Annual Board Evaluation

Pages: 5 pages Issued: March 2010 Author: Process Knowhow Email us at service@processknowhow.com if you require further information Free to download - please add to your cart to download as a printable document. The following is an extract: What are board evaluations? In the context of listed company corporate governance, board evaluation refers to the set of reviews that assess the effectiveness of the board’s processes with a view to improving them. The evaluation process forms part of the system of controls that ensure a business achieves its objectives and includes assessments covering the board, its committees and individual directors. UK listed companies predominantly adopt the Unitary board structure for which the Combined Code on Corporate Governance sets out the widely adopted framework. For companies which comply with the Combined Code, the principles and provisions of A.3.1, A.6 and A.6.1 provide minimum requirements for annual board evaluations. These are: The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors; The board should state in the annual report how performance evaluation of the board and its committees and individual directors has been conducted; The non-executive directors led by the senior independent director, should be responsible for performance evaluation of the chairman, taking into account the views of executive directors. The chairman’s performance should be appraised at least annually and on such other occasions as are deemed appropriate; Individual evaluation should aim to demonstrate whether each director continues to contribute effectively and to demonstrate commitment to the role (including commitment of time for board and committee meetings and any other duties); The chairman should act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the board and, where appropriate, proposing new members be appointed or seeking the resignation of directors. Complying with the Combined Code’s minimum requirements is not generally considered to be onerous. It requires disclosure to be made that is capable of being supported which confirms annual board evaluations have been performed and the methods used. Most FTSE 350 companies do not disclose the results of board evaluations or provide much detail about them. What are the outputs of annual board evaluations? The objectives for annual evaluations should be agreed by the board at the outset and might include To comply with the applicable regulatory requirements with regard to evaluations e.g. Combined Code A.3.1, A.6 and A.6.1; To recommend actions to be taken to ensure the business complies with all relevant regulatory requirements where these are flagged during evaluations; To recommend improvements to the board and business processes; To recommend updates to the company’s risk matrix and risk registers; To recommend updates to the Committee Terms of Reference and board policies; To recommend where board members and, if applicable, members of the senior management team might benefit from training and development; and To provide information for the Nomination Committee (or its equivalent) to consider whether board succession plans and the current balance, skills, experience and structure of the board are appropriate for the business. Approaches taken to board evaluations Most FTSE 350 companies conduct board evaluations using one or a combination of assessment questionnaires prepared by the company secretary, chairman and other board members and/ or one-to-one interviews of the directors conducted by the chairman (the chairman being interviewed by the Senior Independent Director or by one or more of the non-executive directors). The chairman leads the annual board evaluation process and proposes to the board how evaluations are to be performed. This includes what contribution is expected from each director and on the timetable. Chairmen of the committees consult with the other committee members to formulate proposals to put to the board on how each committee should be evaluated. Gaining board consensus at an early stage is an important factor to the success of the process as individual board members need to be prepared to accept any reasonable findings and recommendations arising from evaluations. The evaluation of the chairman of the board might include the same evaluation questionnaire used for the other directors together with additional questions appropriate for reviewing his role as chairman. The annual performance appraisals of the chief executive and executive directors as managers of the business might be kept separate from board evaluations which might focus on the performance of directors as board members. In some companies, recommendations arising from the annual board evaluation process are incorporated into the personal bonus objectives for the chief executive and executive directors. The company secretary supports the board and committee chairmen by ensuring that high quality questionnaires are prepared, circulated and get completed on time by the directors. The company secretary can also arrange one-to-one interviews for directors to ensure that all meetings take place. Evaluations are often carried out over several weeks or months depending on committee meeting dates and director diaries. The use of external company secretary services are being increasingly recommended, such as in the Walker report, to be used to facilitate the evaluation process, They can support the chairman to incorporate best practices with the development of questionnaires and with planning interviews. Company secretary services arrange, and in some case conduct, interviews with the directors. They collate the results of evaluations into an appropriate report of findings and recommendations for the board. Other external consultants are occasionally appointed to conduct special evaluations on behalf of the board or the shareholders. This is typically to benchmark the board and the directors of an evolving company against companies seen as role models. The outcome of this is to make recommendations on updating the structure, balance and membership of the board and its committees and to set personal performance improvement targets for individual directors. Examples of where consultants can add value include where the chairman or non-executive directors require support to carry through difficult changes, where there are team working issues amongst the board and where board members are unwilling to engage in an internal evaluation process. Assessment questionnaires Questionnaires completed by board members are popular and have advantages such as they can bring transparency and rigor to the process. They provide an auditable trail to support statements in the annual report that confirm evaluations have been performed. Questionnaires can be designed so that the responses can be systematically collated into specific actionable findings. Questionnaire results can also be tracked from one year to the next to monitor whether the board’s processes are improving. A disadvantage is that questionnaires require administrative effort to prepare, distribute and for replies to be collated into a usable format for which the chairmen might not have the necessary