Developing a strong process of board evaluation to understand the performance of directors and the board has never been more important for Australia’s governance community, writes Domini Stuart.
When Professor Geoff Kiel FAICD started to evaluate boards he often found serious deficiencies in procedures, policies and processes. That was 15 years ago and, since then, a sharper focus on governance has given rise to significant change.
“Today, most organisations have their structural capital under control so we’re focusing more on human dynamics,” says Kiel, chairman of Strategic Governance, an emeritus professor of the University of Queensland and author of several books including Board, Director and CEO Evaluation. “That’s the kind of feedback good directors are looking for.”
This can include an evaluation of what Kiel calls “director personality”. “My colleagues and I have hypothesised 10 key dimensions of director personality and, for each of these, we have identified specific behaviours that can cause problems on a board,” he continues. “If we take power, for example, a director who exerts too much will dominate a board while no-one will listen to a director who exerts too little.”
“When we suggest there is room for improvement some directors are genuinely surprised and readily commit to change. Others see no reason to pay attention,” he says.
As founder and chief executive officer (CEO) of the Langley Group, Sue Langley offers evaluations based on the latest developments in neuroscience.
“We know from neuroscience that people who aren’t looking after their mental wellbeing are far more likely to make the kinds of impulsive and ego-driven decisions that have no place in the boardroom,” she says. “We’re finding that more directors are starting to recognise the role emotional intelligence, positive psychology and neuroscience can play in improving the board’s effectiveness, performance and collaboration,” she says.
“For example, we’re currently working with some very senior people in a global organisation who want to be a bit more forward thinking in their approach to evaluation. Their organisation has also had a big push towards wellbeing and has realised that, from a brain perspective, if you’re not looking after your wellbeing you can’t function well as a leader.”
Evolving and growing
The evolution of board evaluation has been driven, at least in part, by increasingly prescriptive oversight by regulators. The ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations states that “companies should disclose the process for elevating the performance of the board, its committees and individual directors” while the Australian Prudential Regulation Authority requires that regulated institutions “have procedures for assessing, at least annually, the board’s performance relative to its objectives”.
“The range of services available now is huge compared with when we started out,” says Michael Robinson MAICD, director of Guerdon Associates. “In particular, there are now good-quality, reasonably-priced services for not-for-profits, small private companies and superannuation funds. And the range of sophisticated external services has also expanded for boards of larger organisations with more financial resources.”
Boards new to evaluation generally start with an internal assessment conducted by the chair, but there are good reasons for moving on to an independent review.
“Directors are bound to feel inhibited when they’re being reviewed by someone who sits on the same board,” says Kerryn Newton FAICD, managing director of Directors Australia. “It’s much easier to have a full and frank conversation with an external evaluator who can de-identify all of the information and feedback. Good evaluators will also be able to draw out more information and use their experience with many different kinds of boards to suggest ways of dealing with issues and enhancing performance. They can also mediate if conflict should arise.”
Robinson sees a correlation between the increasing demand for independent reviews and greater board diversity.
“I don’t think this is a coincidence,” he says. “Our observation that diverse boards tend to be more open to other people’s opinions is borne out by the fact that the few listed company boards that don’t seek independent assistance tend to comprise white, semi-retired and relatively wealthy males.”
Since 2012, large superannuation funds have been required to undertake an external review at least every three years. “I’m sure that the experience of directors who sit on finance sector and superannuation boards where board evaluation is a compliance requirement will influence the methods used by their boards in other industries,” says Robinson.
Choice and contention
Evaluations can range from high level to granular. “The light-touch approach might involve an online survey, a discussion about the collated results and some agreed actions,” says Newton.
“At the other end of the spectrum there could be an initial survey; individual interviews with directors and key executive managers who regularly interact with the board and, perhaps, other stakeholders; a facilitated discussion with the board; and then a report. Between the two extremes are various options regarding the scope of the interviews and how they are conducted.”
There are also a few areas of contention. For example, Kiel believes that questionnaires can help to identify areas in need of further investigation but, beyond that, their value is limited by human nature.
“No-one likes to think they’re a failure and marking yourself down can feel like an admission that you’re not doing a good job,” he says. “One-on-one interviews by a trained evaluator are much more likely to elicit the truth. I’ve been in situations where subsequent interviews have painted a very different picture from the initial survey.”
Some argue that benchmarking can enhance and expedite evaluations, others that standardising the questions could limit the process.
