Although boards differ in the severity of their performance problems, the competitive environment in which they work, and the range of performance issues they face, there are a number of key decisions that are relevant to all boards implementing an evaluation process. There are seven key questions to consider when planning a board evaluation.
1. What are our objectives?
The first stage of the board evaluation process is to establish what the board hopes to achieve. Clearly identified objectives enable the board to set specific goals for the evaluation and make decisions about the scope of the review. Such issues as the complexity of the performance problem, the size of the board, the stage of organisational life cycle and significant developments in the organisation’s competitive environment will determine the issues the board wishes to evaluate. These early decisions about overall objectives and resource allocations are critical to the success of the process.
Similarly, the scope of the review — how many people will be involved, how much time and money to allocate — will be determined by the severity of the problems facing the board and the availability of sufficient resources (human, financial, time) to carry out an evaluation. These early decisions about overall objectives and resource allocations are critical to the success of the process.
With clear objectives, it is relatively easy to decide whose performance will be evaluated, who the most appropriate people are to assess performance and the person or group best suited to conducting an evaluation. Similarly, the choice of measurement techniques and decisions on how to disseminate the results of the evaluation, are readily determined once decisions have been made concerning the earlier questions.
Conducting a more traditional board review for conformance and/or value-adding purposes may not be the best option. For example, if the board is concerned about the knowledge, skills and experience of current directors and wishes to establish what skills it needs in the coming years, a skills analysis would be the most appropriate means. On the other hand, if the chair knows the board is not working to its full potential, but is unsure why, the complexity and scope of the board evaluation can be widened to find the root cause of the board’s problems.
2. Who will be evaluated?
Along with establishing objectives, it is important to decide whose performance will be appraised to achieve those objectives. Evaluation of the board as a whole is the most common and important practice for developing shared performance expectations between board members. The purpose of evaluating the board as a whole is to assess how effectively the board is meeting performance expectations and contributing to the achievement of organisational objectives.
To be confident that your board is performing at its best, contact the AICD’s Advisory team to conduct your board review. The AICD’s board review focuses on the key drivers of board effectiveness. Clicks here for a demonstration.
Boards looking beyond group performance to individual performance evaluate individual directors and, in some instances, the chair’s performance. Self- or peer-evaluation techniques may be used, depending on the board’s level of comfort with the evaluation process and the types of issues that the board is trying to assess.
For those organisations that have committees to manage the board’s workload, committee and committee chair evaluation can be a valuable process. For example, the current media focus on accounting standards may encourage boards to reassess the effectiveness of their audit committees, to ensure that all policies and procedures conform to current leading practice guidelines.
Finally, the most common form of performance evaluation is the board’s assessment of the CEO. Since hiring, evaluating, rewarding and, where necessary, firing the CEO are key board functions, assessing the CEO’s performance is an essential requirement of good corporate governance.
3. What will be evaluated?
The third stage in establishing a framework for a board evaluation involves deciding the criteria for the evaluation process. As we have noted, boards are generally looking for performance improvements in the areas of board processes, director skills and relationship building.
To cover the range of objectives the board may have, including meeting any compliance requirements, board evaluations generally use some form of leading practice framework.
4. Who will be asked?
Step four in establishing an evaluation framework is to decide whom to approach to provide feedback on the board’s performance. If the decision has been made to conduct an internal review, most boards choose to confine the evaluation to board members themselves. However, under certain circumstances, it may be important to ask the CEO and senior management team to give their views on the performance of the board. There may even be a need to consult other managers and employees of the firm, as long as they have direct access to the board and can give useful feedback that relates specifically to board performance.
In the case of external evaluations, shareholders and financial markets, customers, governments, suppliers and other key stakeholders can all be asked to participate in the evaluation of the board, depending on the significance of their relationship to the firm, and the closeness of their contacts with board members.
5. What techniques will be used?
Selecting the most appropriate measurement techniques for the objectives is another important decision. Depending on the degree of formality of the evaluation, its objectives and the resources available, there are a number of qualitative and quantitative techniques that may be employed.
Qualitative techniques include in-depth interviews, observation and document analysis. Of these, interviews are frequently used because of their versatility. They can be formal or informal, conducted with groups or individuals. Similarly, they can be conducted face-to-face, or via phone or video conference, if time or distance are important considerations.
Surveys are the other most common research technique. They form the basis of all quantitative analysis and have the added advantage of being able to capture qualitative data as well. For example, apart from the scaled questionnaire on which quantitative analyses are performed, open-ended, qualitative questions inviting director feedback can also be incorporated into a survey. This makes them a very versatile research tool. Surveys can be administered face-to-face, by phone, video conference or other forms of electronic communication such as email or via an online questionnaire.
6. Who will do the evaluation?
The next consideration in establishing your evaluation framework is to decide who the most appropriate person is to conduct the evaluation. If the review is an internal one, the chair commonly conducts the evaluation. However, there are times when it may be more appropriate to delegate either to a non-executive or lead director, or to a board committee. In the case of external evaluations, specialist consultants or other general advisers with expertise in the areas of corporate governance and performance evaluation may lead the process. There are also online providers who can conduct an evaluation over the internet, although these evaluations tend to be generic.
7. What will we do with the results?
The final step in planning the framework for your board evaluation is to determine how, and to whom, the results will be distributed. Internally, this may include the board only, the board and senior management team or broader dissemination throughout the organisation. When communicating with external stakeholders, boards most commonly release information as part of the annual report or in some other form of shareholder communication such as the corporate governance section of the company’s website. However, the results may also be disseminated at analysts’ briefings or to key stakeholder groups, depending on the original objectives of the evaluation.
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