Resources - Evaluating Board Effectiveness

Resources

Evaluating Board Effectiveness

  • Evaluating Board Effectiveness Board evaluation is an important pillar of good governance. Read about approaches to evaluating the effectiveness of boards
  • Date: Jan 10, 2018
  • Category: Corporate Governance

The structured and regular evaluation of boards is an important pillar of good corporate governance. Shareholders have the right to expect a company’s board, and the individual directors on it, to monitor their own performance and commit to improving it. That is the purpose of an annual board effectiveness evaluation.

Board evaluation not only helps to ensure that the board is continuously improving, it also enables the board to communicate this to investors. Telling investors how the evaluation was conducted, who conducted it, what it concluded and how it will feed into improvement considerably helps them to judge how well the board is doing its job.

Directors should not see board evaluation simply as a compliance issue or box-ticking exercise. Going through the motions of box ticking can lead to problems being missed or ignored during evaluations, which should be about driving continuous improvement. If left unchecked over time, this approach is likely to lead to poor behaviour and bad decision making, as directors are not held to account on their performance. At worst, small problems in performance not addressed through a proper approach to evaluation can turn into serious failures in corporate governance over time (see The Cost of Poor Corporate Governance for examples of what happens when things go wrong).

Board evaluations can be carried out using a variety of methods, including questionnaires and interviews, through self-assessment or peer review. There is no one best approach. The most appropriate method will depend on different needs and priorities, as well as the company’s size and stage of development on corporate governance.

For all companies listed in Malaysia, the Malaysian Code on Corporate Governance issued in April 2017 (MCCG) states that the board should undertake a formal and objective annual evaluation of its effectiveness. Furthermore, for Large Companies , the board should engage independent experts periodically to facilitate objective and candid board evaluations. The MCCG also asks companies, particularly the Large Companies, to disclose in their annual reports:

1

How the evaluation was conducted, including whether an independent expert was engaged or if it was internally facilitated

2

The criteria used, such as the assessment of ‘fit and properness’

3

The key strengths or weaknesses identified (the outcomes)

4

The steps or enhancements proposed as a result (the next steps)

The full guidance is clearly and concisely articulated on pages 28-29 of the MCCG. In addition, for more detailed guidance on board evaluation, refer to Practice 5.1 of Bursa Malaysia’s Corporate Governance (CG) Guide (3rd edition).

However, despite the guidance provided by the MCCG and Bursa Malaysia’s CG Guide, Analysis of Corporate Governance Disclosures in Annual Reports in 2015 found that while 76% of listed companies disclose that they had conducted a performance evaluation for the board and individual directors, in stark contrast only 1 in 5 actually disclosed the criteria used in those assessment.

Below are three case study examples, which provide insights into how Axiata Group Berhad, BHP Billiton and Sime Darby Berhad conducted and disclosed their approach to board evaluation. In addition to the two Malaysian examples, BHP Billiton has been added as a benchmark of how global companies report against the same criteria. Please note that these case study examples are for illustrative purposes and are not being endorsed in any way.

Malaysian example: Axiata Group Berhad Annual Report 2016 (page 81) (excerpt of Board Evaluation Disclosure)

How is the evaluation conducted (including whether an independent expert was engaged)

Board evaluation for Axiata is an effective avenue to assess the Board’s collective performance as well as that of individual Directors. It is an integral part of the Board’s annual activities and is carried out under the supervision of the BNC which plays a key role in determining the methodology and approach, areas of assessment and selection of consultants to facilitate the exercise.

The same facilitator who was appointed to do a comprehensive 360 degrees review in 2013 and subsequent updates in 2014 and 2015 was appointed to facilitate the 2016 board evaluation exercise. A refresher approach based on a similar set of criteria and questionnaires was used for the Board to provide their ratings as an update of the areas measured in the preceding exercise.

Assessment criteria

Board

  1. Group Dynamics and Effectiveness
  2. Organisation – Agendas, meeting frequency, quality, structure and timeliness of Board materials, discharge of duties, adequacies of time for deliberations, information & support materials, strategic oversight, balance, size, gender diversity, skillsets, independence elements
  3. Committees – Organisation, agendas, meeting frequency, performance of members, size, balance of topics discussed and adequacies of report to Board
  4. Succession Planning and Development
(see the full report for additional criteria)

Self-Peer (Individual Directors)

  1. Knowledge and understanding on strategy, market, critical success factors, business risk, performance measures, financial discussions, awareness, risk management, skills and experience
  2. Preparation for Board meetings, time commitment and commitment to professional development
  3. Independence - Ability to speak openly, and ability to demonstrate independence exemplified by impartiality, objectivity and consideration of all stakeholders’ interest
(see the full report for additional criteria)
Outcomes and next steps

Based on the findings of the 2016 evaluation exercise tabled to the Board at its meeting in April 2017, the key themes highlighted in previous years’ report remained consistent. Axiata Board continues to be seen as a well-run, high quality Board that facilitates robust exchange of views during Board discussions. The Board is committed to the highest standards of good governance and marked improvements were reported in leveraging of technology to enhance efficiency and effectiveness of Board's deliberations and support materials for Board committees.

