Board Evaluation as a core tool of corporate governance is coming under increased scrutiny from government, regulators and shareholders. In the UK this has led to a formal review of the Evaluation process at the request of the UK government’s Department of Business, Energy and Industrial Strategy (BEIS), prompted at least in part by the failure of infrastructure and construction group Carillion. The review has taken the form of a consultation document prepared by the Institute of Corporate Secretaries and Administrators (ICSA) which explores the need, and agreement within the sector, for the following:
A code of practice for the providers of Board Evaluation services, with arrangements for implementation and monitoring
Voluntary principles to be applied by listed companies when engaging external reviewers to undertake Board Evaluations
Guidance for listed companies on disclosure in accordance with the 2018 UK Corporate Governance Code
Fidelio conducts Board Evaluations internationally. We have submitted our response and are in broad agreement with the ICSA consultation. We clearly see this as a fork in the road for Board Evaluation with an opportunity to opt for increasing Board effectiveness versus box-ticking that satisfies neither stakeholders nor shareholders. In this Table Talk we explore what’s at stake and how Board Evaluation can best serve the interests of all stakeholders.
Audit or Effectiveness?
In our view the most important point of principle in Board Evaluation is to agree its primary purpose. There are in essence two routes forward and clarity needs to be reached on whether Board Evaluation is :
A tool to audit the Board against prescribed criteria, so that the Evaluation becomes in effect a compliance certificate. This approach may give clarity and simplicity but could have negative consequences and encourage excessive caution at a time when Boards need to be contributing to growth and innovation
A means of increasing Board effectiveness, less tightly defined but with greater focus on the desired outcome of a more effective Board better able to deliver value for shareholders and stakeholders
Fidelio clearly sees the benefits of enabling Boards to increase effectiveness. It’s important for stakeholders in the Board Evaluation process to build a common view here. Our experience with shareholders, for example, tells us that they are interested in the Board’s ability to oversee and increase value rather than another audit, as argued by Dr Hans Hirt at Fidelio's Board Breakfast “Board Evaluation and What Shareholders Want”. The additional benefit of effectiveness versus audit is that the former is forward looking. Fidelio, for example, will build a clear understanding of the objectives and goals of a company and in the course of an Evaluation we will review how well placed is the Board to oversee the achievement of these corporate objectives. Of course this entails a review of all aspects of the work of the Board and its committees. That review is less about compliance and more about how the Board is contributing to the sustainable future of the company and thereby value generation for both shareholders and stakeholders. Typically two or three key areas of focus are identified which if addressed will enable to the Board to increase its effectiveness, at times significantly. By contrast, a black and white audit approach to Board Evaluation shifts the focus to compliance and box-ticking, runs the risk of being mechanistic and backward-looking and could well serve to exacerbate a key problem for the UK Boardroom and UK plc – risk aversion.
Board Evaluation – The Future?
“There should be a formal and rigorous annual evaluation of the performance of the board, its committees, the chair and individual directors. The chair should consider having a regular externally facilitated board evaluation. In FTSE 350 companies this should happen at least every three years. The external evaluator should be identified in the annual report and a statement made about any other connection it has with the company or individual directors” (UK Corporate Governance Code 2018). Independent of the current review into Board Evaluation, Fidelio is seeing two key trends that extend beyond the formal requirements: Firstly, we are seeing companies and organisations beyond the FTSE 350 turn to the regular cycle, typically three years, for external Board Evaluation representing a shift towards embracing best practice rather than adhering narrowly to a specific relevant code. Examples here include:
Boards of listed companies outside the UK
Boards of regulatory bodies
Boards of not-for-profit organisations, charities, arts organisations, educational bodies and membership organisations/professional bodies
And secondly, we are seeing the work towards increasing Board effectiveness continue between the three year formal Board Evaluations with Chairs commissioning reviews and development programmes to add value in specific areas, for example:
Observation of a Board and/or Committee Meeting
Focused Review of one aspect of Board effectiveness e.g. following a change in Board composition
Development modules for the Board focusing for example on shareholder activism, the work of a Committee or a new element of the Code such as employee representation.
Development modules for individual Board Members for example the creation of peer networks for Committee Chairs.
Thus we see a significant trend towards Board Evaluation being adopted by Boards internationally as a means of increasing Board effectiveness. Shareholders and regulators are right to show an interest in how Board Evaluation is conducted but should be wary of being over-prescriptive of the means. A focus on the end-goal of increasing effectiveness will be beneficial to both investors and stakeholders.
Nor does Board effectiveness need to wait for a three year cycle. Many Boards are applying elements of a fully fledged Board Evaluation outside the three year cycle, with or without external support, often to great effect.
To explore how Fidelio can support your Board in increasing its effectiveness through Evaluation, Development and Search, please contact Gillian Karran-Cumberlege.