Board Evaluation: A Tool for Regulators, Shareholders & the Chair
Board Evaluation has become a standard tool for quoted companies seeking to increase Board effectiveness. Originally a response to regulators and shareholders, Board Evaluation is evolving from a tick box exercise with a heavy compliance focus to a valuable tool for Chairmen in navigating complexity and disruption.
Fidelio’s focus is building Boards fit for the future through Evaluation, Development and Search. A meaningful and thought provoking Board Evaluation gives comfort to shareholders and regulators; it also enables the Chair to take stock and assess how the Board can develop to meet the disruptive challenges facing most organisations today.
In this Overture Fidelio outlines trends we see in the market and in our Board Evaluation practice including:
- Increased complexity and disruption have turned Board Evaluation into a practical instrument for the Chair providing a heat map of key challenges, as well as clear recommendations for next steps
- Evaluation has become a tool for ensuring diversity of perspective and thought at the Boardroom table, as well as a mechanism for identifying ‘white spaces’ in the skill matrix
- Evaluation is no longer restricted to quoted companies and is being adopted across a range of organisations and bodies across healthcare, education and the arts, including non-profits and regulators
- Chairs are showing greater interest in benchmarking against peers and leading competitors. How are other Boards structured in terms of composition and committees? How are Boards responding to new governance challenges? What can be learned?
- The value of a thorough Board Evaluation with a focus on effectiveness and dynamic is increasingly being recognised in the context of the Executive Committee
Origins of Evaluation
Board Evaluation, including regular external Board Evaluation, has now become a standard element of Corporate Governance for quoted companies in most mature markets. Corporate Governance Codes typically recommend Board Evaluation, as we see in the UK, Germany, the US and the Netherlands. Specifically in the UK an external Evaluation is advocated every 3 years while internal Evaluations are carried out each year.
Board Evaluation was originally introduced to give comfort to external stakeholders and shareholders seeking to ensure that the Board was observing good governance and overseeing the organisation effectively. Early Board Evaluations frequently were heavily focused on compliance.
Initially many Boards were sceptical of the value of Board Evaluations. Often the process was found to be mechanical and not particularly forward-looking.
Fidelio has seen a sea change in Board attitudes to Board Evaluation in particular in the last two years and we are delighted to support our clients in this regard.
Adding Value and Addressing Complexity
Disruptive change has undoubtedly played a role here and we noted in the immediate aftermath of the Brexit Referendum in the UK an uptick in Chairmen seeking to take stock, take a deep breath and ask the questions: what do we know? What don’t we know? And what new perspectives do we need to include?
Equally, Fidelio has seen a shift from questionnaire-based statistical analysis that took a great deal of the Board Director’s time but frequently resulted in analysis that was simply put in the drawer. Our approach to Board Evaluation which clearly resonates includes the following:
- The design of a bespoke questionnaire focused on governance, effectiveness and Board-specific challenges
- In-depth one-on-one interviews
- Observation of a Board meeting
- Review of key Board Papers
- A Board Report including analysis of the findings, “a heat map” of areas of future focus and recommendations to increase Board effectiveness.
- Peer benchmarking – a detailed analysis of how peer Boards are structured and dealing with governance challenges
- A presentation of key findings at a Board meeting, as well as the recommendations
- Following up to review progress
This combines the advantages of a qualitative and quantitative approach. It provides a rigorous underpinning for the heat map focussing the Board’s attention. Additionally one-on-one interviews are conducted with experienced practitioners who bring deep knowledge of the Boardroom and understanding of shareholder and stakeholder expectations.
In recent years External Board Evaluations have become more comprehensive in their scope in order to ensure relevance and practicality. Aspects of the Board Evaluation which we see being “built out” at the request of the Chair include:
- Extending the schedule of one–on-one interviews to include not only Board Members but also key member of the executive, and in some instances key stakeholders.
- Benchmarking against relevant key competitors. How are these Boards structured? How are committees being used? What does good look like? Where can we find innovation in good governance?
- Deep dive into a particular aspect of the Board’s work, for example the skill matrix or the succession planning process.
- External Evaluation outside the three year cycle. This typically is prompted by an important event for the Board or the company, frequently relating to change of Chair or CEO. The Evaluation then focuses on how the Board has responded and whether specific issues have arisen that need attention.
Reputational Risk and Board Accountability
We see the increasing focus on Evaluation as a response to very substantial disruption and reputational risk facing Boards. Consider the high profile examples of Boards recently in the public glare recently, such as Wells Fargo, Volkswagen, Oxfam, Facebook and Carillion.
As the world becomes much more complex and disruption increases, the Board faces new challenges at an ever faster pace, including from:
- Geopolitical instability
- The rise of populism
- Anti-business sentiment
- Climate change
- Regulatory burden
In this context, Evaluation is one tool available to Chairmen to gain greater understanding of how the Board can position itself for the challenges ahead.
It is very clear that the demand for Board accountability is increasing. This is a theme we explore in-depth in Fidelio’s “A Seat at the Table Programme for senior female executives and directors. Against this backdrop, it is no surprise that we are seeing the Board Evaluation being rolled out across a range of organisations – public and private companies; arts and sports organisations; leading charities; educational bodies; governmental and regulatory organisations.
In these instances the Board Evaluation takes a similar form and provides a helpful tool for the Chair to consider Board composition. It also is an effective mechanism to review the remit and purpose of the organisation. Keeping the Board focussed on its remit can be surprisingly complex for subsidiary boards for example or for some non-profit organisations.
Boards that are in the public eye or in receipt of government or public money are alert to heightened accountability and Fidelio has been pleased to support Chairmen across a range of organisations as they ensure that the Board is well placed to discharge fiduciary duties and to add value to the organisations.
Effectiveness of the Executive Committee
Given the benefits of the Board Evaluation, Fidelio is also seeing this tool being rolled out at the executive level. Much of this thinking comes from Financial Services where the regulators are taking a keen interest in subsidiary boards abut also Executive Committees as part of the governance framework. For most organisations the importance of the Executive Committee is increasing and this is recognised by the regulators.
While Executive Committee Members represent business divisions or corporate functions their effectiveness – like the Board – is greatly enhanced through a positive dynamic and a clear understanding of purpose. Fidelio sees Executive Committee Evaluations as a major trend representing an important innovation in enhancing the effectiveness and accountability of leading organisations.
Board Evaluation has become an important tool for the Chair in increasing Board effectiveness and ensuring the Board is adding value. Fidelio is pleased to be providing innovative and practical support for our clients and delivering Board Evaluations that are a practical next step in enhancing effectiveness and navigating complexity.
For further information on Fidelio’s contribution to building Boards fit for the future through Search, Development and Evaluation, please contact us.