Board Reviews: Who Guards the Guards?

By now your Board has probably held several discussions about Board effectiveness. How do we know we’re adding value in our role as Directors? What improvements have we made to corporate governance practice? How have we lifted organisational performance? How well are we evaluating ourselves?

Board reviews: who guards the guards

After all, scrutiny of Boards and their Directors has never been more acute: expectations on Boards and aspiring Directors have increased significantly since the global financial crisis.

You may also have reflected on the capability of external Board reviewers, leading to the question: If Board evaluation experts are the guardians of Boardroom effectiveness, who is guarding the guards?

One attempt to address this question has emerged recently in the UK, where a Board review advisory practice released a code of practice which it hopes will be embraced by Boards and external reviewers and enforced by an independent oversight body. To some this makes perfect sense, as how can any industry be taken seriously that does not have a set of standards to adhere to?

Helen Pitcher, of Advanced Boardroom Excellence, the firm which launched the code, observes … “The market suffers a lack of clarity as to what chairmen and company secretaries can expect from a board evaluation. Many chairmen also lack information on who the key players are, or they have had variable experience of evaluations and are unclear as to what represents value, with fees ranging from £20,000 to £250,000 in some instances.”

Notable recommendations outlined in the proposed charter include: the maintenance of advisor independence by refraining to pursue more than two consecutive assignments, the appropriate handling of conflicts of interest, the implementation of safeguards against potential insider trading, and a sharper focus on client and adviser communication throughout the Board review process.

While the proposed code of practice is quite extensive, one aspect which we believe to be an important area is its focus on communication, which is the subject of multiple recommendations.

Without effective communication, a Board evaluation becomes vulnerable to misunderstanding and participants are more likely to fall prey to “tick the box” syndrome.

If we consider the five main steps of Board effectiveness reviews as:

  1. Scoping – The Board reviewer consults the Chairman of the Board to clarify the aims of the review and how it will proceed.
  2. Information gathering – Conducted by the Board reviewer via interviews, surveys, documentation analysis, observation of the Board, research of other Boards or any combination of these elements.
  3. Reporting – This involves the communication of the reviewer’s findings with the Chairman and perhaps the Board.
  4. Post Evaluation Review – The Board discusses the findings of the review (where the consultant may or may not be present) and decides on a series of actions.
  5. Follow-up – The reviewer assists the Chairman in ensuring progress of the agreed actions to improve the functioning of the Board.

Set out below are some key suggestions of the code relating to communication, next to which I have identified which of the steps of the process (set out above – A to E) they will significantly improve:

UK Code of practice
suggestions

Rationale and expected
benefit for the Board

Board Review Steps
A B C D E
Consultants and Chairman should work together to engage the interest of the whole Board – ensures cooperation during information gathering and gives Directors a sense of ownership over actions.   X X X X
Consultant and client should agree on appropriate interactions with each Director – reduces confusion during information gathering and ensures Directors do not become offended   X   X  
Client should accept consultant observation of the Board – eases the way during information gathering and improves report quality   X X    
Consultant should be provided with relevant company documents and information – necessary to frame information gathering and improve report quality   X X    
The consultant should feed back in a discrete, balanced and informative, but also courageous manner – Directors respond better to suggestions X     X X
Client should consider how to disclose the evaluation outcome annual report – Directors will be more comfortable if they know how the evaluation is to be disclosed.       X X
Client and consultant should agree on the scope of the assignment – focuses consultant on the correct issues and informs them of the level of engagement required   X X    
Client and consultant should agree on timing deliverables and fees – reduces possibility of future disagreements X X X X X
Client and consultant should agree who are contacts for both sides and which consultant will carry out the work – ensures a more open and swift line of communication X X X X X
Both parties will provide feedback to each other throughout the review on how it is progressing for them – ensures any problems are swiftly addressed X X X X X
Both parties will agree how lessons learned will be best shared to the participants – helps ease the pain of feedback     X X X
Both parties will agree on how the follow-up will be conducted – a prearranged process will allow a more objective evaluation of the outcomes         X

While there are many other suggestions contained in the proposed Code, this set seem to highlight the core of what Boards and external reviewers ought discuss and agree to ensure that Board reviews deliver the benefits of enhancing governance and improving organisational performance.

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