Two-fifths of the world's CEOs believe their business will no longer exist in 10 years' time based on their current trajectories1. This stark figure reflects the unpredictable economic conditions, along with environmental threats created by climate change, geopolitical tensions and increasing regulatory burdens. Now more than ever, it is critical that companies have an effective Board that can navigate the multitude of challenges their businesses face, and one that is flexible enough to capitalise on potential opportunities. However just 29% of C-Suite executives2 rate their Board performance as good or excellent, which suggests improvement is needed. Newgate Compliance, a subsidiary of Ocorian, discuss the process around independent board evaluation and the value it can add for companies.
Everything you need to know about independent board evaluation
Who is responsible for board evaluation?
The three different Corporate Governance Codes imposed in Guernsey, Jersey, and the UK; all require businesses to conduct regular evaluations of their Boards.
While regulators do not demand that Board evaluations be conducted by an independent body, the UK government is clear that "an external review is typically more detailed than an internal one, with greater focus on specific issues e.g. relationships and behaviours... An external review allows the Board an opportunity for candid self-reflection, which can be difficult when the board is undertaking the review itself."3
It is worth noting, regulators use their assessment of board effectiveness at the start of every regulatory visit as a litmus test; determining if the business is being run as they expect and guide them towards areas they wish to focus on.
But it is not just regulators who value independent evaluation. A third-party specialist assessment of the Board's efficacy is also beneficial to investors who are under increasing pressure to demonstrate a commitment to robust corporate governance across their portfolios, in line with a growing focus on environmental, social and governance (ESG) considerations.
What is the process of independent board evaluation?
Independent board evaluations were put in place to understand and assess the entire remit of the Board from its composition, including skills and expertise, as well as diversity and inclusion, to succession planning, board dynamics and risk exposure.
Following a thorough investigation, which includes an anonymised questionnaire and one-to-one interviews with key members, the evaluators deliver a report to the Board.
The final report reveals the Board's strengths and weaknesses and allows companies to capitalise on what they are getting right and correct where processes or individuals fall short.
What are the six stages of independent board evaluation?
- Project initiation – Establish the business context and agree the review scope and objectives.
- Data gathering – Conduct governance and board effectiveness questionnaire.
- Governance structure reviews – Assess the adequacy of board documentation, policies, procedures, and management information.
- Interaction - One-to-one interviews with board members to establish career history, experience and discuss findings of the questionnaire. Board meeting observation to understand how business is conducted, the process for prioritising board matters, the relationships and how they are managed, and the way in which decisions are taken.
- Analysis and findings - Review and assessment of results and determination of findings.
- Reporting - The results of the findings and a first draft of the report are presented by to the chair of the board for review and discussion.
What are the typical challenges uncovered by board evaluations?
Independent board evaluations can uncover challenges, which once resolved allow companies to function more effectively. And while no two boards are the same, there are challenges that surface time and again.
More executives than ever before want to remove an ineffective board director – a 2022 survey of C-suite executives found 89% believe one or more directors should be replaced which compares to 53% who said no change was needed the year before4.
Executives also report a worrying lack of requisite skills and diversity on the board. Just 29% say their board has the right mix of skills and expertise, while only 21% say the board has enough gender, racial and ethnic diversity.
In addition, executives report challenges including excessive deference to veteran board members; a reluctance to retire; board members who are stretched too thin from holding several non-executive director roles; and domineering chairs who are unwilling to hear opinions from other directors.
How important is it to address feedback following board evaluations?
Just 29% of C-suite executives think their boards do not need to change, which highlights the importance of regular reviews to ascertain where improvements can be made5.
Boards need to be reinvigorated and refreshed if they are to keep pace with changing business dynamics, regulatory requirements and wider ESG risks. Furthermore, it is imperative boards are equipped with a suitable mix of people to give a variety of viewpoints and ideas.
Confronting challenges on a board may be daunting, particularly given the involvement of the company's most senior personnel, but with the help of an independent evaluation service companies can receive a dispassionate account of how the entire board operates, with suggestions for a clear programme for change.
Independent board evaluations go beyond a simple compliance box-ticking exercise to allow a company to move forward in the most effective way, really adding value to the business.
Only by fully understanding how the company's directors operate can businesses hope to survive long into the future.
When did you last independently evaluate your Board?
Newgate Compliance, Ocorian's subsidiary compliance consultancy service offers an independent board performance evaluation review. Our panel of independent corporate governance experts from various industry sectors run a streamlined evaluation exercise designed to spot risks and address potential exposures.
5. As above
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.