Do Board Evaluation Measure Board Effectiveness? Development of a Board Evaluation Model
Janicke L. Rasmussen, PhD Norwegian Business School,
Department Accounting, Auditing and Law
Riga Business School 19th September 2013
Published with acceptance of the author. No use without acceptance of the Author
Content of presentation • What is a Board evaluation?
• Historical perspective on Board Evaluation • Why Board Evaluation?
• How Board Evaluations are conducted in large listed Norwegian companies
• How Board Evaluations should be conducted – the board evaluation model
What is a board evaluation?
What is evaluated
Who evaluates
The Board Others The Board
Board self-evaluation Board evaluation
Others Boards evaluations Evaluations conducted on behalf of the board, but not defined as board evaluation.
• Board evalua+ons are defined as evalua+ons where the boards as a whole, or the individual directors, are evaluated.
• They can be performed by the board itself or by someone on behalf of the board.
• In a corporate governance context, board evalua+on is about assessing boards’ work.
Board evaluations – a recent development?
• Although board evaluations are viewed as a recent development, they have been part of the corporate governance discussion over the last two decades.
• As early as 1994, The Blue Ribbon Commission published the report, “Performance Evaluation of CEOs, Boards and Directors, followed by the report, “Board evaluation: Improving Director effectiveness” in 2000 (Long 2006).
• Most European Codes which has mushroomed since the millennium recommend that board evaluations are performed.
• Studies of listed companies in 13 European countries in 2009 show that, on average, 75 percent of boards conduct board evaluations.
Why board evaluation? • The rationale behind implementing board evaluations in the different
Codes for Practice of Corporate Governance is based on their ability to contribute to board effectiveness (Berg, 2007). “Ensuring that the directors, their defined tasks and processes contribute to adding value, enabling the company to reach the goals set.”
Director
(Input) Processes (Doing the things right)
Tasks (Doing the right things)
Company goals
How board evaluation can be used to measure board effectiveness
Board composition, board structure, identified tasks, board processes
Expected task performance (accountability)
Actual task performance
Board evaluation
Rationale behind board evaluations • it is necessary for boards to address this issue to maintain their competitive edge and to
meet the expectations of investors.(Cadbury, 2002).
• introduction of board evaluations would enable the shareholders to better quality assure the decision-making boards make on behalf of them. (Long, 2006).
• Board evaluations are considered an important corporate governance mechanism which may increase the possibility to get funding, and to influence the cost of capital (Jay A. Conger, 2002).
• Board evaluations are useful to give stakeholders the possibility to observe what directors pay attention to, how they do their work, and how the board prepares itself to meet future demands. (Furr & Furr, 2005).
• Evaluations can clarify the individual and collective roles and responsibilities of the board and its directors (Conger, et al., 1998; Graf, 2007; Julien & Rieger, 2003; Kazanjian, 2000; Leblanc, 2005c).
• Other benefits are improved decision-making and delegation of work, enhanced communication and operation, in addition to improved leadership and teamwork (Long, 2006).
The system of board evaluation
What is the purpose of the board evalua+on?
Who will receive the result?
Who is going to perform the evalua+on?
How is the evalua+on going to be performed?
The content of the evalua+on
When should the evalua+on be performed?
What is done with the result?
Prepare Perform
Proper follow
-‐up
How Board Evaluations are performed (findings from research project)
o No clear purpose of board evaluation to enable measure effectiveness was identified. - «Development of boards» - «Building teams» - «Benchmark»
• Most common recipients was the nomination committee or the board itself (or both) - Conflicting interest?
• The board evaluation: - Quantitative evaluation (score between 1-6 ) - Either the Chairperson is very involved in the process, or he is not involved at all - Most of the evaluation is normativ (given no clear purpose) - About 30 % of the content is outside the definition of board evaluation - Little/no evaluation of Chairman, board prosesses, boards sub-committees. - No board evaluate individual Directors - Board evaluations are performed once a year, normally at the end of the year. - Board members are to a little extent involved in the process other than giving response to the
questions asked. Despite of this, they are very satisfied with the board evaluation process.
• No systematic follow-up procedure - It is considered directors own responsibility to follow-up (if needed)
Conclusion – how board evaluations are performed
• Instead of being used as a mechanism to enhance board performance, it becomes a congratulatory event that is performed once a year.
• The following statement by one of the board members may be used to illustrate this:
“The first things we go over are, why are we doing so well? Are we really that good?”
Purpose WHY
Recipients FOR WHOM
• Transparency • Recruitment • Development of Boards work
The Board itself? Shareholders? Financial markets? Employees? Management? Government?
The evaluator WHO
Experience Knowledge Independence ExperGse Time
Modality HOW Interviews Survey Board collecGve Individual assessment WriKen/oral?
The content WHAT
The content must be linked to the purpose and should enable the board to measure effecGveness
Timing WHEN
Should be linked to the purpose • NominaGon process?
• Strategy away-‐days?
• Change Directors? • Improve board processes? • Ini+ate educa+on? • Change the structures?
Recipients FOR WHOM
Model for board evaluation
Summary model for board evaluation to contribute to board effectiveness.
• A clear purpose of the evaluation must be developed and understood. A general purpose to «develop the board» is not enough to establish a system of board evaluation which can measure board effectiveness.
• Board Expectations must be identified ....Both for the board collectively and individual board members. This can be done either through the selection process (for individual board members) and through the strategy process (for the board collectively). This will enable a comparison between expected performance and actual performance.
• The system which the board establish must enable comparisons between expected and actual work….in an objective way. It is also important that the different elements of the board work identified within the context of the purpose ARE in fact included in the board evaluation (Board composition, board structure, identified tasks, board processes).
• If multiple purposes of board evaluation of the board evaluation, it is important to establish processes which meet the different purposes.
• If gaps between expected and actual performance are identifies, it is important to establish processes to eliminate these gaps.
Thanks for your attention Any questions? For further enquiries; [email protected]