The NED Network: Board effectiveness and evaluation

In our latest NED Network event, head of governance Karl George led a discussion with associate director Tom Proverbs-Garbett on board evaluation and assessment of board effectiveness.

It can be difficult to get a board evaluation right, for it to truly be effective and contribute positively to board performance. However, it’s a key piece to get right for an organisation’s success given stakeholder expectations around board accountability and an increasingly complex governance and regulatory landscape. Non-executive directors have a key role to play in keeping things on track.

Board evaluation isn’t about keeping the board in a continuous spotlight; members need the space and resources to bring the organisation’s vision and objectives to fruition. Rather, it’s about ensuring a process takes place regularly by which the board and its individual members are assessed on their effectiveness in their position and ability to deliver governance for the organisation. 

Starting with the UK Corporate Governance Code (UKCGC)

While only directly applicable to premium listed companies on the London Stock Exchange, the UKCGC’s position as the pre-eminent statement of governance best practice is unrivalled.  It makes sense, then, to start here.

The UKCGC tells us that: 

'There should be a formal and rigorous annual evaluation of the performance of the board, its committees, the chair and individual directors. The chair should consider having a regular externally facilitated board evaluation. In FTSE 350 companies this should happen at least every three years (Provision 21).'

This supports wider principles of the UKCGC. Two of these principles in particular will need to be considered as part of the evaluation:

'The board and its committees should have a combination of skills, experience and knowledge. Consideration should be given to the length of service of the board as a whole and membership regularly refreshed (Principle K).

Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively (Principle L).'

Governance framework

So, we have a good sense of the broad outcomes of a board evaluation and its frequency.

Before we go further, we need to understand the specific governance framework an organisation is working within and have some sort of benchmark for quality of governance.  This allows us to ensure the business has the right architecture to facilitate effective performance. 

Karl and Tom discussed the TGF framework, that was developed in-house. This is a methodology that takes as its starting point the resources for an effective governance framework. The framework was built around the questions below.

• Does the organisation have up-to-date terms of reference for its board and committees?
• Are the papers that go to the board sufficiently detailed?
• Are matters arising from well written minutes followed up?
• Is the board well-balanced in terms of skills and diversity?
• Does the board execute its role strategically, declaring and managing conflicts of interests?
• Does the board act collegiately, with the non-executives and executives working well together while maintaining – in the case of the non-executives – sufficient professional scepticism?

Board dynamics

With the framework understood – or gaps identified – a key component of any evaluation will be assessment of the behaviour and dynamics in the boardroom. 

Karl talked through the “TGF Zoo”, a simile for different (poor) behaviours used to highlight those areas that can impact the effectiveness of a board in carrying out its responsibilities. Board members should watch out for ‘group think’, passivity, undue focus on operational matters, and any conflicting personalities/styles. Evaluators will be!

Which other areas are typically looked at during a board evaluation?

In addition to the overall governance framework and board dynamics, board evaluations tend also to consider the (typically, but not exclusively) below areas.

1. Skills and expertise: whether there are a depth and variety of skills and experience on the board.
2. Risk: whether the board has the appropriate risk management processes in place and are adhering to applicable regulations.
3. Strategy: whether the board’s strategic focus and direction aligns with the vision and culture of the business.
4. Communication: how the board communicates, both in terms of critical messages and in relation to business as usual matters.
5. Processes: the effectiveness of the various internal processes, including decision making and conduct of meetings.

What does a typical board evaluation look like?

We conduct our evaluation in three stages.

1. Stage one: Initial assessment

a. Review of governance documentation: We would begin with a desk top review of key documents, including constitutional documents, roles and responsibilities of the chair and chairs of sub-committees; recruitment, induction, training, appraisal and succession procedures for directors,  the most recent board effectiveness review(s) and similar.

b. Review of board material: We would then conduct a close review of the agendas, reports and minutes prepared for board meetings, with an assessment of their effectiveness in terms of contributing to discussion and decision-making. It is an essential part of good governance that the board receives high-quality information. We would speak to the governance lead about how material is produced. We benchmark the board papers reviewed against those of other organisations where we have recently carried out this exercise. While benchmarking should, in our view, always be treated with an element of caution given different approaches to governance depending on sector and regulatory/legal requirements. We consider it helpful in stimulating debate amongst members of the board about the timing and content of meetings.

c. Board and committee meeting observations: We will review a meeting of the board and a committee meeting with a view to providing feedback on chairing of the meeting, contributions by board and committee members and the overall effectiveness of proceedings.

At the conclusion of stage one, we will be able to provide assurance on the framework within which the board and therefore the organisation operates and the material it receives.

2. Stage two: Triangulation 

a. Whole board appraisal: In discussion with the chair and the governance lead, we draft and distribute a questionnaire to board members to record their assessment of how the board is operating. The bespoke questionnaire is tailored to include any areas of concern or interest.  The results are compiled by theme and reported to the board, identifying areas for further consideration and (where appropriate) recommendations for change.

b. Skills audit:  Board members will be asked to provide an assessment of their skills and experience (based on guidance provided) for us to prepare an overall skills matrix. From this we will determine skills gaps, areas of strength and areas for development. The skills audit tool is also able to suggest areas for training and where diversity might be broadened. 

c. Interviews with board members: We use interviews to seek to understand their views of the organisation, their contribution and areas of strength and development. It’s at this point that we would explore the relationship between the board and its management team, including the exchange of information and scheme of delegation.
At this stage, we will have a good idea of how the board’s practices, relationships and cultural norms compare with best practices. 

3. Stage three: Reporting

a. Disclosure reporting: We review the Annual Report and other external reporting to assess the level of governance disclosure, consistency and transparency across all reports. This includes consideration of whether relevant environmental, social and governance (ESG) and equality, diversity and inclusion (EDI) frameworks, metrics and required regulatory disclosures are included.

b. Workforce engagement: We undertake an assessment of the quality of engagement with the organisation’s employees and how that engagement influences board decisions and the impact of those decisions on the employees. We do this by way of surveys, focus groups and interviews.

c. Stakeholder engagement: Similar to the workforce engagement assessment, we consider the quality of engagement with customers and other stakeholders of the organisation and how that engagement influences board decisions and the impact of those decisions on the stakeholders. Again, this is by way of surveys, focus groups and interviews.

At the end of the process, we provide a summary of all assessments carried out, together with an action plan for improvements.

It may not be the case that all assessments are relevant to your organisation (or not all at once).  A board evaluation is a fluid appraisal of the board’s effectiveness and requires openness and trust between the board under evaluation and the facilitator.  This means that at the outset of the process agreeing the scope of the evaluation will be very important.

Benefits of a board evaluation

Tips for undergoing a board evaluation

• Understand the current governance framework and set expectations for the process.
• Use a typical board meeting and the resources for that meeting to get an insight into how you are performing.
• Pick the right way of evaluating – whilst the fundamentals of board evaluation are often similar, the approach needs to be appropriate for the organisation and board make-up.
• Be clear why you are conducting the evaluation – it’s about improvement and effectiveness, not criticising the board’s approach.
• Make sure actionable outcomes emerge – a roadmap for improvement is critical to making the process worth it.
• Independence is key – having the right person conducting the evaluation is critical.