Making it Count: Board Effectiveness Exercises Re-Examined

Board evaluation exercises are too often seen as a routine compliance process. When done right, however, there is much more to be gained from board assessments that can create real long-term value for the company.

Directors of listed boards will be familiar with the annual board assessment. Principle 5 of the Code of Corporate Governance stipulates: “The Board undertakes a formal annual assessment of its effectiveness as a whole, and that of each of its board committees and individual directors.”

This typically involves a survey of sorts, where each director provides their perspective on the board’s performance. The results are compiled, ratings communicated, and some recommendations are made along the way. Job well done. Rinse and repeat.

But is that really all there is to it? Do such assessments truly help? Or are boards simply going through the motion just to satisfy a compliance requirement?

From review to preview

The intended outcome from board effectiveness exercises is better boards that are well-positioned to tackle the business and governance challenges that lie ahead. All too often, board assessment reports tend to be more like report cards – focused on past achievements. Not that it is wrong to take stock; the existing board-level structures and processes must be fit for purpose. But the emphasis needs to shift towards the exercise being more anticipatory and forward-looking.

To do that, the board needs to be clear about where the company is headed. As companies regain their footing coming out of the global pandemic, the medium- to long-term business strategies should be the primary inputs that drive the development and succession planning of the board. Specifically, what are the competencies and skillsets the board needs to possess five to 10 years from now? Is there any specific industry/market knowledge that can help give the board an edge?

The answers to these questions should form the basis of the composition analysis that is usually undertaken as part of the board evaluation process. But this tends not to be the case. Often, the analysis is performed against criteria that are based on present requirements not linked to the overarching strategy of the company.

Ideally, the analysis should provide directors with a preview into the future state of the board – an “avatar” board, as it is sometimes called. Done properly, it also helps to address the issue of board renewal: in being able to articulate what the directors as a collective need to bring to the table.

Nominating Committees (NCs) are inherently better equipped to develop more substantive succession plans. Equipped with such insights, the NC is able to anticipate what the board loses when an incumbent director rolls off. More importantly, the NC will have in advance a detailed template with which to conduct its search for a replacement director that considers upcoming traits deemed essential to the success of the company.

Tackling diversity in the process

Board diversity transcends appearances. An optically diverse board is not necessarily diverse if, under the hood, everyone still succumbs to groupthink. The value of a board lies in the breadth of experience, knowledge, and opinions each director contributes.

A degree of conflict is to be expected, even amongst directors of high-performing boards. And when a director appreciates and values the concept of independence, he makes it a point to highlight alternative views from his peers. This can encourage further discourse without devolving into disruptive arguments.

A well-performed board composition analysis will essentially lay the foundation of a board’s diversity policy by stipulating what aspects of diversity are needed against what the board currently has. It also shows the thought process in arriving at these requirements.

Hence, listed companies that undertake this exercise will satisfy, in a way, the recent additions to the Singapore Exchange’s Listing Rules on diversity. From 1 January 2022, issuers are now required to maintain a board diversity policy that addresses gender, skills and experience, and any other relevant aspects of diversity.

These additional competency requirements will, more likely than not, lead to director searches needing to explore candidates beyond the traditional slate of lawyers, bankers and accountants. At the macro level this is a fantastic way to strengthen the bench of Singapore directors.

Getting both hardware and software right

Board effectiveness assessments traditionally tend to be heavily weighted towards technical aspects of governance, such as board structure, reporting and monitoring mechanisms, terms of reference, etc. They also delve into tangible, quantifiable proxies such as director attendance and the extent of independence on the board.

Good policies and procedures are critical for corporate governance but a disproportionate number of boards fail to adequately address the “softer” aspects of board performance. The box, “Software is Important”, shows some of the behaviours that differentiate the most effective directors. It is just as important to keep an eye on issues around board dynamics as well as culture, which ultimately translates to the tone at the top.

Some behaviours critical for success include:

1. Prepared and engaged. Comes prepared, is fully present at meetings and seeks to add value.
2. Current and open. Stays abreast of industry and company developments, is open to new ideas, processes and ways to solve problems.
3. Builds trust and respect. Is able to earn the trust and respect of fellow directors.
4. External stakeholder savvy. Understands external stakeholder perspectives and concerns as well as how to think about maximising shareholder returns.

The run-of-mill board survey issued to directors often does not really capture insights into the culture and board dynamics. Other tools and techniques, such as psychometrics, interviews and meeting observations, can provide additional colour in assessing board effectiveness. Doing so requires the commitment of extra time and resources, which is why many boards often choose not to go down this path.

The key is knowing when to deploy the tools. Think of it like this: as a new director, would it not be useful to understand the kinds of personality traits your fellow directors have, and how you can best navigate them? Or, as a chair, knowing how to best engage the members of your board and facilitate robust discussions given the current culture? Board members can gain an appreciation of the aspects of their leadership style that require calibration.

It takes courage and self-confidence to recognise one’s flaws and deficiencies. Which is why it is so hard for board and director self-assessments to be objective. In fact, directors often place themselves at the upper end of the spectrum when asked to rate their effectiveness. This is one reason to involve independent third parties where possible and help remove some of this bias.

Incorporating rigour and discipline

The most inspiring boards never shy away from wanting to “up their game.” High-performing teams are seldom a result of a group of talented individuals simply coming together, but rather due to a deliberate and rigorous intent to build on each other’s strengths such that the sum is more than its parts.

This does not happen overnight, and in this context, chairs and NCs would do well to reflect on what is being done to push the envelope in board development. And this comes back to the way in which board effectiveness evaluations are deployed. Such exercises need to be part of a continuous multi-year programme, as opposed to an annual one-off affair.

Software is Important

Differentiating Behaviours: The following behaviours differentiate the most effective directors

Boards here often look to refresh themselves in thirds over a nine-year timeframe (in part due to the independence requirements advocated by the Corporate Governance code). In such a scenario, a three-year assessment model would be appropriate. Such an approach not only allows for more targeted interventions over a continuous period, but also helps to coordinate efforts to focus on areas where directors would like to gain more insights to.

The higher intent

Aside from regulations and listing requirements, the fundamental reason for board assessments is self-improvement. Directors, in discharging their fiduciary duty to act and think in the best interests of the company, need to ensure that the board they serve is the best that it can be. 

Board evaluation exercises provide directors with an opportunity to reflect and seek new ways to develop. The value of a board effectiveness programme done well is tremendous, but it can only be as useful as the board wants it to be. After all, the desired outcome is a better board, not a better board review

This article was first published in the Q3 2022 issue of the SID Directors Bulletin by the Singapore Institute of Directors.