of hiring an external evaluator with a sufficient understanding of the business and the industry may cause some companies to use a rolling cycle of internal and external assessments. For example, this can be a solution in the UK, where the Corporate Governance Code from the Financial Reporting Council (FRC) dictates that an external evaluation must take place every three years.
You can also run evaluations more frequently if you wish. A good way of tracking your progress is by requesting real-time feedback on the effectiveness of board and committee meetings as they happen. This isn’t a complete evaluation but it allows you to nurture a culture of continuous improvement. Use Meeting Express to gain insights into how to improve your meetings and leadership skills.
6. Set guidelines for reporting
Disclosure of outcomes and action points is an important part of the evaluation process. You must decide for your policy how you will report after the event.
This might be through means laid out in the law in your country. For example, French and Dutch firms, amongst others, are required to list the outcomes in their annual report according to national disclosure requirements. You could also choose to detail your findings on the company website, for full transparency.
How often should you evaluate your board of directors?
The frequency and timeline of evaluations depend on the minimum standards in the jurisdiction and the culture of the company. In France, for example, directors must set aside time every year to debate the operation of the board in a meeting and are required to conduct a formal evaluation once every three years. However, a French company could choose to hold an annual evaluation by the governance committee if it thought that would be beneficial to its board and stakeholders. Some countries mandate an evaluation of the board on an annual basis.
How do you measure the effectiveness of the board?
The effectiveness of a board can be gleaned from tracking its progress over time and using the findings from your evaluation to form a plan for action.
The key here is how you analyse the results. To ensure rich data and actionable insights, use BoardClic’s board evaluation platform to find out the most pertinent and useful metrics to measure for your industry and sector. In addition, you can not only see how you stack up against your own historic scores but also how you compare with your peers.
Our wealth of benchmark data helps you gain an edge over your competition. You can also pinpoint critical challenges and turn them into objectives.
Who should read your board evaluation policy?
The effectiveness of your board evaluation processes affects everyone involved in the success of your company. Your board evaluation policy is of interest to the board itself, investors, management and all other stakeholders in the business.
A board evaluation policy formalises your assessment processes and makes them available to scrutiny from all company stakeholders. It offers transparency and accountability for the board and shows that you are serious about making real, tangible changes to its function, rather than performing a check-box task every year in order to comply with regulations. Board assessments provide real value to companies while keeping the regulators at bay. That’s why they should be embraced by forward-thinking organisations.
Use BoardClic to carry out your evaluations digitally, collect insights and find out how your performance compares to other companies in your industry. Try Boardclic today.