Board reviews have become an accepted and valued part of board governance in the UK. Philip Sidney, Associate, Lintstock, highlights some insights into board evaluation best practice from a recent Lintstock study of current practices in the UK.
2018 was an interesting, if turbulent, year for the UK corporate world. Dealing with the ongoing perception of societal division following Britain’s vote in 2016 to leave the European Union, a newly elected Conservative government enacted proposals to increase employee representation, to provide for greater shareholder oversight of remuneration and to extend corporate governance regulation to companies which are privately held. High-profile cases of corporate largesse and mismanagement over the year have led to further challenging questions being asked of boards’ oversight, and the degree of regulatory oversight needed to supervise boards themselves.
2018 also marked the 15th anniversary of the adoption of the provision in the UK Corporate Governance Code (the Code) that each Financial Times Stock Exchange (FTSE) 350 board ‘should undertake a formal and rigorous evaluation of its own performance’; a further provision for companies to conduct a review facilitated by an independent external party every three years was introduced in 2010. Having facilitated board evaluations since the introduction of the Code, Lintstock have been asked by the All Party Parliamentary Corporate Governance Group to review performance against the Code every five years since its enactment; the latest study, 15 Years of Reviewing the Performance of Boards, was launched at the Houses of Parliament in London in June 2018.
The study offers a snapshot of a space in an atmosphere of change. Against the backdrop of Brexit, the corporate sector is still digesting extensive revisions to the Code, which applied from 1 January 2019. With such a rate of change – and considering the febrile political and social atmosphere – it would seem that the UK corporate sector (and with it, the board evaluation space) may look significantly different on the 20th anniversary of the Code’s introduction in 2023.
Nevertheless, in setting out the thoughts of corporate leaders on the state of the board evaluation space in 2018, we hope that the study can be of use both for companies with an established cycle of board reviews and those seeking to expand or enhance their processes for analysing the effectiveness of their boards. In researching our report we canvassed the views of the directors and company secretaries of FTSE All Share companies, as well as a selection of leading international companies – including several from Hong Kong – and institutional investors; the study is based on the responses we received from the 370 participants, and we are grateful to them for the level of engagement and candour that was shown.
The respondents gave robust descriptions of the board reviews they had experienced, both positive and negative, and there were some accounts of unsatisfactory exercises that make for uncomfortable reading for those active in the space. Such commentary serves as a useful reminder that each evaluation has a bearing on the credibility of the next, and as such it is important that all those engaged in board reviews, as well as seeking to improve the performance of boards, focus on enhancing the practice of the board review itself.
Part of the cycle
Happily, the responses to our study suggest that, for the most part, board reviews have become an accepted and valued part of the board’s cycle in the UK; over 80% of respondents to the study survey felt that board reviews have had a positive impact on the performance of their boards, with only 1% reporting a negative impact.
Following the Code’s introduction of the board evaluation requirement, most large listed company boards will now have undertaken around 15 annual reviews, of which at least two will have been externally facilitated; 86% of respondents felt that their board would still undertake an annual review of its effectiveness in the absence of a requirement to do so, and 66% indicated that their board would still conduct an externally facilitated review every three years without being directed to by the Code. The cycle of two internally facilitated reviews with one externally facilitated exercise had become an established custom prior to the 2010 changes to the Code, which essentially formalised what was already market practice, and our sense is that this ‘2:1’ cycle is increasingly the international standard amongst top corporates. We have clients in Asia, including Hong Kong, who have operated according to this cycle for a number of years.
Implementing a cycle of internal and external reviews has clear value in allowing the advantages of each type of exercise to complement the other: a lighter-touch internal exercise can provide consistency and momentum between more comprehensive external evaluations, with the internal facilitator’s greater knowledge of the day-to-day running of the organisation enabling a clearer focus on current issues, before the external review undertakes a more in-depth examination of the board’s performance that can provide an independent perspective, informed by experience of best practice from other organisations. In this way, internal reviews can ensure there is continuity and follow-up between external exercises, acting as an inexpensive and informal ‘temperature check’.
Moving to external
In considering whether, and how, to incorporate an external review into the cycle of their board, it is important for companies to acknowledge that different boards have different needs. A given approach or methodology that benefits one board may add less value for another, and a review that takes place at one stage in the board’s cycle – for example during restructuring or following a change in leadership – could deliver different results at another time, even with the same participants.
