Board Evaluation: An Essential Tool in Developing Board Effectiveness
By Dr Chris Pierce
CEO Global Governance Services and GCC BDI Faculty member
The Board of Directors is the most important governing body within a company but until very recently the process of evaluating the board, its committees and the individual directors has not been regarded by either chairmen or directors as a board priority. Up until now, very few boards of directors in this region have been evaluating themselves, their committees or their individual directors in an effective or rigorous manner. The latest GCC BDI 2017 Board Effectiveness Review identified that 55% of respondents were not looking to introduce the process nor do they see any value in the process.
However, the situation in the GCC is substantially and rapidly changing. The latest GCC BDI 2017 Board Effectiveness Review identified that 38% of respondents were currently conducting an assessment on an annual or bi annual basis. This is a significant increase on previous survey results. In many cases this trend to undertake board evaluation is driven by boards wanting to improve their professionalism. In other cases, the driver has been regulators in the region requiring board evaluations to take place. An additional driver has been some of the National Codes of Corporate Governance that are recommending that board evaluations should be undertaken.
Examples
Saudi Arabia
Since 2014, the Saudi Arabian Monetary Agency (SAMA) has been requiring the Boards of all banks that operate in Saudi Arabia to carry out on a regular basis an assessment of both the Board members as a whole and of the individual Board members. The Agency requires that bank Boards must also periodically review the effectiveness of its own controls and work procedures and identify weak points and make any necessary changes whenever the need arises. The Agency recognizes that entrusting an external person or organisation to carry out a Board assessment can contribute to the objectivity of the process.
Bahrain
Since 2011, the Corporate Governance Code of the Kingdom of Bahrain has been recommending that the board shall conduct an evaluation of its performance and the performance of each committee and each individual director at least annually. The evaluation process shall include: assessing how the board operates, evaluating the performance of each committee, reviewing each director’s work, his/her attendance at board and committee meetings, and his/her constructive involvement in discussions and decision making, and reviewing the board’s current composition against its desired composition with a view towards maintaining an appropriate balance of skills and experience and a view towards planned and progressive refreshing of the board. The Code states that while the evaluation is a responsibility of the entire board, it should be organized and assisted by an internal board committee and, when appropriate, with the help of external experts. The Code recommends that the board should report to the shareholders, at each annual shareholder meeting, that evaluations have been done.
REASONS FOR BOARD EVALUATION
There are many drivers for introducing board evaluation to improve board effectiveness:
- To improve board leadership and performance
A board evaluation provides the opportunity for the Board to think smarter, be more professional, work more effectively and achieve greater things. Research studies from around the world confirm that when the Chairman of a Board takes ownership of the Board assessment process, their meetings proceed more smoothly, they make better decisions, and they have greater influence on long-term corporate strategy.
In many cases, the assessment process leads the Board to reconsider Board practices, including priorities on the agenda and the efficiency of its communication and information systems. In addition, the process of raising directors’ concerns acts as an early warning system to the Board, which will allow changes to be implemented before more deep-rooted problems set in.
- Investor and shareowner pressures
Board evaluation is increasingly being used by companies to demonstrate to their investors and shareowners their commitment to improving performance at the highest levels.
Positive results from Board evaluations signal to shareholders and key stakeholders that the company is well governed. When the Board is able to demonstrate an ethical culture and effective practices, the evaluation process raises the profile and reputation of the Chairperson, senior leaders and the company as a whole.
Institutional investors are increasingly viewing board evaluation as a significant criterion in their governance ratings of companies. It is likely that in the near future, enlightened institutional investors will be requesting board evaluation reports (including a description of the process and a summary of the Board development plan arising from the evaluation) in the Company’s Annual Report to shareholders.
- Compliance with legal requirements
There is a global trend toward mandatory board evaluations being required by regulatory bodies such as stock exchanges, central banks and financial services commissions.
THE GCC BDI BOARD EVALUATION PROCESS
GCC BDI has developed a proprietary process to assess the effectiveness of Boards. The evaluation process combines a survey as well as one-on-one interview results that are all conducted in a non-attributive and confidential manner. The process combines quantitative information, international best practices, and board member opinions to create a comprehensive picture of board performance. In addition, the evaluation serves as a platform to engage board members in the creation of a board improvement plan, in order to ensure that board members have the resources they need to more easily and effectively fulfil their roles.
