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BB Board Evaluation

Demo information

May 2011

18 w w w . c h a r t e r e d s e c r e t a r y . n e t

An outside viewterms of Codes and best practice; responses to questionnaires or interviews should be totally unattributed and not visible to internal colleagues; the feedback process should be handled externally and confidentially, ensuring more open input.

In addition, there should be a clear separation between:

an evaluation of the board’s effectiveness; the appraisal of each individual director’s competence; and the individual director’s contribution to the team.

The confusion of these distinct elements often leads to frustrated participants and poor insights.

In order for an evaluation to be successful, interaction and interviews should be tailored and focused on the relevant issues, at the same time as exploring new territory. This requires the right person-to-person match in character, knowledge, respect and trust. External evaluation is independent from the company, therefore it ensures that the difficult questions are asked and valuable feedback received, without risking any existing business relationships.

The final collation process is critical and the level of detail disclosed must be appropriate for different groups of internal and external stakeholders. All information must be of value and definitive, with no ‘boilerplate’ output. It is vital that: responses are unattributed; there is an understanding that not all the findings of an evaluation need be in the public domain and that evaluation outcomes belong to each and every board member.

External board evaluation brings invaluable insight into the workings of the board from the perspective of an outsider. It is designed to facilitate open and honest review of the board’s workings, rather than to point the finger of blame. As such it is a process to be embraced rather than feared as part of a wider drive to improve board effectiveness.

prescriptive solutions imposed by outsiders.However, there really is little to worry about.

It is well-known that effective board evaluations produce value and improve board performance. Company secretaries are frequently pivotal in educating boards with regard to the true nature and value of sensitive and well-conducted external board evaluation.

So how do boards progress from suspicion to satisfaction? The most important step is to identify for the board why an externally facilitated evaluation is a vital step towards the continuous improvement of the board’s effectiveness, enabling an unbiased assessment of the current board’s structure and workings.

There are several steps which, if taken, will help to remove the invalid suspicion of evaluations, such as:

an external review of the scope, content and wording of any internally produced questionnaires or interview guidelines. This ensures that these documents achieve their objectives and are fit for purpose in

Why do boards resist external evaluation? It is true that most FTSE boards have an internal self-evaluation process in place,

however many industry sectors still fall short of best practice. It would seem that external evaluation is required, therefore, to ensure that standards are maintained.

Consider, for example, the reasons why an annual board evaluation is now required of the largest companies in the UK, with one in three to be externally facilitated. An analysis of costly corporate and banking failures indicates that it was neither the unitary board model nor the principles of the then Combined Code that were at fault; some boards simply did not carry out their duties effectively and did not adopt a culture of good corporate governance.

Why then does hostility and resistance manifest when boards are faced with an external evaluation? In our experience, such evaluations are often perceived as imposed, intrusive and unnecessary. This reaction is human and understandable: few people take kindly to

Sharon Constancon is Chief Executive of Genius Methods Ltd. For more information, please visit www.geniusmethods.com.

Sharon Constancon is Chief Executive of Genius Methods Ltd

Effective board evaluations produce value.

» About the author

» International perspectives

with Sharon Constancon

Key Genius Methods USP’s

Board Evaluation Menu from which to tailor to requirement

The Specific situation

A Board Evaluation and Governance Review was undertaken for a

major internationally listed conglomerate (confidentiality requested).

The company was established in 1978 and floated in 2005 with a

market capitalisation in the region of £950 million

The founder, who has maintained a hands on role, and family

have retained 62% of the shares.

Fellow directors and employees hold 10% of shares.

The balance of 28% of the shares are listed on the stock market.

The Board Evaluation and Governance Review were conducted

simultaneously.

The nature of the regulated industry had embedded high

standards of governance in the organisation. The Board was

reasonably balanced and directors communicated well.

Controls were robust and the Board was compliant with key UK

governance standards.

Need for Board Evaluation

Being family owned and run since inception, external input was

needed to refresh thinking

Ownership is skewed

No governance regulatory demand in listing jurisdiction

All companies benefit from an objective view of governance

practices

Adding value

“Board Evaluation is an important

annual exercise that adds

considerable value to all

organisations, regardless of size.