As mentioned above, the timing of an external review – both the point at which it occurs in the year and the demands it makes on the time of internal personnel and the directors themselves – has a significant bearing on the value of the exercise. There is potential for external reviews to represent an unwanted distraction during periods where a company is experiencing substantial change (due to a major transaction, for example), and we tend to encourage companies to undertake a lighter-touch exercise – or postpone their review for a short period – if circumstances make it clear that the time is not right.
Similarly, it is key to ensure that an appropriate balance is struck between the time required of board members and the insight gained through the evaluation. For busy directors, an extensive process that involves both surveys and one-on-one interviews represents a substantial commitment, and clearly it is important for practitioners to recognise this, especially when considering whether to include an interview phase in the exercise. Given that there is no definition of what constitutes ‘external’ facilitation, an independent review based around a core survey component is used by a number of leading companies.
With this in mind, care needs to be taken to scope the content of the review correctly, making sure that the correct areas of board performance are covered in sufficient depth to be value-additive. Insufficient understanding of the company on the behalf of external facilitators, and a perceived tendency among providers to offer a ‘one-size-fits-all’ service, were seen by our study’s respondents to represent major disadvantages of using external facilitation; it is imperative for providers to tailor external reviews to the needs and circumstances of each individual board that they serve. While there will inevitably be some aspects of board effectiveness that need to be covered in every review – the composition, for example – there is clearly value in ensuring that reviews are business-focused, and relevant to the board and the company it oversees. One useful way of doing this is for exercises to examine the board’s performance in the context of particular events, such as key appointments or transactions, or a recent strategy day. Such case studies are helpful in providing a picture of the board ‘in action’, augmenting more general consideration of the board’s effectiveness with specific examples of how it has performed in certain contexts.
The role of the company secretary
The company secretary plays a pivotal role in ensuring the success of an external review; company secretaries are usually our first point of contact with a client, and their input as a key project sponsor is crucial, with their knowledge of the company, the board’s processes and the preferences of individual directors all helping to ensure that exercises have a value-additive focus on relevant issues. As well as contributing to the facilitation of the review, we are strong proponents of company secretaries taking part as respondents, where their familiarity with the board allows them to provide useful insight and a different perspective to the board members themselves.
In our experience the company secretary is also a highly effective facilitator of a company’s internal review; we often assist companies with internal exercises, and increasingly we have been asked to undertake the survey and reporting phase and then provide briefing notes that allow the company secretary to follow up with individual director interviews, perhaps in conjunction with the chair or senior independent director.
There was a sense in our study that board reviews are part ‘art’ – dependent on the qualities of the facilitator – but also part ‘science’, insofar as there are certain best practices and common methodologies utilised. The importance of collaboration in this space – between company secretaries, chairs, external facilitators and other interested parties – was emphasised by many respondents, and there was widespread recognition that a broader knowledge of best practice would be beneficial. Whether shared informally between individual companies or directors, or distributed more widely in independent publications or public forums, greater insight into what works (and what doesn’t) can only help to enhance the practice and ensure that each review a company undertakes can enhance its board’s effectiveness and help to move the company forward.
Many respondents to our study reported that director engagement in the board review process has increased in the past five years, and it seems that greater appreciation on the part of boards of the value that evaluations can deliver, combined with greater professionalism and ability to deliver value on the part of facilitators, can create a ‘virtuous cycle’ of board reviews whereby engagement in the exercise and the benefit derived from it increase in tandem, year-on-year.
As the board evaluation space develops internationally, it is to be hoped that all those working in this field can play a part in promoting understanding of the practice, enabling more boards to be provided with engaging and value-additive reviews that improve their effectiveness in overseeing the companies they govern, thereby enhancing the performance of the companies themselves.
Lintstock is a London-based corporate advisory firm specialising in board reviews. Lintstock also promotes best practice in the area of board reviews by hosting workshops for company secretaries around the world. For more information, or to obtain a copy of ‘15 Years of Reviewing the Performance of Boards’, contact the firm’s Partner, Oliver Ziehn: firstname.lastname@example.org.
SIDEBAR: About the study
The report 15 Years of Reviewing the Performance of Boards, was launched by the All Party Parliamentary Corporate Governance Group (APCGG) at the Houses of Parliament in London in June 2018. The report, produced by Lintstock for the APCGG, was based on a survey in which over 350 respondents took part, including 66 company secretaries – 25 from Financial Times Stock Exchange (FTSE) 100 companies, 21 from FTSE 250 companies, nine from FTSE Small Cap companies, and 11 from international companies.