Board Effectiveness, Performance and Evaluation
Summary of the research
This research aims to capture the state of play of board and director evaluation processes both internationally and in Australia. Board evaluation is becoming widely established in companies internationally, and in large Australian corporations the commitment and rigour surroundingboard evaluation is increasing. Board evaluation processes may have proved nominal in the past but presently board evaluation in large corporations is seen as an essential tool to assist in achieving better board performance and effectiveness.
This report provides a survey of processes of company board evaluation and explores their value in improving board performance. The survey examines the policy and practices of international corporations and a selection of Australian companies in the large listed sector.
The first stage of the research involved an analysis of information on board evaluation as published by a sample of companies world-wide. This allows a comparison of Australian companies with international companies in terms of their regulatory environment and how they communicate with shareholders about their efforts to improve board effectiveness and performance. The companies surveyed were from the ASX 30, NYSE 10, Euro 10, FTSE 10 and TSE 10.
The second stage of the research consisted of interviews with Australian directors and investors to explore their perspectives on board evaluation; its association with board effectiveness and performance; and their views on potential improvements to board evaluation. Interviews were conducted with 12 directors who sit on 26 boards from the ASX 100.
The report is a comprehensive summary of current practices in board evaluation. For queries and more information about the report, please contact us here.
Disclosure on board evaluation is strongly influenced by the regulatory approach of each country. In the US where a rules-based approach to regulation is prevalent, disclosure is relatively standardised and perfunctory. In the principles-based jurisdictions (Australia, UK, Canada and some European countries) there is the opportunity for richer disclosure although a common format is still apparent with only a few companies voluntarily offering more (or different) information.
As with all corporate governance processes, a performance evaluation process needs to be adapted to a company’s circumstances including the stage of the corporate life-cycle and length of tenure of board members. The same process does not have to be used every year.
An effective board will not save any performance issues for discussion during the annual board evaluation but will undergo a continual self-improvement process. Good boards will be proactive, not only assessing themselves retrospectively but prospectively.
Opinion is divided on whether performance evaluation of individual directors is a valuable exercise or whether it can inhibit whole-board dynamics and group performance. There perhaps needs to be more discussion over why, in the context of a board, the individual can be less important than the team.
The relationship between the board and senior management is vital to effective board performance in terms of information flow and strategy development. For this reason, it is good practice to involve members of senior management in the board evaluation process.
Many board members find that board effectiveness can be greatly enhanced if the board members, particularly non-executives, have a chance to get together outside of formal board meetings to discuss issues that might not fall within the formal meeting agenda.
The general opinion is that the use of an experienced external consultant can be very valuable but may not be justified every year. External reviews are costly but may be particularly useful when the board is going through change.
Outcomes of board evaluation processes range from relatively minor amendments to board processes (meeting agendas, format of board papers etc) through alteration of committee structures (amalgamation or changes to committee charters) to significant changes in board composition (to fill skill gaps or remove directors contributing to dysfunction).
The process of implementing the outcomes of board evaluation is a crucial step that perhaps deserves more attention. It is a vital component in whether a board evaluation process actually leads to better board performance.
Links to other processes
The links between the process of board evaluation and other processes such as director re-election, succession planning and director education and development are becoming clearer and more formalised in practice.
The effective board
Factors necessary for effective board performance include:
• a boardroom culture of mutual respect, honesty and openness that encourages constructive debate
• diversity of experience, styles, thought and, as far as possible, age, gender and nationality
• a good relationship with the CEO and senior management
• a common purpose and strategic clarity
• an experienced chairperson who can manage the board agenda, encourage debate and work in harmony with the CEO
• efficient board structure and processes including committees, board papers, information flow and a good company secretary
The dysfunctional board
Factors that can hinder board effectiveness include the opposites:
• an adversarial atmosphere in the boardroom or an unmotivated board with a tendency to group-think
• skill deficits or lack of genuine independence on the board
• a poor relationship with the CEO and senior management which can impede information flow
• conflicts of interest or factional interests on the board, perhaps due to a dominant shareholder
• poor chairmanship – a chair who is too week, too autocratic or too close to the CEO
• poor processes leading to inefficient use of time
Boards are creating detailed matrices of the skills required on the board and are using these in their succession planning and nomination processes. However, there is still room for improvement in succession planning in order to reduce the influence of dominant board members and to improve long-term plans.
Some directors were open to the concept of increased reporting on board evaluation including providing more detail on non-sensitive outcomes. Others were of the view that this was of little value and, interestingly, the fund managers we spoke to agreed. It seems that the institutional investors place little value on annual report disclosures preferring to assess board members based on their backgrounds and personal characteristics.
Both directors and fund managers understood that the link between board performance and company performance is complex and that even the best of boards can be hindered by factors beyond their control.
Indicators of an effective board
Both directors and fund managers agreed that it is difficult for outsiders to assess whether a board is performing effectively. However indicators include:
• willingness of a company to seek and respond to market feedback
• personal characteristics and credibility of directors
• professional history of directors
• company performance within the industry
• quality of board decisions, particularly in times of crisis
Launch of the report
The report was launched at the Australian Stock Exchange on the 27th October 2010 by the Chairman Michael O'Sullivan and CEO Ann Byrne of the Australian Council of Superannuation Investors (ACSI), the peak-body group representing over half of Australia's non-for-profit superannuation sector.
Representatives from the Australian Institute of Company Directors, Australian Shareholders Association, Chartered Secretaries Australia, and members of ACSI and the Australian Stock Exchange Corporate Governance Council were in attendance at the launch of the report.
You can download a copy of the report from the link below:
The slides of the presentation by Professor Thomas Clarke and Alice Klettner
Or visit our research partner, ACSI:
Media coverage of the report can be found in the links below or full-text access here
The Australian (2010) Come clean on ability, boards told, 28 October 2010 http://www.theaustralian.com.au/business/come-clean-on-ability-boards-told/story-e6frg8zx-1225944407213
Gardner, Jessica (2010) Super council advises disclosure, Australian Financial Review, 28 October 2010, Thursday, p.15 http://afr.com/p/national/super_council_advises_disclosure_xFguqrt7aSeT9xQK6aB4CO?hl
McDuling, John (2010) More disclosure pose unintended risks, Financial Standard, 28 October 2010 http://www.financialstandard.com.au/news/view/30455/
Stevens, Nicole (2010) Investor call for greater board disclosure, AAP in Business Day, 27 October 2010 http://news.smh.com.au/breaking-news-business/investor-call-for-greater-board-disclosure-20101027-173g1.htm