Board Effectiveness
Corporate governance
practitioners have been applying Peter Drucker’s idea that “what gets measured
gets managed,” and among senior leaders, what gets acknowledged and valued gets
done even better. The second decade of SEBI’s existence, has seen broad
attempts to improve board effectiveness by acknowledging its role and functions
in furthering corporate objectives with due respect for all stakeholders.
Significance of Board Effectiveness
This view is
confirmed by an analysis of the boards of directors of the “100 Most Innovative
Companies in the World”, listed in the 2014-2016 editions of Forbes magazine.
Such analysis indicates that boards can, and should, play a much larger
strategic role in the creation of new products and/or processes.
A
well-functioning board provides companies with a clear competitive advantage
and can help build connections with government, society and other stakeholders.
It assists company leaders in making better decisions and avoiding tunnel
vision by providing relevant information on the current state of the business
environment in which they operate.
Boards can also
help identify new business opportunities and provide a more coherent sense of
their peers and competitors. Finally, pro-active board members with relevant
expertise can help business leaders to identify “expertise gaps” in their
executive teams. It is in this collaborative context that boards can have the
most impact on a company’s business strategy and capacity for innovation.
(Source: Board
Evaluation : Overview of International Practices, OECD, 2016)
An effective
performance evaluation exercise helps the board, committees and individual
directors
perform to their optimum capabilities It improves leadership/performance
culture, clarifies differing directors’ roles, improves board communication and
facilitates board teamwork, improves decision making processes and efficiency
of board operations, etc.
“Board Evaluation” is a
term that commonly refers to the assessment of the Board as a whole, its
committees and its individual members.
Corporate events in the decades 1990s and 2000s have made it clear that boards can fail.
Failure has come in various disguises: failure to manage risks, to proactively
contribute to firm strategy, to identify the ‘right’ team, and in some cases,
to deal with integrity issues and possibly outright fraud. It is also clear
that we need better governance at all levels. The latter calls for increasing
board effectiveness. The four pillars of Board effectiveness are :
1. People and builds on their quality, focus and
dedication
2. Information
architecture
3. Structures and
processes
4. Group dynamics
The need for Board Effectiveness Evaluation
It recognizes the pressures associated with regulatory and
investor requirements. Equally if not more significant are senior leaders’
standards of excellence and their determination to strengthen the leadership
culture and performance of the Board.
1. Compliance
with legal requirements
There is a global
trend toward mandatory provisions made by regulatory bodies such as stock
exchanges, central banks and financial services commissions. The Ministry of
Corporate Affairs, which has the responsibility to administer India’s Companies
Act (2013), now mandates the annual reporting of Board evaluations for designated
companies.
2. Investor and
shareowner pressures
Board evaluation is
increasingly used to demonstrate to investors the commitment to improving
performance at the highest levels. Institutional investors consider Board
evaluation a significant criterion in their governance ratings of companies. In
the near future institutional investors are likely to 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 Annual Report to
shareholders. 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.
3. To improve
leadership and performance
The Chairperson of
Infosys was among the first to champion the benefits of Board evaluation.
Senior leaders
at Tata
Group, a global enterprise headquartered in India, have developed a business
excellence model for
the regular, systematic assessment of leadership systems, including Board
governance. The assessment framework reinforces Tata’s values, ethical
behaviors and performance expectations. The Leadership category includes
mechanisms for senior leaders to conduct selfexamination, receive feedback, and
improve.6 Studies in Europe7 and the US8 confirm that when senior leaders take
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.
Benefits of engaging the Board include:
• Improved
decision-making – In many cases, the
assessment process leads the Board to reconsider Board practices, including
priorities on the agenda and the efficiency of its communication systems and
information architecture. The process of raising directors’ concerns acts as an
early warning system to the Board, which will allow changes to be implemented
before more deeprooted problems set in.
• Improved
performance – Board and individual
effectiveness improves as a result of developmental as a result of
developmental assessment. Improvements in Board practices and structures help
to improve trust, respect and business confidence. Significant results may be
recognized through corporate governance and Board leadership awards.
• Improved
accountability – Board evaluation is a
major method for a company to improve its accountability, transparency and
disclosure. Positive results of ‘Board evaluation’’ can be included in Annual
Reports, which allow the Board to frame and provide evidence of the value it
creates for the company and beyond
A Framework for Evaluation of Board effectiveness
If the chair and the Board perceive Board evaluation as an
opportunity to get the Board to think smarter and work more effectively, Board
evaluation can achieve great things
No one self-evaluation method is right for everyboard—or right for every year—and should be driven by the company’s current
circumstances. Whatever process is selected, it should lead to a critical look
at the board’s effectiveness and culminate in specific actionable items for
board improvement based on evaluation results.
Step 1: Define Evaluation Objectives
Step 2: Determine Who Will be Evaluated: Board, Board Committees,
Individual Directors
Step 3: Determine Role of Board Leaders and Management in the
Process
Step 4: Establish Evaluation Methodology
Self Evaluation Surveys , one-to-one Interview by
Lead Director; by third party
Step 5: Conduct Evaluations, Analyze Evaluation Results, Report to
the Board and Develop Action Plan
Step 6: Disclose Board Evaluation Process and Outcome
Timing of Board Evaluations
There is no “one size fits all” approach to
board evaluations – including the timing of when evaluations are conducted. It
is important however that directors at least annually assess board and board
committee performance in some form.
One best practice is to conduct board
evaluations following critical inflection points in the company’s life cycle,
which can include the company undergoing significant transformations, such as:
- Preparing to go public
- Mergers or other significant
corporate transactions
- Restructuring
- CEO transition
- Change in board leadership or
composition, reputational concerns, litigation or other crisis events
- A significant period of time
without refreshment
Board effectiveness has a view that looks beyond
control of behavior and recognises that a well-balanced board plays a crucial
role and can be a competitive advantage for a company in terms of innovation
and value creation. The G20/OECD Principles of Corporate Governance (hereafter
“the Principles”) emphasise that: “Together with a guiding corporate strategy,
the board is chiefly responsible for monitoring managerial performance and
achieving an adequate return for shareholders, while preventing conflicts of
interest and balancing competing demands on the corporation.”
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