Board evaluation is entering a new era

Board evaluation is entering a new era. Both the final Walker recommendations following his review of corporate governance in banks and other financial entities and the Financial Reporting Council’s draft UK Corporate Governance Code published at the end of last year talked about the importance of rigorous and effective board evaluation. For the first time, both were prescriptive about the need for board evaluation to be facilitated externally. Sir David Walker recommended once every two or three years and the FRC draft Code (which is of course still out for consultation) specifies that at least every third year the evaluation should be externally facilitated.

Ali Gill is the co-founder and CEO of Crelos Ltd, a leading change and talent management consultancy. She’s committed to applying the learnings from psychology and to original thinking about the role of behaviour and group dynamics in Board performance. She has been involved in executive and non-executive assessment and development including board evaluations for many years and feels that the time has come to view board evaluations differently.

“Evaluation can be seen as something that is ‘done’ to boards who are not working well,” she explains, “but this is just not the case. Evaluation should be a process of evolution and learning. The productivity of groups is greatly enhanced when the group takes responsibility for collaborative evaluation of its work. In fact, the higher performing you are as a board, the more important it is to bring a different perspective to contribute to the information the Board has about itself. Groups have unique and changing characteristics. They can be collaborative, fragmentary, hopeful, despairing, keen, fearful, committed, and even blind. Having an external facilitator can help to mobilise resources and open horizons, encourage openness and a willingness to embrace change and address things the obvious and sometomes hidden dynamics that people may not want to talk about. It is very difficult ot evaluate yourself objectively.”

“You can experience resistance from some boards and usually this revolves around confidentiality or fear of what might surface and the group's ability to deal with it. How will the information collected be used? Who will have access to it? Often resistance is dependent upon the experience of the particular directors. If they have grown up through corporate life and have been used to regular performance appraisals, executive assessment and development then they will welcome the opportunity to reflect on both a personal and group level about how things might be improved. It depends a lot on the dynamics of the Board and how they perceive themselves. It’s absolutely key that the Chairman really believes in evaluation and feels comfortable with the process.”

“Having said that, there is no one size fits all. Every situation is different. One of the best methods of working out the group dynamics of a Board is to observe board meetings, but this is not appropriate for all Boards. Some directors and Chairmen might feel threatened by being observed. If this is the case, it's better to forget about the observation, conduct thr evaluation through in-depth interviews and through the process build sufficient trust to table a conversation about why they feel threatened.”

Ali is also clear about the need for any evaluation to sit firmly within the overall strategy of the business. “It’s really important that any feedback is given in the context of what’s going on the following year. For example, you might find from the individual director evaluations that there is insufficient knowledge or expertise in a specific area, for exmaple strategy or risk. If the business is involved in a major strategic review or is exposed to certain risk factors next year, you would want to work with particular directors to help enhance their skills in that area or consider a re-organisation of the Board to bring on new skills.”

“The range of topics which need to be considered during an evaluation are not solely behavioural or gorup dynamics focussed. A thorough evaluation must also consider matters of board administration such as structure, composition, time management and informaion flows. It also must consider matters of overight such as reporting, compliance and key relationships. And finally the evaluation must consider matters of decision making; for example strategy, capital and values.”

“This is the real opportunity for improvements in board evaluation and with this in mind Crelos have partnered with the Tavistock Institute, solicitors Norton Rose and a panel of experienced CEOs/Chairmen/Senior Independent Directors or non-executive directors to give that vital sector knowledge and input.”

“We believe that a multi-disciplinary team involving people with expertise in different disciplines will change the way board evaluation is done, contributing to the improvements on corporate governance that the Walker Report and proposed changes to the Combined Code indicate are needed". The team will be piloting the new approach over the coming weeks.”

“The demand to improve corporate governance through board evaluation is clear. We are in a new era and so no-one really knows what good board evaluation looks like at the moment,” concludes Ali “What is best practice? It would be good to see an independent body set up, similar to the Remuneration Committee Institute, which would provide guidance and best practice for the future. The implications of getting this wrong are immense.”

This article was first published in the February 2010 newsletter on The Non-Executive Director website. The Non-Executive Director is a Financial Times business.

Steve Bicknell, Co-founder and Head Honcho

'There are many ways to change businesses, from reorganising, buying a new CRM to starting new product lines. These are required, not sufficient, causes of successful change. The key issue is people. Will they alter attitudes and behaviour to drive the change through? This is one of the most challenging and enjoyable issues we work on.'

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