Board evaluations have become an established part of board governance best practice around the world, but John Dinner, President, John T Dinner Board Governance Services, argues their ultimate value for organisations can be increased if an outcomes-based approach to the evaluation process is adopted.
Regulators and other oversight bodies have included board and related evaluation processes as a part of good governance practices and guidelines for more than 25 years. These were precipitated by a focus on boards and their effectiveness in response to significant corporate failures, the lessons learned and an effort to clarify how good governance is achieved. Since then, there have been regular iterations of guidelines and practices in which board evaluation processes have been a consistent component.
However, based on anecdotal evidence, it would appear the approach to board evaluations has not evolved significantly and this article encourages a new focus on governance outcomes, as opposed to traditional inputs, when assessing board performance and effectiveness. This premise recognises that sustained efforts to adopt and refine governance inputs have failed to satisfactorily impact how organisations are governed. Governance outcomes result from actually realising the purported benefits that would result from the effective implementation of governance inputs. These inputs relate largely to the many component pieces that come under the banners of board structure, governance processes and boardroom dynamics and relationships.
Optimising board assessments
Boards can easily defend the status quo in terms of how they evaluate their performance as a team, as well their component pieces. That said, many organisations consistently demonstrate leadership in the area of board-related evaluations, as well as other governance practices. The following represents themes identified during a broad review of board-related assessments and the process used to complete them. These themes reflect best practices and personal expert experience in conducting board assessments.
The success of board evaluations can be enhanced by soliciting input from as many individuals as possible who have first hand observation/experience of board performance. In addition to members of the board, it can be particularly beneficial to also include members of management or staff in the process as they bring unique and valid perspectives to the assessment process. While management may not be well positioned to respond to all related issues, they can add an important perspective to the broader evaluation process.
In doing so, it is recommended the evaluation process design should include the following:
- management participation should be limited to those who have regular interaction with the full board or one or more of its committees, and
- the same confidentiality should be provided to management as that committed to board members.
Reporting should not separate out conclusions reflecting board and management input. As there tends to be a high level of consistency of responses between the two groups, all responses (both survey and interviews) should be melded into a single assessment report. Where there is disparity of responses, these different perspectives should not be assigned to either the board or management, as this can have a negative impact on the candour management will exercise in its assessment of the board.
Interviewing evaluation participants
There is real value to be derived from making one-on-one confidential interviews as a central part of the assessment process. Relative to relying solely on survey results, interviews are highly effective in uncovering more meaningful, relevant and thoughtful feedback. In my professional experience, evaluation participants often view surveys simply as a task to be completed. As much as they serve as a useful starting point in a more rigorous evaluation process, they do not always uncover the most salient issues impacting good governance.
The use of interviews results in increased demands on directors’ time, but the expected payback relative to the time investment by directors is significant and worthy of serious consideration.
Participation by new directors
Many organisations defer participation by new directors in full board assessment processes until at least a full year or some other term has been served. The rationale for this policy is entirely understandable and can be easily supported. It reflects a belief that new directors need to have a certain exposure and service on the board to be able to meaningfully assess and provide an informed perspective on how well their colleagues deliver on their fiduciary duties.
At the same time, there is real value to be derived from all board members participating in the board assessment process, despite the limited tenure of newer directors. Newer directors can bring a fresh perspective and probe different issues that may not be top of mind of more veteran board members.
Use of external facilitators
The provisions of the 2014 UK Corporate Governance Code, which now require board evaluations of FTSE 350 companies to be externally facilitated every three years, are clearly the direction in which board evaluations are heading. About 19% of the largest public US companies used an outsider for their board evaluations in 2013. Spencer Stuart, the international executive search firm, predicts that as many as 35% of major US companies will follow suit in the next several years.
Most North American boards that use an external resource for their board evaluations also tend to follow the UK approach of ‘every three years’ instead of annually. Board evaluations in the intervening years are generally conducted internally, often using a survey format or short phone calls from the board chair or chair of the nominating/governance committee to each director.
Adopting an outcomes-based approach
The concept of governance outcomes, while not revolutionary, is far from mainstream. This approach is new, innovative, leading edge and, in most jurisdictions, largely untested. However, it is no longer without precedent. The 2016 King Report on Corporate Governance (King IV) in South Africa addresses governance outcomes explicitly, representing what the authors cite as the ‘original intellectual thinking of the King Committee’. These governance outcomes include:
- establishing an ethical culture
- creating sustainable organisational performance and value creation
- protecting and building trust in the organisation, its reputation and legitimacy
- adequate and effective control by the governing body, and
- setting an example by the board’s own ethical behaviour.
Arguably, some of these governance outcomes can be viewed as inputs. Is establishing an ethical culture an outcome in and of itself or does it, in turn, lead to something else – an outcome (or outcomes) that boards and organisations in general should pursue? An ethical culture should lead to trust and confidence in that organisation, the work of the board and the leadership that reports to it.
Similarly, adequate and effective control by a board is, surely, a governance input that is fully intended to produce some greater, more impactful outcome. But to date in the recent history of focus on governing well, most boards have been measuring these and other inputs without undertaking the much harder work of identifying, understanding and defining metrics that will show proof of the degree to which the intended ends – the outcomes – are achieved.
As much as the work of the Institute of Corporate Directors in South Africa has helped launch and move the governance outcomes agenda forward, there may well be more work to determine exactly what constitutes genuine governance outcomes.
The author believes governance outcomes relate to the benefits, payback or reward realised when the underlying principles of good governance are fully achieved. Examples of these principles include: leadership; stewardship; independence; transparency; owner rights; and accountability.
The author has been exploring the concept of governance outcomes for many years and has identified the following as being primary governance outcomes:
- trust and confidence in the work of the board and management on the part of key stakeholders, particularly an organisation’s owners and customers
- deep reputational respect across a broader set of stakeholders
- mission and vision achievement, and
- increasing organisational value.
An outcomes-focused approach relies on a markedly different board evaluation model with an entirely new focus – namely a shift away from metrics related to governance inputs to ones linked to governance outcomes. This new focus reflects the board’s impact on the organisations, as opposed to isolated practices, the board’s value as a strategic asset to the organisations they oversee, and the board’s contribution to organisational success in tangible, relevant ways.
Assessing governance outcomes is likely to achieve success in the following ways:
- refreshing and re-energising the more traditional approach to board assessments organisations have typically employed, with diminishing returns resulting from the repetitive process
- challenging process participants to think about how the board performs from different perspectives, frustrating some while energising others, and
- identifying new opportunities the board of directors could leverage to continue on its good governance journey.
Over the past quarter century, many boards have responded positively to new ways of encouraging greater oversight effectiveness. One of the most significant developments has been the practice of regularly assessing board performance. Over time, however, the practice of assessing board effectiveness using the same process and metrics produces diminishing returns. Board performance assessment practices need to evolve as well so they are positioned to deliver new insights and serve as a catalyst for continuous board improvements. The purpose of this paper is to encourage boards to adopt this proactive posture in adopting new practices and applying greater rigour to its approach to assessing their effectiveness.
John Dinner, President
John T Dinner Board Governance Services
The author can be reached by email at: email@example.com.