FEATURE
Approach
A Directors need to discuss and resolve key issues
valuable
David Anderson argues that board evaluation provides
valuable feedback to boards, which will ultimately make
them more effective.
n the context of the recent global
I financial crisis, the UK’s new Corporate
Governance Code is a welcome call for a
return to basics. Today no one questions
the need for boards to improve their game – nor
the power and responsibility of boards to effect
change. While the global financial crisis did not
happen simply because of failures in corporate
governance, it is widely recognised that stronger
boards delivering better value and bolder oversight
are part of the solution.
In human psychology terms, feedback is the
foundation of performance improvement. Smart
boards take the next logical step and integrate
feedback when refining their work, to ensure
insights and observations are captured and built
upon in an iterative fashion. Simply put, lessons
cannot be learnt, nor the benefits of wisdom
realised, if directors don’t look for ways in which
to do their job better. To do anything less is an
abrogation of basic duties and shows a lack of
commitment to delivering one’s best in governance.
The new UK Governance Code reflects this
understanding. It seems that boards in the UK,
as well as in Australia and Canada, are rapidly
coming to the same conclusion. However, despite
ongoing calls for board evaluation, the uptake has
been meagre.
BEYOND REPROACH?
Unfortunately, a relatively small percentage of
boards have engaged in rigorous reviews of their
performance. One can sympathise with certain
reasons for this: directors can be concerned about
being exposed as inadequate; or fear upsetting
collegiality and thus creating a climate which is
unpalatable to service. They may also feel that
at this level, evaluation is not required. These
perspectives, and the emotions underlying them,
are real and have validity. Yet there are even better
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tool
reasons for undertaking a thoughtful process of
reflection and invited input. To avail oneself of
feedback is a gift, particularly if a person believes
his or her work is important. What does it say if a
board thinks itself beyond such a principle?
VALUABLE REVIEW
The new Code will get boards thinking about
board evaluation, encouraging them to adopt
an approach that seriously intends to improve
performance. The impetus will partly come from
the requirement to use external evaluators at least
once every three years. This represents a bold
innovation in the exercise of governance.
THREE DECISIONS
Simply put, directors need to decide on three
things to put themselves on the right path:
• Purpose: why is the board undertaking
evaluation? This will drive everything else.
• Approach: how will the board gather feedback
to reflect on its performance?
• Value: what should the board do with any
feedback to realise its potential value through
enhanced performance?
Purpose
Each board should state why evaluation warrants
its time and energy. Predominantly, the purpose
of evaluation is to actively examine board
performance in order to find ways to improve
its effectiveness. Philosophically, those at the
top of a hierarchy need to set an example by
engaging in self-reflection and inviting feedback.
Psychologically, our sense of accountability
increases under scrutiny; feedback is the best
way to motivate and direct a change in behaviour.
Pragmatically, stakeholders, from investors to
regulators, expect boards to evaluate themselves.
in designing and executing the evaluation
process. They should consider a variety of
factors, including who owns the evaluation
process. Accountability in any process requires
a clear owner. Boards should explicitly assign
or delegate responsibility for the executing the
process, either to the Board Chair or Chair of the
Governance Committee. Directors should also
consider what will be evaluated and set out the
general principles under which the board expects
itself to operate. For example:
Accountability
Whether the board has set clear expectations
of itself and management, employs the means
to gauge actual performance against such
expectations and acts within its authority to apply
consequences to demonstrate accountability and
encourage learning. For example, do stakeholders
believe accountability is reflected in remuneration?
Transparency
The board should offer concise, accurate and
timely communication on relevant matters to
stakeholders, both proactively and reactively
where appropriate. Do stakeholders perceive
the board as demonstrating transparency in its
governance?
Merit in appointment and remuneration
The board should articulate a clear appointment
philosophy, covering its expectations of director
nominees in terms of their value to the work
of the board. It should also show due regard in
its appointments in terms of planning for and
managing the psychological dynamics of group
behaviour. For example, the need for diverse views
to be presented in debate in order to yield better
decisions, as well as how members are motivated,
for example in terms of the effect of remuneration
plans on judgement. Do stakeholders believe the
board respects meritocracy in its director and
executive appointments and remuneration?
