Guest article by Mark Peters and Derek Woodward, Managing Partners of BE-GS.
Listed companies are required to conduct a formal and rigorous annual evaluation of the Board, its Committees, the Chair, and individual directors. Chairs should consider having a regular externally facilitated evaluation; and in FTSE350 companies, this should happen at least every three years (The UK Corporate Governance Code ‘the Code’). Additionally, regular evaluations are either recommended or required for many other organisations, for example, the Wates Principles for Large Private Companies (‘Wates Principles’).
Boards continually need to monitor and improve their performance. This can be achieved through evaluation, which provides a powerful and valuable feedback mechanism for improving effectiveness, maximising strengths, and highlighting areas for further development. Evaluations should inform and influence succession planning. They are an opportunity for Boards to review skills, assess their composition and agree plans for filling skills gaps and increasing diversity. (The Financial Reporting Council Guidance on Board Effectiveness ‘the FRC Guidance’). But a well conducted evaluation should be about much more than the composition of the Board; it should also look at What the Board does and How it does it!
The primary purpose of regular Board evaluations is to help the Board continuously to improve both its own performance and the performance of the company. Engaging an independent reviewer can bring greater objectivity and fresh insights to the process, as well as providing some reassurance to the company’s shareholders and other stakeholders, that the company takes its responsibility for continuous improvement seriously. The final report of the Chartered Governance Institute following their Review of the Effectiveness of Independent Board Evaluation in the UK Listed Sector, published in January 2021 (‘the CGI Report’).
Furthermore, the Wates Principles provide that regular evaluation can help individual directors to contribute effectively and highlight the strengths and weaknesses of the Board as a whole.
Whether conducting an internal or external evaluation, Boards should aim to gain the maximum benefit from their annual review. The statements above, highlight the reasons for conducting an evaluation and the benefits that can be gained as part of a continuous programme of monitoring and improvement for the Board (and its Committees), as a whole and for the Chair and individual directors – the business operates in a dynamic environment and the Board should adapt to remain ahead of the curve. At Board Effectiveness and Governance Services (‘BE-GS’), we want to dispel the myth than an internal evaluation should be, in any way, ‘light touch’.
The FRC Guidance is clear that externally conducted reviews should not be approached as a compliance exercise. At BE-GS, we echo this same sentiment for internal reviews - whether internal or externally facilitated, evaluations should be conducted with rigour and executed with the objective of gaining maximum benefit.”
With this objective, the evaluation should be tailored to the needs of the Board and the company. This does not mean limiting the breadth of the review but identifying key areas that may require further focus. Initial discussions between the Chair, with the support of the company secretary and the evaluator (bringing a broad external perspective), are essential ingredients for a successful review. For internal reviews, the initial discussion between the Chair and the company secretary should aim to achieve agreement on coverage as well as methodology, typically achieved by a comprehensive questionnaire.
The FRC Guidance is clear that questionnaire-based external evaluations are unlikely to get beneath the dynamics in the Boardroom. The preferred practice is for the evaluator to conduct individual interviews with each of the directors and the company secretary, whilst providing, in advance, a schedule of areas to be covered. It is essential though to allow sufficient time for directors to raise specific concerns.
The FRC Guidance states that the nature and extent of an external evaluator’s contact with the Board and individual directors are defining factors in quality. It suggests that the Chair should consider ways in which to obtain feedback from the workforce and other stakeholders. At BE-GS, we fully recognise that Boards do not work in a bubble and strongly believe the review should include views from beyond the Boardroom, seeking input from shareholders, senior executives, the workforce, auditors, and external advisors such as brokers. Understanding the perception of Boards outside the Boardroom is an important element for measuring effectiveness.
So, what should the evaluation cover? The Code, the FRC Guidance and the CGI Report are all non-prescriptive, but the FRC Guidance offers a non-exhaustive list of areas which may be considered. The CGI Report recommends that, signatories to the proposed Code of Practice for Board reviewers, should use their knowledge and experience to recommend a scope and methodology that is appropriate to the client’s circumstances, guided by an objective view of the client’s best interests.
Typically, we would explore: the composition of the Board and its attributes measured against the strategic objectives of the business; succession plans; and the induction programme as well as the ongoing development of the Board as a whole and the directors individually. We also review how the Board plugs skills gaps in the short, medium and long-term.
We review what the Board and Committees do, making best use of precious time, both in and outside the Boardroom; we look at whether there is an appropriate balance between strategy, capital allocation, operational and performance management, not forgetting directors’ responsibilities for people, succession, culture and values, diversity and inclusion, organisational capability, risks & controls, and stakeholder engagement (and how the Board understands stakeholders’ views).
Of equal importance is to understand how the Board works as a unit, looking at the behaviours, interactions and relationships amongst all the directors – in the Boardroom and in between meetings. Does the Chair ensure each director has an opportunity to contribute, allowing sufficient time for major decisions or contentious issues? Are ‘out of Boardroom’ opportunities to interact with other directors and management built into the corporate calendar? These are just some of the areas to be explored.
As we hopefully emerge from the Covid pandemic, there is a great opportunity for directors now to reflect on how the Board handled this and to explore the “new normal”, taking advantage of the many learnings before these lessons dim with time. How well were the significant challenges and disruptions handled? How well did those risk mitigation strategies and business interruption plans work in practice?
Each evaluator offers different skills and experience. But the key experience must be a deep understanding of how Boards operate and the issues and behaviours which can create tensions in a Boardroom. An evaluator who has this type of experience will intrinsically know what good and “not so good” look like. They will also have a clear view on the relationships between executive and non-executive directors and how they should engage with each other, what structures and processes work best to aid the efficient operation of Boards/Committees and how agendas should be structured across the year to make sure directors are properly fulfilling their duties and complying with their legal, regulatory and Code obligations.
At BE-GS, our quality Board evaluation approach, combined with our extensive “in the Boardroom” experience will provide credible insights in support of our relevant experience-based recommendations; supporting the Board’s effectiveness in achieving its strategic objectives, meeting its duties and obligations, and building confidence and reputation across its stakeholder communities.
Mark Peters and Derek Woodward are Managing Partners of BE-GS. They have years of experience of careful and discreet handling of companies’ highly confidential information and in maintaining senior level relationships; and are sensitive to delicate issues that can pertain in the Boardroom. Full details of the services they offer, their biographies and testimonials can be found at www.be-gs.com