“I think that, in general, benchmarking needs to be approached with caution because the nature of boards varies so much across different ownership types and industry sectors as well as according to the size and stage of the organisation,” says Newton.
And, while some believe that having every director review every other director provides welcome insights, there’s a chance that critical feedback could undermine the board’s collegiality.
“We’re being asked to do more of these individual director reviews and we do get some very good feedback, but they certainly do have to be handled with care,” says Kiel.
Engaging the whole board
Whatever the nature of the evaluation, it can only succeed if there is genuine buy-in from the whole board. “It’s vital that directors regard board evaluations as developmental rather than judgemental and are willing to engage in an open and constructive conversation,” says Newton.
There are still some pockets of resistance. “It amazes me that, after decades of routinely collaborating with c-suite executives to measure and manage their performance, some boards remain reluctant to take director evaluation seriously,” says Robert Gordon GAICD, founder and director of programs at Board Accord.
“Evaluations can be transformational when they’re embraced as a personal and professional development exercise. Personal blind spots, unaligned positional standoffs and poor communication inhibiting engagement and limiting outcomes must be unwrapped and resolved for a board to perform optimally,” he says.
Robinson is surprised that so few boards start out with a defined strategy. “We typically find that a board evaluation conducted after, or even during, a board strategy review is most effective because it is clear where the board is expected to add value,” he says.
It is also surprising that some boards confuse a governance review of the organisation with a board performance review, or use an evaluation to resolve a sensitive issue that would be better addressed in a different way.
“I’ve known chairs to call for an external board evaluation to draw attention to an underperforming director rather than deal with the matter themselves,” says Newton.
Some boards are content to go through the process of evaluation, tick the box and file the report away. “We discuss our observations and recommendations with the board before handing down the report so that we can include a list of agreed actions in the report itself,” says Newton. “Of course, we also include any recommendations they didn’t agree to – we would never compromise our independence – but, overall, we have found this to be a much more effective way of getting buy-in from the whole board.”
She recommends that boards draw up an implementation plan that prioritises the agreed actions and gives responsibility for carrying them out to individual directors or committees.
“This plan should then be included on the board meeting agenda until the changes have been implemented,” she says. “If it isn’t, there’s a serious risk it will be forgotten.”
Some boards may be incapable of change. “I’ve seen boards where the directors were at loggerheads but both sides had a very secure position in terms of the shareholders they represented,” says Kiel. “They knew they were dysfunctional as a group of people but claimed there was nothing they could do about it. I’ve also seen boards in a similar situation that have used an evaluation as a springboard for revitalisation and renewal, and where most of the troublesome directors then decided to leave.”
An annual assessment of some kind is widely accepted as best practice. “We suggest undertaking an externally-facilitated review every second or third year and using some form of internal evaluation methodology in between,” says Newton. “An independent review does take time and energy and, sometimes, recommendations take longer than a year to implement.”
However, Gordon sees value in what he describes as a yearly professional health check. “Boardroom breakdowns don’t happen overnight,” he says.
“Yale’s Jeffrey Sonnenfeld says that healthy boards exemplify a virtuous cycle of respect, trust and candour which, when it goes awry, can turn into a vicious cycle where all three are lost. Early intervention can prevent the downward spiral and, done routinely, an externally-led annual review can provide that invaluable ‘stitch in time’.”
Technology is adding a new sense of urgency to the evolution of board evaluation. “Digital disruption is going to have as much impact on boards as the companies they oversee,” Gordon continues.
“The current governance model was largely formatted after the industrial revolution so it’s hardly surprising that it’s outdated and totally out of sync with the information age.
“Many CEOs are already aware of this and, if boards are going to stay ahead of the curve, it’s vital that they start thinking about how that model might develop over the next decade. A good evaluation needs to disrupt the board’s thinking and empower it to govern the coming disruption.”
Getting more out of board evaluations
Geoffrey Kiel: An evaluation is a key element in building a better board but only if the whole board approaches it with the right attitude, appropriate methodologies and a willingness to change.
Kerryn Newton: Before embarking on a review, ensure the whole board is clear about its nature, scope and potential outcomes.
Michael Robinson: Observations from members of the management team who have had frequent interaction with the board can add a useful new perspective.
Robert Gordon: Directors need a particular mindset in order to manage today’s volatile, uncertain, complex, ambiguous and disruptive (VUCAD) international marketplace. A review can be a mechanism for developing that.
Sue Langley: When feedback and performance conversations focus on what people do well they feel more positive and motivated and perform at their best.
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