The newly refurbished Corporate Governance Code 2010 states that, “evaluation of the board of FTSE 350 companies should be externally facilitated at least every three years” (B.6.2). This is a wake-up call for private, public and listed companies alike to the need for penetrating and purposeful assessment of board performance, requiring a revisit of some of the variables the review process involves. Firstly...
Who should carry out the board review?
The chairman often assumes the role, but experience has shown that this approach lacks the independence and objectivity that a serious review really needs. As Tricker puts it, “the chairman is effectively marking his own examination paper” (Corporate Governance: Principles, Policies, and Practices, 315).
An experienced INED, perhaps the senior INED, could be asked to lead the review. Or, a special board committee, typically made up of INEDs, might take on the role. Some boards give the responsibility to the audit committee using the internal audit function. Whilst an executive director such as the CEO or CFO will have appropriate knowledge of the business and the board, his or her perspective is unlikely to be seen as objective by other board members.
An alternative approach is for the board to seek an independent perspective, inviting someone outside the board to lead the review process and report. A past chairman – who would have knowledge of the business – is a possibility, but here there could be a lack of objectivity on board politics. Another possibility is a respected chairman or INED from the board of another non-competitor company.
Then, of course, there are independent organisations and firms of consultants up for the job. Unfortunately, some of those offering such services do not yet have a lot of experience at carrying them out. (Management consultancy projects call for an altogether different mind-set to those dealing with board level interactions and political processes.) In response to the Code provision that FTSE 350 companies arrange externally-facilitated board reviews at least every three years, the IoD pointed out that:
scepticism about the effectiveness of external facilitators, and the fact that presently there are only a few organisations with sufficient quality and experience to perform such a role, could mean that companies are slow to comply with this new requirement.
When it comes to board assessment then, the ‘who’ question is not answered straightforwardly. Factors to take into account include the nature of the corporation, the culture of the board, and the relevant pros and cons of different candidates for the task. Get this bit right, and the review itself has a fighting chance of being accepted, efficient and energising.
More to come on What does a board review involve?
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