Starting: Board evaluations. What does good really look like? Part 1. The corporate governance code in the UK’s blueprint for corporate governance codes worldwide. Nowhere else is the practice of conducting board evaluations more advanced. Nowhere else do more boards of listed organizations conduct board evaluations on a regular basis. I’m delighted to talk with Maurine Beresford, head of corporate governance at the Financial Reporting Council about board evaluations. What does good really look like? I’m Doctor Sabine Dembkowski, founder and managing partner of Better Boards.
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Interviewer: Maureen, it’s a real honor to have you and thank you so much for contributing to the Better Boards podcast series.
Maureen: Thank you. It’s great to be here. I hope I can offer some insight to your listeners.
Interviewer: I’m absolutely sure you will Maureen. Well, we are passionate about board evaluations, but what I very often discover is that we are a lone group. Many boards appear not to be really passionate about it. They do it. Somehow board evaluations are pretty unloved, aren’t they?
Maureen: I think it’s a little difficult to tell. At the FRC, we read a lot of reports in my team. And we across different disclosures. For example, audit disclosures, culture disclosures, diversity disclosures. But I would say actually board evaluations could definitely be improved. What we see is that on the whole companies tend to make very similar statements about their board evaluations. Often highlighting that the board is working together effectively or something along the lines as we will focus on our strategy or our diversity and inclusion. But they don’t offer any concrete actions or generally offer much follow-up detail on what actually is happening and what actual actions being taken from the previous board evaluation and how they’re getting on.
This level of reporting, it just provides very little insight and makes it very difficult for the reader of annual report to understand what these statements mean. I think the disclosures and the narrative generally lack like color and we do understand that the FRC that the findings of board evaluations can be commercially sensitive. But many companies are looked to give the kind of basic findings and I think there could be a better balance stroke between what’s commercial and how they can explain what actions that they’re going to take in the sort of 1, 2, 3-year period following a board evaluation.
Interviewer: Yeah, no absolutely. Let’s take a step back and first maybe state why do board evaluations really matter. I mean it’s a fantastic instrument and the UK is very advanced in its practice.
Maureen: I think you’re right. It is a fantastic instrument and I think if everybody gets behind it, it can give some great results to boards and companies. It’s an important tool to support governance in the UK. I think its primary purpose is to help the board reflect and continuously improve both its own performance and that of the company. But it’s important as an opportunity to delve into how the board is effective. How they think as a whole and whether there is an effective challenge to the executive? The UK corporate governance code actually says a successful company is led by an effective board. And the question is really, how does the board know that they’re effective, and how does the company and all those working in the company know that the board is effective?
And a board evaluation is one way of doing that. I think an effective board evaluation should offer board members the opportunity to take stock and consider their performance over the last year. And it should be objective and it should be rigorous.
Interviewer: So, I was thinking an effective board evaluation. Do you have any views on what should be part of the data-gathering effort for a board evaluation? Some rely on interviews, some on observation of a board meeting, others on a combination of interviews, observation and some use now digital questionnaire. What’s your view on this?
Maureen: We’ve not really looked into this in any detail, and I’ve not actually seen any evidence to suggest that any particular methodology is a reliable indicator of quality. I wouldn’t wanted to suggest on this podcast what specific data should be collected. I don’t want every company to rush off and use one particular method. I think you’ve got to think about what’s right for your company. But I do think a good evaluation should be able to access information and view that present an honest picture of how the board works and how its committees are working.
And I think a questionnaire doesn’t have probing questions that won’t be effective for example. Equally, if a board evaluator only attends a board meeting and is just listening to that meeting. They’re unlikely to be able to assess and how effective that board is, because it’s highly likely that those round the board will modify their behavior during that meeting. So, I think it should be remembered that the better evaluations are likely to include both quantitative and qualitative parts.
Maureen: And including both aspects will enable the board and individual directors to identify actions to optimize the board’s composition and performance. I think we should also take into consideration that the pandemic has compelled many organizations to embrace more technology into their everyday board management functions. So, I think there might be an opportunity here for boards to take into account new technologies to see if their approach to board evaluations could be enhanced, or maybe even improved. And that would include the data that you kind of suggested in your questions. But I would say is that that any data collected if it’s about an individual, it should be anonymous, secure and confidential and this will encourage better feedback.