It is neither process-heavy nor

hugely time-consuming.

Whether or not a company is

affected by the Walker Review or

the UK Corporate Governance

Code, there is merit in spending

time in preparation for a Board

Evaluation and securing the

benefits that flow from it”.

Neville Bain

Chairman of the Institute of Directors

For further information please contact Sharon Constançon

Email: [email protected] Telephone : 01494 565 947

© Copyright Genius Methods Ltd 2011 www.geniusmethods.com

mailto:[email protected]

Process followed

The Board members completed a questionnaire which covered

various governance, structure, communication, behaviour,

leadership, risk, succession planning, management

development and committee specific issues.

All directors answered each question and were encouraged to

provide comments to whichever questions they chose. The last

section was purely for director written contribution.

From this information further structured discussions occurred

with key individuals on the Board, senior non-Board executives,

internal and external audit. This ensured a rounded view given

the imbalance of stakeholders.

A report was compiled which was discussed by the directors

and a schedule of improvements was defined.

Results

Against the backdrop of a highly successful and profitable

company, well run and widely respected, an objective, external

assessment was able to make a valid contribution to adding

further dimensions to management excellence.

The following areas were identified for improvement. These

were all implemented over the following six month period. The

implementation was monitored and reported on at each Board

meeting in the intervening period.

Further improvements were also noted that are in the process

of being implemented.

All recommendations were accepted by the Board. Board

dynamics improved as a result of the evaluation. The Board

away day significantly improved Board cohesion and team

spirit.

“The ABI’s leading role in corporate

governance stems from our members’

belief that well-governed companies will

produce better returns for shareholders

over time. This piece of research, using

data generated by our own Institutional

Voting Information Service (IVIS), does

show a clear connection between good

governance, company performance and

investor return. One important

conclusion, not highlighted in other

research, is that good governance

reduces volatility of returns. Moreover,

good governance is also a precursor to

good performance rather than vice

versa”.

Stephen Haddrill

Director General,

Association of British Insurers

The new UK Corporate Governance Code

requires that all premium FTSE 350 listed

companies to have an external Board

Evaluation at least every third year. Under

the “comply or explain” principle, they will

have to “explain” if they do not.

This standard is Best Practice for all other

listed and non-listed companies

The Walker Review for Banks and Financial

Institutions which lead to the new UK Code,

identifies good business principles that add

real value and thus provide guidance to

Boards in effectively conducting its affairs

and leading the business.





Findings and actions taken

One of the three subsidiary companies needed an additional director to

provide a better balance of skills.

This director was identified and appointed.

Directors did not have clear terms of office.

This has now been corrected.

Independent directors did not have an annual review with the

Chairman.

The process has now been put in place and voted to be mutually

beneficial

The strategy process was relatively informal in that each Board

agenda had items of significant strategic importance but there was no

full strategy overview.

The company has now put in place a full strategy process with a full

Board day off-site to address strategy; the independent directors

contribute at stages in the process and the final strategy is more a

reflection of the full Board.

Management development and succession planning needed to be

considered given the family ownership and high shareholding.

This is being addressed and is now more thorough and has been

elevated to the status of an important annual Board agenda item

The agenda structure and time allocation to strategic issues needed to

be addressed to ensure adequate time was given to these important

matters.

The agenda has been re-shaped so that the important and strategic

items are first on the agenda and the routine items relegated to the

end. Time allocation has materially improved.

Further recommendations for improvement

The coherence of the strategy process and an external analysis of the

operating environment. This was missing and therefore a risk that was

not adequately addressed

Process of appointing independent directors needed to be formalized.

This would help clarify succession issues

Director annual appraisals

Timely information flow for Board packs and information flow to the

Board

Valuable Insights

“I was initially reluctant to conduct

this on two counts.

First, I was afraid this was just

another box-ticking time wasting

process.

Second, as the person that built this

business from infancy to the

current time, I felt that I knew how

to run the Board.

I was wrong.

The exercise has been very helpful,

conducted by an excellent

consultant with really valuable

insights.

I have fully endorsed the action

plan and this will be a regular

annual exercise in our company”.

Chairman and

Company Founder





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