Importance of board evaluation

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THE effectiveness of the board of directors plays a crucial part in the success or failure of any organisation. A structured evaluation of that effectiveness is a fundamental requirement of the recently enacted Corporate Governance Act for State-Owned Enterprises. It is also viewed as sound governance for non-listed and regulated organisations. In this installment I will explore the different types of board evaluations.

By Robert Mandeya

Types of board evaluations

Board evaluations may be classified as self-evaluations or external evaluations.

Through self-evaluations, the board is responsible for managing both the process as well as the content. Self-evaluations are typically coordinated either by the board chair, the governance committee chair, or the board secretary/ corporate governance officer. A board’s performance is generally evaluated by a standard questionnaire and/or through one-on-one interviews.

A Board-managed evaluation process may also move beyond strict self-evaluation by seeking assessment input from stakeholders (e.g., executive officers and shareholders).

External evaluations are carried out by an external third party, retained by and reporting to the board. External evaluations of board members are also made by using a questionnaire and/or one-on-one interviews. But such external evaluators may bring their own judgment on the quality of the board’s performance during the evaluation, and may decide to also request inputs from other stakeholders.

It is of great importance that trust is established in the credibility and confidentiality of the process of board evaluations, regardless of whether it is managed by the board itself or by a third party. Trust is the best incentive to encourage candid input and feedback from board members and other stakeholders, and makes it more likely that the evaluation results will be taken seriously by the board.

Board evaluation

The reasons why companies implement board evaluations may vary, but there are typically three main motivations.

Improving the overall board performance, as well as the company’s performance indirectly. Although not a norm in Zimbabwe, organisations that conduct board evaluations acknowledge that performance improvement is the main motivational element, in addition to raising the company’s corporate governance standards.

Thus, board evaluations have become a very useful tool for ensuring that the boards and their members function properly, according to their assigned roles.

Currently, market trends clearly indicate the need for progressive, value-generating boards in contrast with the traditional vision, in which boards could be characterised as passive or even inconsequential.

Ascertaining the fulfillment of the board’s responsibilities; The inclusion in the evaluation questionnaire of certain mandatory requirements related to directors’ performance in different jurisdictions has also proven for some companies to be a sufficient motivation to conduct board evaluations as a way to ensure that the board is properly doing its job.

In some cases—particularly in listed companies—board evaluations may be resisted and seen as a threat if they are done incorrectly and confidentiality is not assured, thus creating a potential liability for directors. A way of overcoming possible internal resistances is having an internal documents retention policy and using trusted parties to carefully handle and report on the data from board evaluations.

Directors may find evaluations to be a tool that helps them improve their performance, and consequently improve the quality of their advice to officers on the complexities inherent to the business operations.

Responding to external demands; Addressing investors’ expectations could be another motivation to implement board evaluations. The boards of modern and well-performing companies are expected to have directors that not only add value to business operations but that are also capable of independent judgment and have expertise in financial, accounting, and audit procedures to comply with the applicable legislation or regulation in some jurisdictions. A formal assessment of the board can thus serve to measure the performance of the team of directors, identify its strengths, weaknesses and opportunities for improvement and, consequently, develop plans to correct them.

Finally, all of the foregoing is to the benefit of all shareholders, and to promote value creation in the markets in which companies with good corporate governance participate.

Action plan

An board evaluation should be focussed on the improvement of board performance, through the development and implementation of action plans. Board evaluations are not simply a control mechanism over board members, but a tool to identify areas of governance improvement. Nevertheless, receiving a poor evaluation may certainly result in a director not being re-elected.

Certainly, board evaluation in and of itself is not the end goal. Once the results have been analysed, distributed, and disclosed, the companies should take action based in the relevant areas. Action plans in some companies are considered and approved by the board. In other companies, action plans are developed and followed-up by the corporate governance committee. The monitoring may be also delegated to the board secretary.

Mandeya is an executive coach, trainer in human capital development and corporate education, a certified leadership and professional development practitioner and founder of the Leadership Institute for Research and Development (LiRD). — robert@lird.co.zw, info@lird.co.zw or +263 772 466 925.

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