By James Beck
A question I am asked regularly is how often a board should be reviewed. For a board that is not obliged to annually assess its performance such as ASX listed companies and APRA regulated entities, the question is a valid one. But even for those organisations where board reviews are mandatory, there are still considerations to be made as to the type and scope of an annual evaluation.
Some boards will decide to evaluate their performance on an ‘as needs’ basis, while others will prefer to conduct a major review every two or three years. Many boards conduct an annual or even a semi-annual review. Finally, others will opt to include performance evaluation as a regular agenda item at each board meeting. There are advantages and disadvantages of these different review cycles.
The ‘as needs’ review
The ‘as needs’ approach may be beneficial to boards that have a clearly articulated and understood policy on triggers that will prompt a review. For example, any changes to board composition – the resignation of a chair or other director, the creation of a new committee or decision to change the organisation’s strategic direction are situations that might automatically trigger an evaluation. These events will prompt the board to reassess its skills mix and the changing roles of individuals. Another situation where the board may consider evaluating the performance of an individual director is where the director is reaching the end of their term. The board may choose to tie re-election to an evaluation of the individual director’s performance.
The difficulty with the ‘as needs’ review is that, unless there are clear guidelines linking them to specific situations as outlined above, performance evaluation is liable to be overlooked. The implication of the ‘as needs’ review is that evaluation will only occur when a problem has already been identified. This approach does not promote a culture of continuous improvement or demonstrate the board’s commitment to performance improvement. These goals are best achieved by instituting a regular performance evaluation cycle.
The two or three-yearly review
Some boards choose to hold a regular performance evaluation every two or three years. These will tend to involve a more extensive process that combines interviews and surveys and often involves an external facilitator. This system will be the most appropriate for boards working in relatively stable industries, especially if the board membership is consistent.
The chief disadvantage of two or three-yearly reviews is that most organisations operate in a very dynamic environment and many changes will occur during this time frame. If the board is to perform its role in setting the strategic direction of the organisation and monitoring changes in the external environment, directors should be reviewing the board’s performance in these areas more frequently to fulfil their governance responsibilities adequately.
The annual or semi-annual review
The annual review is the most commonly recommended and/or mandated form of board evaluation and is consistent with the annual planning cycle adopted by most boards. Some boards find it useful to tie board evaluation to the strategy formulation process. This is a useful way of adapting performance expectations to fit the strategic needs of the organisation. For those organisations operating in more dynamic business environments, however, annual reviews may not be frequent enough. In high technology industries, for example, a review of the board’s performance every six months may be more appropriate, although this is a rare occurrence.
Although the annual review is the most common form of evaluation, this does not necessarily make it the most effective. There is always a danger that the predictable annual event will become stale and no longer add value. If evaluation becomes too routine an activity, boards are in danger of becoming complacent. In these circumstances, it is important to experiment with different evaluation styles and techniques to keep the process interesting and ensure that it continues to lead to performance improvements. For example, keeping a standard set of evaluation questions to develop performance benchmarks, but adding questions to vary the focus of the evaluation topics by focusing on different areas each year. Similarly, the standard board questionnaire can be supplemented with individual director interviews and/or individual director peer reviews one year and a board skills assessment the next.
The regular meeting review
Still other boards believe that performance evaluation should be an ongoing process, not just an annual event. High performing boards tend to devise other mechanisms apart from an annual review to ensure ongoing performance improvement. One option is to review the effectiveness of each board meeting. This can be scheduled as a regular agenda item, with directors taking turns to lead the discussion.
The technique involves the appointment of one board member to act as the ‘meeting evaluator’. This person observes the participants, assesses the content and importance of items on the agenda and the quality of board papers. The evaluator then gives their opinion in a five-minute review at the end of the meeting. The other board members are then asked for their comments on the effectiveness of the meeting and to offer suggestions for improving performance. The whole process is intended to last no more than 10 or 15 minutes. This is a simple technique for keeping performance issues ‘front of mind’ for the board. It is an easy way to gain quick feedback and to encourage discussion and interaction between board members, and it requires little time or effort to put in place. However, while useful, I would not recommend this as a board’s sole means of evaluation. This is especially so in dysfunctional boards, as it can be very easy ignore an ‘elephant in the room’ by just evaluating meetings.
Frequency or approach?
As the above discussion has shown, it not only the frequency of board reviews that matters, but also the methodology. An all too common approach evident in the public disclosures of ASX-listed entities required under Recommendation 1.6 of the ASX Principles1is that each year the board undertakes the following activities:
- the chair meet with each non-executive director separately to discuss individual performance and ideas for improvement; and
- the board as a whole discusses and analyses its own performance during the year including suggestions for change or improvement.
The success of an annual review in which the chair questions each director on aspects of the performance of the board and/or individual directors each year will be highly dependent on the skills of the chair and the nature of the chair’s relationship with each board member. I would therefore recommend that such reviews are only conducted on alternate years, with an external review conducted every second year so that the findings are the result of directors being able to candidly comment on or discuss sensitive issues where interviews are held, particularly where confidentiality is assured.
It must be noted that board evaluations are not standalone processes, but rather form part of an integrated, evolving cycle of corporate governance accountability and improvement. Effective evaluations require the board to set annual objectives, collect, disseminate information on progress toward the objectives, then judge performance, and make adjustments on an ongoing basis.
Boards need to have a sense of the frequency and pattern of their reviews – how they will cycle through the various important aspects of governance over time. Most boards undertake an annual evaluation. However, an annual review does not make sense for some elements of governance. For instance, if a committee meets only 3 times a year, committee members could conceivably spend the first meeting discussing what they thought the committee evaluation process should include, the second meeting carrying out the review and the third discussing the results. Evaluation would be a constant agenda item for that committee.
Instead, many organisations have a changing approach for evaluation – for example, alternating whole-of-board evaluations one year with individual director evaluations the next. Similarly, smaller update or check-in evaluations undertaken in-house can be alternated with a rigorous extensive review conducted by an external party every 2-3 years. Approaches such as these are made to balance the resource implications of conducting an evaluation with rigour.
From experience, I would recommend that, at a minimum, a formal board performance evaluation should occur every second year. Ideally, this would be an externally facilitated review that takes into consideration the performance of the board, individual directors, the chair and committees. Other situations where it may be appropriate to conduct a formal and preferably external board evaluation include:
- a change of the chair;
- a change in strategic direction;
- a breakdown of decision-making processes;
- the emergence of dysfunctional boardroom dynamics.
For boards that do undertake an annual review, I would also recommend an externally facilitated review every second year that takes into consideration the performance of the board, individual directors, the chair and committees.
I further suggest that the board explore a range of techniques as a means of investigating different performance issues and to keep the evaluation process fresh and interesting. For example, meeting observation can bring to light boardroom dynamics and meeting process issues. In this way, a regular evaluation cycle will continue to benefit the board.2
1 ASX Corporate Governance Council, 2014, Corporate Governance Principles and Recommendations, 3rd edn, Sydney, Australian Securities Exchange, available www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf.
2 For more on board evaluations, see Kiel, G. & Beck, J., 2006, ‘Seven steps to effective board and director evaluations’, Keeping Good Companies, vol. 58, no. 10, pp. 588-592, available www.effectivegovernance.com.au/content/Document/Articles/Seven-steps-to-effective-board-and-director-evaluations-Beck-and-Kiel.pdf.