BOARD EVALUATION OR BOARD PERFORMANCE REVIEW?
Boards are routinely subject to evaluation and review. The criterion by which they are judged is typically effectiveness.
Much has been written about the effective Board and, without a doubt, an effective Board is highly welcome to both employees and shareholders. But what constitutes an effective Board remains hard to pin down and is often highly subjective.
It is common practice to judge executive teams by their performance. Metrics and KPIs are readily available to measure this. In recent years financial and share price metrics have been supplemented by a range of non-financial KPIs frequently reflecting ESG considerations.
Performance has not, however, been the main criterion for assessing Boards. This is partly because Boards have a different role to play from executive teams, in particular providing oversight, as well as strategic and sustainable long-term direction. Shareholders and regulators have learned that measuring Boards against the same metrics as their executive colleagues can too easily result in compounding short-termism.
THE HIGH PERFORMING BOARD
Nonetheless, Fidelio has seen among our clients a strong and increasing interest in “the high performing Board”, and we have conducted workshops and evaluations to that end.
The UK regulator, the Financial Reporting Council (FRC), is also encouraging a shift in focus in Board evaluation away from effectiveness and towards performance.
“the FRC should consider adopting the term ‘board performance review’ instead of ‘board evaluation’… because … the term ‘evaluation’ has contributed to the erroneous perception that … reviews are intended as a backwards-looking assurance function, … the value of such reviews is in informing a continual process of self-improvement”
UK Corporate Governance Code Consultation 2023
The FRC’s proposed change in language is seeking to remedy an approach to Board reviews that is compliance-based and gives rise to box-ticking and risk aversion. But there is a bigger picture here. Boards can and should be expected to perform. They have a responsibility for the success of the business and that will not be achieved on a sustainable basis if the Board is reduced to box-ticking.
PERFORMANCE AND VALUE
On the contrary, the Board is a key contributor to the value equation and to deliver value performance is required.
Of course, Board performance cannot be measured in snap shots or short-term time horizons and isolating the Board’s contribution to value creation over any time period is nigh on impossible. But it is possible to assess how well aligned the Board is to value, in terms of operational oversight, strategic contribution and stakeholder engagement. This is a framework that Fidelio has successfully adopted to support both shareholders and the Chair in assessing value.
To learn more about Fidelio’s approach to building and assessing high performing Boards, please get in touch.
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