Companies need to spend more time critically evaluating their own governance performance. Corporate governance weaknesses inexorably cause poor corporate performance and can result in compliance breakdowns.
It is hard to turn corporate focus to governance issues. Corporate leaders are reluctant to admit “weaknesses” and agree to the need for change. Companies do not like change – in fact they resist change.
In the last few years, forward-thinking companies are conducting their own evaluations. Companies are conducting board assessments annually. But board assessments are no panacea. Even if an annual assessment is conducted, there is no guarantee that a board will implement needed changes.
An accurate board evaluation process can identify issues and enact reforms to improve performance. The board should agree in advance to the following:
Purpose of the evaluation
Designated board member or committee to oversee the evaluation
Senior management is included in the process
Post-evaluation review to identify issues and adopt changes which may be required
Directors need to agree to the purpose of the evaluation. This may be obvious but there should be a shared commitment to the scope and purpose of the evaluation. This should include how the evaluation is conducted (e.g. questionnaire or individual interviews) and whether the evaluation extends to individual director assessments.
The board should also agree in advance on the subjects to be examined. The subjects can include information flow, communications issues, the effectiveness of individual committees, the relationship of the board to senior management, and board agendas.
An independent board member should chair the evaluation process and make sure the evaluation is conducted with an inclusive agenda where all directors participate and are involved in the process.
The Chief Executive Officer and other senior managers should be involved in the evaluation process. It is important to focus on the interactions between senior managers and board members. Senior executives can provide important feedback on board performance.
A third-party facilitator with significant governance expertise should be retained to guide the process and provide a “best practices” perspective.
Boards use questionnaires to collect information used in the assessment. Interviews are a better technique in drawing out board performance issues. These interviews are confidential and should cover a wide range of issues, including board composition, information flow, board meeting dynamics, relationship with senior management, and the quality of board supervision and decision-making. The evaluation should include review of board documentation, governance documents, charters, minutes, agendas and an observation of a board meeting. The assessment should focus on the board’s role in strategic decisions, access to information, and competency of board members, succession planning, and board discussions. Procedural issues should also be addressed.
Boards have to be willing to consider the findings of the evaluation which should include an open discussion of the findings. The board should identify issues for improvement and try to enact improvements. The governance committee should assume follow up responsibility for addressing he need for reforms.