The GCC BDI Board Effectiveness Initiative involves a 3-stage process:
Stage 1: Online survey
An anonymous, online survey is completed by all board members and the board secretary. The survey is based upon a tailored framework for board effectiveness. This framework is comprised of 6 dimensions, each representing a critical component that define an effective board:
1) Board composition and directors’ capabilities
2) Directors duties & responsibilities
3) Board structure, processes & protocols
4) Delivering on roles of the Board
5) Effective Board dynamics and Board review & renewal
6) Board performance and renewal
Stage 2: Interviews
One-on-one, in-depth interviews are conducted with each board member and senior executive. During the one to one interviews, the GCC BDI evaluators assess the board’s effectiveness using the 6-dimensional framework outlined above.
Stage 3: Findings
The results of the survey and interviews are then benchmarked against data in the GCC BDI’s regional board effectiveness index This database contains all the results from board reviews conducted to date with GCC companies. This benchmark allows boards to compare and contrast their effectiveness with other GCC companies, as well as best international practices.
All contributions by directors in the final evaluation report and assessment results should be anonymous and non-attributable.
Both the survey and interview results are analysed and combined in a final report for the Chairman and then presented to the Board. The final report also comprises recommendations for an action plan to help enhance the Board and Board members capabilities. A presentation of findings is made to the Board and a Board improvement plan is developed.
GCC BDI draws on the expertise and knowledge of its partners (McKinsey & Co., PwC, Heidrick & Struggles, and Allen & Overy) and its regional and international faculty, to assemble the best evaluator or team of evaluators for each company. The final choice of evaluators often depends on the particular industry and sector expertise required.
APPROACHES TO BOARD EVALUATION
Approaches to Board evaluation are influenced by sector requirements and ownership structures.
Different sectors tend to differ in their priorities. Board evaluations in the public sector often focus upon the Board’s oversight of service provisions to key stakeholders (e.g. value for money audits), which often have a current or historical orientation. However, board evaluations in the private sector tend to focus upon the Board’s performance with an eye on value creation and its involvement in management oversight, with present and future orientations.
Different ownership structures also tend to differ in approaches to Board evaluation. Companies with a widely dispersed ownership structure tend to focus upon the Board’s reporting to shareholders, which often has a current or historical orientation. Companies with a highly concentrated ownership structures often focus upon the Board’s treatment of related party transactions, abuse of minority shareholder interests, conflicts of interests, and other business issues.
BENEFITS OF BOARD EVALUATION
The latest GCC BDI 2017 Board Effectiveness Review identified that 18% of respondents provided more education to their board members as a result of the board evaluation and 5% of respondents changed their board composition as a result of the board evaluation.
International research studies have found the following benefits being associated with board evaluations:
- Board directors feel more confident as a result of being a part of a more professional and effective board.
- Board practices such as board papers and packs are improved in terms of user friendly content and produced more punctually.
- There is a greater clarity of roles relating the board, the committees and individual directors.
- Chairmen and members of the board welcome the greater levels of transparency and disclosure that tend to occur after an evaluation has taken place.
- The board thinks more about the impact of its decisions on key stakeholders and about the long term.
One of the key methods for identifying improvements in corporate governance within your company is to conduct a board evaluation. If you are one of the 55% of respondents from the recent GCC BDI survey who were not looking to introduce the process or who see no value in the process, should this be an item on the agenda for your next board meeting for board directors to discuss?
CHRIS PIERCE, Ph.D
Dr. Pierce is a Senior Associate with the GCC BDI and is a member of GCC BDI’s team of board evaluators. He has facilitated many board evaluations in the GCC. He is also CEO of Global Governance Services Ltd. based in London.
Chris is the author of the best-selling book “Corporate Governance in the Gulf” which is currently being revised and the second edition will be published in early 2018.
For further information on board evaluation services provided by GCC BDI please contact Jane Valls, Executive Director by email jane.valls@gccbdi.org or telephone +971 4554 7967