Development
The board should demonstrate a commitment
to ongoing education covering the evolving
needs of the business and the rising
expectations of stakeholders. This should be
backed up by the appropriate tools, resources
and effort to ensure processes that promote
growth and improve performance are adhered
to. A board may explicitly reference the
five principles set out in the Code, which
are: board leadership, board effectiveness,
director accountability, alignment of
remuneration and constructive relations
with shareholders. In addition, it may
explicitly reflect on its mandates covering
the board, its committees and key
leadership roles. Finally, each board should
evaluate its effectiveness in terms of actual
outcomes assessed against the goals that

were set at the beginning of the evaluation cycle.
Do stakeholders see evidence that the board is
strengthening over time?
FEEDBACK
Most board evaluation processes only involve
directors, as they alone have direct access to the
workings of the board, understand its culture and
the full picture of what constrains it and what
opportunities are available to it. Directors are
thus a vital source of feedback on every aspect
of board performance. However, director-only
feedback is entirely self-referential and thus by
definition absents itself from other points of
view from stakeholders whose perception of
board performance and
subsequent actions can affect
the board, its composition and
its ability to function. Today no one questions the need for
Executives (beyond a
board’s own executive boards to improve their game.
directors) can provide
important information to
a board on board and CEO performance. So
much of a board’s work is carried out in
conjunction with executives; as a result,
executives represent a source of direct observation
of board behaviour. Executives are also intimately
affected by the culture, behaviour and decisions
of the board. Directors who forgo the perspective
of executives when evaluating the board and its
committees are choosing to accept a considerable
blind spot in their understanding of board
performance. Executives can be a valuable
source of suggestions on how to improve the
functioning and priorities of the board, as well
as its relationship with the CEO and management
team. When reviewing feedback, the views of
non-executive directors, executive directors and
non-director executives should be aggregated,
reported and considered separately.
Investors are an increasingly viable source of
feedback because they are much more engaged
in tracking the performance of the boards and
companies that they govern, having experienced
an awakening, like directors themselves, as to
their role in the system of
corporate power
and control.
Directors
are generally
reluctant to engage investors directly, but
overcoming inhibitions while undertaking
disciplined communication holds great potential
for a board in understanding its owners and
capitalising on the relationship it creates in
the process.
GATHERING FEEDBACK
The most common means of gathering feedback
from these sources are surveys and interviews.
Both are valuable and can complement each other
in a rigorous evaluation process. A board should
vary the means of gathering feedback over time
to keep the process fresh. Direct observation of
a board for the purpose of evaluation has merit,
often as a means of validating preliminary findings
derived from other methods. Many boards are not
comfortable (and some counsel will oppose) direct
observation by outsiders; each board should
weigh the benefits against its concerns and decide
how to proceed.
MAKING AN IMPACT
Feedback should be presented in a concise
manner which is specifically designed to act
as a catalyst for action. Set against key
performance principles, mandates and goals,
feedback can be
summarised as
observations,
implications,
recommendations
and required
resources. Where
possible,
ABOUT THE AUTHOR
David Anderson MBA PhD ICD.D is the President of The
Anderson Governance Group (www.taggra.com), based in
Toronto. He can be reached at: david.anderson@taggra.com
and +1 (416) 815-1212.
BOARD EVALUATION
recommendations should be formulated as
priorities or objectives, ready-made for board
and committee action plans. This cements the
evaluation process as providing vital input to
the annual priority or action planning process
for the board.
VALUABLE FEEDBACK
Feedback can be valuable both where it validates
and sustains current philosophies and practices,
and where it challenges and alters them. The
main focus should be for feedback to lead to
improvement, with each year’s priorities and
action plans developing from that feedback
and acting as a starting point in the next cycle.
This provides continuity and
reinforces the legitimacy of the
process. When participants see
that their feedback is translated
into new performance goals,
which are reviewed for
progress, commitment to the
feedback process is enhanced.
Boards should regard evaluation as an ongoing
process, both formal and informal, and constantly
integrate new feedback into how they interpret
their performance. Boards that do this will gain
the most from the evaluation process.
CONCLUSION
The new UK Governance Code places explicit
emphasis on the need for boards to undertake
rigorous evaluation. It does so in the conviction
that a purposeful reflection on performance and
the means to improve it will build boards that
are more capable of delivering better governance.
Directors should embrace this admonishment
and not let the compliance-driven mandate for
periodic external evaluation
obscure the unique possibility
that board evaluation offers. An
opportunity to focus attention
on vital issues of performance
and to engage directors,
executives and investors in
strengthening the board.
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