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Board Assessment: Tradition versus Technologyby Philip Higginson, CEO ProNed
“Companies should disclose the process for evaluating the performance of the board, its committees and individual directors”
Recommendation 2.5, ASX Corporate Governance Principles and Recommendations (2nd Edition)
"It is sensible for a Board to review itself-for it to see whether it is performing, and if there is any way to improve." (Institutional Investor 1990)
ProNed has been an advocate of board assessment and performance reviews since these words were written into our lexicon in the early 90’s. It is vital that the board performs to the very best of its ability and where abilities are struggling, appropriate changes need to be made. The effective and efficient functioning of many boards is still hamstrung by under-performing directors, who have not been properly assessed before being appointed. The Board Assessment is the starting point for improved board performance and/or the exiting of poor-performing directors. The 'ejection' of poor directors is never easy, but in our view the Board Assessment provides the only impartial and effective means of doing so, if done at arms length by a qualified consultant with many years of commercial board experience under their belt and performed without fear nor favour.
All senior executives down to the most junior employee in any serious business are annually evaluated (often bonuses depend upon it solely), and have been since the 1980’s. It is no longer surprising that as these executives have now worked their way through to assuming executive or non-executive director positions, that board evaluations are now fully accepted as being both sensible and appropriate to the good stewardship of the company.
But who should evaluate the board?
Certainly not the chairman or the chairman’s delegate. We know of one listed company chairman delighted with the earlier results of an assessment of the chair could not believe the 180 degree turn-around in under 12 months following an independent ProNed assessment. The reason of course was originally, the lack of candour. When the deputy chair performed the role on behalf of the chair no other director was willing to openly criticise the chair because they had no guarantee that the chair’s choice for the investigation role would not report back who said what – and whilst we can all claim publicly to be totally fearless in such circumstances, in private few directors are. It is not co-incidental that the chair was removed from office and the board in 2008.
The board has to prove its worth, just like all other parts of the company. If the board is not adding value to the company, then it is not functioning properly and the company’s performance shall be sub-optimal.
ProNed is able to offer its clients the choice of two methods of board evaluation. Simply put one is the traditional method used for decades prior to the advent of the weblink and sophisticated computer analyses, and the other is a more technically advanced method but still relies on a trained and experienced ‘eye’ to assess and report the findings.
The traditional method is of course the more labour intensive but starts with the individual director being interviewed according to a set questionnaire, a written statement from the director as to the contribution they make to the board and an interview with each other director about their respective views on their fellow directors. Only members of the executive who are permanent attendees at board meetings should be interviewed concerning their view of the board as a whole and the individual members. These days this is usually restricted to the MD/CEO and CFO and Board Secretary – no part-time attendees no matter if they attend every board meeting should be asked their view. The chairman and the board secretary can usually answer all the questions relating to process and procedures. These days boards are resisting the latter questions (once established it rarely changes year on year) in favour of board performance questions, that is how the board’s performance is affecting the performance of the company. This of course is a much more difficult area of assessment and calls for first-class, defensible research findings from impeccable organisations and academic institutions.
This brings us to the second and more modern technologically advanced method of board assessment. One that provides total candour, and can be completed in private in less than 30 minutes. No director can be identified and we give that guarantee to all members of the board. The only possibility of identification is perhaps in the “open-ended” questions that allow the director to wax lyrically. If they use certain language for which they are famous, and or push particular hobby-horses they can expose themselves on those particular questions, but that does not identify them for any other answer. The open-ended questions represent approximately three in a hundred.
These questions have been developed as a result of 8 years research within one of the premier Business Schools in the USA. ProNed is particularly proud to announce a JV business with Prof Sydney Finkelstein of Tuck Business School within Dartmouth College, Hanover, New Hampshire for his Breakout Performance Index (BPI).
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