The Corporate Governance Code in the UK is the blueprint for corporate governance codes worldwide. Nowhere else is the practice of conducting board evaluations more advanced, and nowhere else do more boards of listed organisations conduct board evaluations on a regular basis.
In this podcast, Dr Sabine Dembkowski talks with Maureen Beresford, Head of Corporate Governance at the Financial Reporting Council (FRC).
Maureen’s team is responsible for the UK Corporate Governance Code and its supporting guidance. She has been in this role for almost two years, and prior to this, she worked at the Department for Business, Energy and Industrial Strategy, where she was responsible for company law and reporting. As part of her current role, she produces the FRC report each year on how companies have complied with the Code. For the last three years, board evaluations have formed part of this review.
Some of the key takeaways of the conversation include:
“Board evaluations could definitely be improved…”
Maureen Beresford details how, in the work she and her team do, she sees many boards making very similar statements about their evaluations – broad-brush statements such as “the board is working together effectively”. Her concern, however, is that these do not give any concrete actions that have been taken, or detail any follow up from the previous board evaluation. More could be done in terms of concrete actions and following up detail on actions taken from previous evaluations.
Maureen says this level of reporting offers very little insight, however the reflection that goes on during a board evaluation can be important, both in terms of improving the performance of the board, but also the company as a whole. She explains that the FSC understands that the findings of a board evaluation can be commercially very sensitive, but many companies are reluctant to give even the basic findings.
“An opportunity to delve into how the board is effective.”
Board evaluations are an important tool to support governance in the UK. Maureen firmly believes that if everyone “gets behind it”, a board evaluation can give some great results and insights to boards and companies. An effective board evaluation should offer board members the opportunity to take stock and consider their performance over the last year. It should be both objective and rigorous.
“An honest picture of how the board works and how its Committees are working.”
Maureen suggests there is no evidence to suggest that any particular methodology is a reliable indicator of quality, and therefore cannot suggest that any specific data that should be collected. What she does point out is that a questionnaire that does not have probing questions will not be effective. Equally, an evaluator simply attending a board meeting and listening in is also unlikely to be effective, as participants are likely to modify their behaviour during a meeting when observed.
Better board evaluations are likely to include both quantitative and qualitative parts, as including both aspects will enable the board and individual directors to identify actions to optimise the board’s composition and performance.
Maureen explains how the pandemic has meant that boards have been forced to embrace digital technology into everyday board management functions, and using these methods could potentially enhance the data collected during board evaluations. There is opportunity here to introduce new technology that will enhance evaluation and therefore performance.
She also emphasises that any data collected about individuals should be anonymous, secure and confidential, as this should encourage better feedback.
“Board, committee and individual director evaluations topics should be customised to get the feedback that you require.”
Good evaluations can elicit valuable feedback on board dynamics, structure, performance and composition. FRC guidance on board effectiveness provides insight into a list of areas that could be considered, such as:
- Succession and development plans
- Company culture, performance and strategy
- The quality of board governance documents such as the quality and timings of papers and presentations to the board.
- How the board communicates with, listens and responds to investors and key stakeholders.
Where a company is pursuing an externally facilitated board evaluation, the chair needs to ensure the board gets the most out of the evaluation, and they should ensure that the approach is seen as an opportunity, not a compliance exercise.
The UK Code recommends that FTSE 350 companies should conduct an externally facilitated board evaluation every three years.
Overall, boards need to question whether the evaluation:
- Has a clear objective and scope.
- Offers all members of the board the same opportunity to contribute – in confidence.
- Will collect evidence to support any proposals.
- Will enable the board and individual directors to identify actions to improve board and director performance.
“Set your scope, involve people, collect evidence and be clear about your outcomes.”
When asked about the content of a board evaluation, Maureen cites her organisation’s guidance. For example, the evaluation should take into account succession and development plans, culture, quality of documentation and how the board listens to the concerns of shareholders and key stakeholders. With regard to external evaluations, Maureen believes that this is an opportunity for boards to learn more and get the most from the evaluation, as opposed to it being an exercise in compliance.
“We would really, really like to see a move away from general statements.”
Improvements have been made, and companies have come a long way since evaluations were first introduced. Maureen says that, in terms of reporting, she has begun to see some companies provide more detail on the areas that the evaluation covered, along with suggested areas of prioritisation. For example, the last annual review highlighted that several companies added questions/topics specifically addressing the board’s responses and governance in the face of the Covid-19 pandemic. This is useful in showing the board’s desire to receive feedback on its performance under stressful conditions.
Other improvements to evaluation could be include the disclosure process, how they carried out their evaluation, who undertook it, and where the evaluation was externally facilitated, details on who within the company was responsible for providing the external reviewer with the necessary access and support – which is extremely important.
Such disclosures could be significantly enhanced by stating the length of time for which the reviewer has undertaken the board performance review for the company, and whether they have other connections with the company (which is requested in the FRC Code but often not reported on) or the person leading the appointment process.
The three top takeaways from our conversation are:
- Board evaluations should not be viewed as a compliance exercise as much as an opportunity for change and improvement.
- Trust in the process and its confidentiality is critical in order for a board evaluation to be successful
- There needs to be the desire to improve – Don’t assume that everything is fine; be open to new ideas and learn to really embrace the process