Regulators mandate regular (annual) reviews
The requirements for boards to conduct a regular review of their performance, their committees and individual directors are becoming commonplace in most developed and developing countries in the world. The requirements in Australia have been in place for many years and continue to be refined and expanded upon. Some of the current requirements are set out below.
Recommendation 1.6 of the current Australian ASX Corporate Governance Principles and Recommendations states that a listed entity should have and disclose a process for periodically evaluating the performance of the board, its committees and individual directors. Its commentary recommends the process of a regular board review should preferably be carried out annually.
Paragraph 44 of APRA’s prudential standard CPS 510 states that The board of a locally incorporated APRA-regulated institution must have procedures for assessing, at least annually, the board’s performance relative to its objectives. It must also have in place a procedure for assessing, at least annually, the performance of individual directors.
Paragraph 21 of APRA’s prudential standard SPS 510 which applies to all registrable superannuation entity licensees has almost identical wording to Paragraph 44 of CPS 510.
The Commonwealth and each of the states have similar requirements for the regular review of the performance of government boards and of individual directors. Clause 81(1)(d) of the State of Victoria’s Public Administration Act 2004, for example, states that The board of a public entity must, except in the case of a Commissioner entity, ensure that adequate procedures are in place for— (i) assessing the performance of individual directors; and (ii) dealing with poor performance by directors; and (iii) resolving disputes between directors; and (iv) assessing its own performance.
Externally facilitated reviews have become quite clearly defined
Most large organisations in Australia and many smaller organisations that are serious about good governance undertake an independent externally facilitated board review every two or three years.
Most of those reviews have evolved to include one hour interviews of directors and certain executives after they have completed a well-designed survey, and the synthesis of the external party’s findings and recommendations into a written expert’s report that is presented to the board.
Some reviews are extended to include the review of documentation such as board and committee charters, agendas, board packs and minutes as well as observing the board in session.
Many smaller organisations seek out a validated benchmarked Board Effectiveness Survey with a limited survey of committees and/or directors as they often don’t feel they can afford the time or expense of adding interviews by an external party to the process.
The reviews in between external reviews are less clearly defined
Most organisations carry out what is often described as a “lite touch” review in the year or years between each externally facilitated review. Those lite touch reviews come in many forms:
- A fire-side chat with directors on how the board is going and whether any changes are desired
- An internal survey of directors using paper, an Excel spreadsheet, a DIY online survey or via a third party board documentation platform such as Diligent. The survey is often one that has been used before, allowing for some trends to be monitored. The surveys are often returned to the Chair or the Company Secretary who prepares a report that can be discussed by the board
- Some organisations do what has been described in (b) above but ask an independent party to collect the survey responses from directors and executives and to prepare a report of the responses for the board
- Other organisations focus their lite touch review on the improvements or otherwise that have been made in relation to issues identified during the most recent externally facilitated independent review. This is done internally or with the help of the independent expert that assisted with the previous review
An affordable third party alternative
With the recent launch of Board Benchmarking’s online, validated, world-class benchmarked board surveys, organisations can now carry out an affordable board survey each year as:
- An integral part of their externally facilitated board review that is carried out every two or three years; and
- The main part of the lite touch review that is carried out in the years between their externally facilitated review.
Board Benchmarking’s board survey has many benefits for lite touch reviews:
- A simple, streamlined and unobtrusive process
- All surveys are benchmarked which makes all the difference as explained here
- Benchmarked reports include comparable figures for each survey item and for each factor, so the board knows where it is improving and where its effectiveness may have declined
- A short Committee Effectiveness Survey Module and/or a short Director Effectiveness Survey Module can be added to the end of the board survey
- The board survey in conjunction with the committee and director surveys described above meet the requirements of the ASX and APRA for an annual review of the performance of the board as a whole, of committees and of individual directors
- The survey responses are collected by Board Benchmarking which is independent of your organisation, so directors and executives who respond to the survey are likely to be more candid in their responses.