How to measure the effectiveness of your company’s board

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Board effectiveness

The IoD’s Information and Advisory Service (IAS) outlines the process for checking whether your senior team is performing well and properly equipped to lead the business to long-term success

As high-profile business failures continue to hit the headlines, the performance of corporate boards is coming under ever-increasing scrutiny. For instance, to comply with The UK Corporate Governance Code large listed companies now need to conduct “a formal and rigorous annual evaluation of the performance of the board, its committees, the chair and individual directors”.

In July 2018 the regulator responsible for the code, the Financial Reporting Council (FRC), issued Guidance on Board Effectiveness, chiefly to encourage plc directors to consider how to improve their own performance. It followed this with The Wates Corporate Governance Principles for Large Private Companies (a publication to which the IoD contributed). This recommends that such firms conduct regular board evaluations to help “individual directors contribute effectively” and to “highlight the strengths and weaknesses of the board as a whole”.

While they aren’t obligatory for most firms, such evaluations offer potential benefits to any board. For instance, they can help to pinpoint where it should be improving its skills and increasing its diversity, which helps to reduce the risk of groupthink – a precursor to numerous corporate failures. They can also make the business more credible to investors.

Evaluation in practice

The chair will normally lead the process, which should be rigorous and objective. In its Guidance on Board Effectiveness the FRC (which is expected to be replaced by a more powerful watchdog called the Audit, Reporting and Governance Authority) suggests a long, but not exhaustive, list of aspects to cover. These include the board’s current composition, its succession plans and the quality of the information it provides about the business.

Two main evaluation formats are available: questionnaires and interviews. The former – which seek directors’ views on the board’s performance as a whole, the conduct of its committees and, sometimes, the value of individual contributions – are more popular.

Questionnaires take less time than interviews, but respondents can be reluctant to make contentious points in writing and will tend to give neutral or slightly positive scores if asked to rate anything on a scale. While they are relatively time-consuming, interviews can elicit more candid assessments. With this in mind, boards should think carefully about which approach offers most value.

Responding to the findings

Whichever format is chosen, the substantive points that arise need to be discussed thoroughly by the board and acted upon accordingly. It’s recommended that a separate session from a normal board meeting is convened to devote enough time to this task. Formalising agreed actions in an improvement plan and setting clear implementation schedules is key to the success of the whole process.

Such evaluations may not be mandatory but, given that they can provide an important “health check” and set up the board and the wider business for long-term success, there’s a strong case for firms to view them as such.

 

How the IAS can help you

* The Business Information Service (BIS) is accessible by email (businessinfo@iod.com) or phone: 020 7451 3100

* The Directors’ Advisory Service (DAS) can give guidance by appointment, either face to face at 116 Pall Mall or over the phone: 020 7451 3188

* The legal helpline can answer quick queries about a vast range of issues: 0870 241 3478*

* The tax helpline can give callers advice on both commercial and personal tax matters: 01455 639110†

* IoD members are entitled to 25 enquiries a year to the BIS; four sessions with a DAS adviser; and 25 calls to both the legal and tax helplines. For further details, visit iod.com/information or email businessinfo@iod.com

* Quote your membership number
† Quote your membership number and reference number 33337

Become a member of the IoD

The IoD has a range of memberships for directors, founders and co-founders, providing all the resources and facilities needed to enhance your business. To find out more about membership offerings and to join today, visit iod.com/membership

 

About author

Marc Smith

Marc Smith

Marc Smith is the editor of Director magazine

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