Interviewer: Let’s move on to the content. Do you have any view what should be part of a good board evaluation?
Maureen: I think it would be easy to say everything about the board, wouldn’t it? But I think we’d have to try and drive it down a little bit. So, boards, committees, and individual directors’ evaluation topics. They should be customized to get the feedback that you require and consider board dynamics and the structure and performance and composition of the board. But in our guidance to the corporate governance code, we do actually say that evaluations should consider succession and development plans. Culture, performance and strategy. The quality of board governance documents. Such as the quality and of papers and presentations to the board, and how the board communicates with listens and response to investors and key stakeholder.
I think they’re really important areas to think about before you actually draw up your board evaluation. I think if you’re doing an externally facilitated board evaluation. The chair needs to ensure that the board gets the most out of that evaluation. And make sure that the approach is really seen as an opportunity for improvement and to get the best out of the board and not a compliant exercise that you actually mentioned earlier in one of your questions. I think boards need to question whether their evaluation has clear objectives. It offers members of the board the same opportunity to contribute often in confidence.
Collect evidence to support any proposals and as enable the board and individual directors to identify actions to improve the board and individual director performance. Set your scope, involve people, collect evidence and be clear about your outcomes.
Interviewer: Now the practice conducting board evaluations is evolving, and I think we have come a long way already. Where have you seen progress? What has improved in the last years?
Maureen: I think there has been some improvement and I think if you look over a period of time since the introduction of evaluations, we’ve come a long way. I think over the last three years, it’s very kind almost baby steps now. It seems that we’ve reached a plateau and are just making incremental improvements. But we have seen companies providing more details on the areas that the evaluation covered and maybe prioritizing areas that maybe saying this year, we’re going to look at this issue and next year we’ll look at another issue. So actually, compartmentalizing the work.
We highlighted that many companies last year added questions and topics to address COVID, which was good. Because I think it’s always helpful to see how a board actually reacts in a time of particular stress, and that’s something that we all saw in the last few years. Those skills can be applied to different situations of stress.
Maureen: I think other improvements include the disclosure process. We’re actually seeing more companies report the process of how they actually conducted the evaluation, who undertook it. Specifically details about external facilitation and who was responsible for providing the external review with the necessary access and support. I think that’s really important, because you need to be aware that an external reviewer does have that access that can ensure that they do a really in-depth review. But I think there’s room for improvement.
The disclosures could be significantly enhanced by stating the length of time that the review had undertaken the board performance review, and whether there had any connections to the company. That’s something that we asked for in the code and many companies don’t report on that. And we would really like to see a move away from the general statements that it talked about at the beginning of our discussion. Not just declaratory statements about we’re working well together etc. And much more detail on actions is something that we would really like to see.
Interviewer: This podcast is slightly different because we will have a part two but this is only part one. So, what are the three things our listeners should take away from this podcast?
Maureen: I think the first thing is I’d like to draw on your opening question, board evaluations should not be viewed as just a compliance exercise. It’s a real opportunity for change and for making sure that the board is active and can be improved further. I think you’ve also got to acknowledge that trust in the process and its confidentiality is critical for the success of the evaluation exercise.
So, I think the chair needs to kind of ensure that board members understand why it’s being done. Trust that information that they give to an evaluator or to the chair is confidential and encourage people to be honest. And I think there should be that desire to improve. It’s all linked together. Don’t just assume that everything’s fine. Be open to new ideas and to really embrace the process.
Interviewer: Fantastic. Maureen thank you so much. There’s so much to talk about when it comes to board evaluations. So, this is part one of the discussions with Maureen. Watch out for the next podcast, there we continue our discussion and talk about the next stages in the board evaluation process.
Closing: How can we help you and your board? We at Better Boards are always delighted to hear from you. Get in touch if you have any questions. Get in touch if you would like to see a demo of our platform. You can best reach us at email@example.com. Thank you for listening.