On the suggested areas of improvement, Board and Management succession planning were already being actively addressed along with gender diversity and skillset. Other suggestions on administrative matters were noted by the Board and will be addressed as appropriate.

Global example: BHP Billiton Annual Report 2017 (pages 108-109) (excerpt of Board Evaluation Disclosure)

How is the evaluation conducted (including whether an independent expert was engaged)

The Board conducts regular evaluations of its performance, the performance of its committees, the Chairman, individual Directors and the governance processes that support the Board’s work. The Board evaluation process comprises both assessment and review, as summarised in the diagram below.

The evaluation considers the balance of skills, experience, independence and knowledge of the Group and the Board, its overall diversity, including gender, and how the Board works together as a unit.

Directors provide anonymous feedback on their peers’ performance and individual contributions to the Board, which is passed on to the relevant Director via the Chairman. In respect of the Chairman’s performance, feedback is provided directly to the Senior Independent Director. External independent advisers are engaged to assist with these processes, as necessary. The involvement of an independent third party has assisted in the evaluation processes being rigorous and fair, and ensuring continuous improvement in the operation of the Board and committees, as well as the contributions of individual Directors.

Figure 1: Excerpt from BHP Annual Report 2017, page 108

Assessment criteria

Director Assessment

The assessment of individual Directors focuses on the contribution of the Director to the work of the Board and the expectations of Directors as specified in the Group’s governance framework. The performance of individual Directors is assessed against a range of criteria, including the ability of the Director to:

  1. focus on creating long-term shareholder value;
  2. contribute to the development of strategy;
  3. understand the major risks affecting BHP;
  4. provide clear direction to management;
(see the full report for additional criteria)

Board Effectiveness

The effectiveness of the Board as a whole and of its committees is assessed against the accountabilities set out in the Board Governance Document and each committee’s terms of reference. Matters considered in evaluations include:

  1. the effectiveness of discussion and debate at Board and committee meetings;
  2. the effectiveness of the Board’s and committees’ processes and relationship with management;
  3. the composition of the Board and each committee, focusing on the blend of skills, experience, independence and knowledge of the Group and its diversity, including geographic location, nationality and gender
(see the full report for additional criteria)
Outcomes and next steps

A number of improvements were agreed and implemented following the FY2016 Board evaluation. These included refining the approach to Board strategy discussions and improvements to culture, training and development and Board composition.

Two particular actions agreed in the FY2016 Board evaluation that have been implemented are to provide greater opportunity to attend site visits (and to make those visits more focused), and to better tailor induction programs to the particular skills and experience of the Director.

The range of site visits that took place can be seen in section 2.9 Director induction, training and development. Not all Directors attended each site visit, but there was particular emphasis on the attendance of members of the Sustainability Committee.

Malaysian example: Sime Darby Berhad Annual Report 2017 (page 120) (excerpt of Board Evaluation Disclosure)

How is the evaluation conducted (including whether an independent expert was engaged)

Board Evaluations are conducted annually to provide opportunities for increasing efficiency, maximising strengths and highlighting areas for improvement.

A comprehensive Board Effectiveness Assessment (BEA), Board Committee Assessments and Individual Directors’ Evaluation was conducted in 2016, facilitated by an independent external facilitator. The BEA 2016 concluded with a Board Working Session in August 2016.

In view of the new line-up of the Sime Darby Board upon completion of the pure-play exercise, the Board decided that the BEA in 2017 be conducted internally through questionnaires.

Assessment criteria

Sime Darby presents its assessment criteria as follows:

Outcomes and next steps

The Board Evaluation indicated that the Board has discharged its responsibilities well with good Board structure and operations. Out of the 5-point scale, with 5 being the best possible rating, most assessment criteria under the Board Evaluation were rated either ‘4’ or ‘5’. The Board was satisfied with the evaluation outcome. The Board identified key areas of enhancement and other areas where the Board could further solidify their strength.

The outcome of the evaluation of each Board Committee is provided in the respective Board Committee Report from pages 122 to 142. The feedback for the Director’s Peer Evaluation is provided to the Chairman directly so that he can meet with each Director on an individual basis and engage in dialogues with the Director on his/her performance. The individual feedback form part of the Director’s development plan for continued optimum contribution to the Company.


Author

Thomas Milburn, Corporate Citizenship

Thomas Milburn is a Senior Consultant at Corporate Citizenship based in our Singapore office. He specialises in working with companies on corporate governance, integrating sustainability into management approaches, and sustainability reporting. He has over eight years helping businesses to navigate the complex and changing sustainability agenda and hold an MSc in Corporate Governance and Business Ethics from Birkbeck College, University of London.


  • Tags : Evaluation, Governance, Board, Disclosure, Assessment.

Related Articles

  • Boards and Stewardship

    By Didier CossinJan 31, 2018

    Create long-term value by progressing to value-based governance. A look...

Other Trending

Copyright © 2018 Bursa Malaysia Berhad (30632-P). All rights reserved.