resources. Further, questionnaires provide a written record and directors might only feel able to discuss certain matters in confidence with the chairman. The questionnaires used by listed companies vary widely typically including between 10 and 100 questions depending on what is considered to be appropriate for the company. Larger questionnaires focus on gathering specific information but can take longer for directors to complete. Shorter questionnaires are used to ask open questions for directors to elaborate on their ideas and opinions but might be less suited to driving detailed procedural improvements. Directors might also give superficial answers to open questions if they do not feel engaged in the process. Responses to questions on questionnaires unusually include an appropriate assessment box (e.g. strongly agree through to strongly disagree) together with a comments box for the director to explain their answer, provide information and to suggest how the process can be improved. The board might decide that responses to questionnaires should be kept confidential from the other board members. In this case, the company secretary works with the chairmen of the board and committees to summarise the responses into an anonymised report for chairmen to take forwards as they consider appropriate. Where a business employs a stand alone company secretary they are often asked to complete questionnaires since they have a good insight into the detailed procedures of the board and the business. One-to-one director interview rounds Where one-to-one director interviews are used, an initial round of interviews is often timed to occur after responses to questionnaires have been collated so that the chairman is aware of any issues that need attending to in discussions. Directors are often asked to complete, or to look at, a specific questionnaire prepared for the interview which is used to help guide discussions. Once the initial round of interviews has been completed, and questionnaire responses have been collated, the chairman might then need time to reflect on the findings and to develop recommendations. Further ad-hoc meetings with the chief executive, non-executive directors or executive directors might be held to gather more information and to discuss proposals for recommendations. The chairman of the board might conduct a second round of follow up one-to-one interviews with each director to discuss the findings of evaluations and his conclusions. This can be used to provide confidential feedback to a director on any comments made about them by other board members and to inform them about recommendations which might affect them. What subject areas should board evaluations cover? The board is free to set the scope of evaluations although it is normal for the chairman of the board to propose what should be included. This might follow discussions with the company secretary and directors. Annual evaluations for FTSE companies usually cover compliance, operational and strategic areas but evaluations need to be tailored for each business. The content of questionnaires and interviews needs to be planned so that the evaluation process is efficient, does not overlook significant areas and is measured and appropriate to the business. Typical examples of areas often covered by evaluations that can be expanded into more detailed questions or summarised into fewer questions include: Compliance How does the Board (and its committees and directors) measure in terms of the Higgs report recommendations? Does the Board comply with minimum applicable regulatory requirements and with appropriate best practices? E.g. ICSA guidelines, Combined Code provisions & Turnbull, ABI guidelines, listing rules, legal compliances, Walker Report (where applicable) etc Does the Board comply with its own policies e.g. do committees perform the duties and follow the procedures set out in committee Terms or Reference and any minuted board decisions? Do the Chairman and Chief Executive follow their formal role specifications? Do NEDs and executive directors adhere to policies set by the board and do they follow their terms of appointment? Are director terms appropriate e.g. in respect of director shareholdings? Does the business comply with policies set by the Board e.g. are authority levels set by the board being followed? Operational effectiveness Are Board and Committee meetings effective e.g. well attended with individual directors making a full contribution, are meetings too frequent/ not frequent enough, appropriately minuted, matters arising dealt with between meetings, agendas covering the right areas, board information is appropriate etc Is each committee effective in its own sphere and do the committees work effectively with the board? e.g. what are the expectations for the contribution of committees and are the expectations being met, is the split of responsibilities between the board and committees optimal, are recommendations made by the committees taken on by the board, are the Audit Committee and Remco independent etc Do the committee chairmen have any recommendations on how the committee processes should be improved? Are the business processes effective in the areas where the board is involved or where the board should be involved e.g. external reporting, risk management, senior management appointments, oversight of major projects etc (the list will vary for a business) Are all relevant Combined Code areas followed e.g. is the board kept appropriately informed with adequate information, new directors receive an adequate induction etc Are there any known areas where improvements to the board processes could add net benefit? The board strategy process Is the full board responsible for, and engaged in, setting the strategy for the business and is the board appropriately involved in developing and approving the objectives for the business? Is the board appropriately involved in deciding what is communicated externally e.g. for the results, plans and objectives for the business? Does the process for setting the structure of executive remuneration ensure that the interests of management are aligned with those of the shareholders? Does the board have a formal process for monitoring board structure and balance such as a Nomination Committee or its equivalent? Does the business face significant risks, is the board appropriately involved in overseeing them and are the processes for risk management adequate? Board evaluations are not strategy reviews but they should assess the adequacy of the processes and procedures of the board for setting and implementing strategy and risk management. An outcome of the annual board evaluation might be a recommendation for the board to improve the procedures it follows in respect of strategy development and risk management. Conclusion of the annual evaluation process The annual evaluation process is concluded at a board meeting at which the chairmen of the board and committees presents the findings of evaluations, recommendations and proposals for actions. The board approves the evaluations together with how actions will be implemented and monitored. The annual board evaluation conducted in the following year should review whether actions have been implemented.