What constitutes a rigorous board review?
Written by Board Benchmarking Executive Chairman, Nicholas Barnett.
The ASX Corporate Governance Principles and Recommendations state, “A listed entity should have and disclose a process for periodically evaluating the performance of the board, its committees and individual directors.”
The New York Stock Exchange “requires the board of directors to make a self-assessment of its performance at least once a year to determine if it or its committees function effectively and report thereon.”
The UK Corporate Governance Code goes further by stating that “the board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.”
I like the inclusion of the words “formal” and “rigorous” in the UK Corporate Governance Code. But what constitutes rigorous and what is a lack of rigour?
I joined a virtual round table discussion that was arranged by our UK partner, Halex Consulting, in July 2023 to discuss this important topic. It was a fabulous discussion with Company Secretaries, Chairs, and Directors from many different types of companies in the UK, including listed companies.
I was pleased to be able to give an Australian perspective which, interestingly, correlated closely with the prevailing view in the UK. This article sets out several of the conclusions reached.
What board reviews lack rigour?
A good place to start is to consider what sort of board reviews lack rigour. There are plenty of them!
For instance, a casual discussion led by the Chair with fellow directors, where they collectively agree their board is functioning quite well, won’t cut it. Likewise, individual conversations between the Chair and each director, while better than complete inaction, also fall short of the ideal solution.
During discussions among participants at the UK roundtable, the prevailing opinion was that a brief survey hastily put together using Google searches and conducted in-house would not meet the criteria either. Many were concerned that an in-house survey would result in directors being less likely to express their views with the same candour that they would if the survey was carried out by an independent third party.
What constitutes a formal rigorous board review?
The round table participants found it much easier to agree on what wouldn’t make the grade than what would pass the rigorous test. Some individuals believed that the term “rigorous” should encompass interviews conducted by an unbiased third party, in conjunction with a comprehensive and well-structured board survey. Others were less convinced about the necessity of interviews if the survey was sufficiently robust and carried out by an external party, to increase the likelihood of candid responses.
One attendee highlighted their previous survey which had identified an outlier, leading the Chair to inquire about the identity and reasons behind the outlier. This raised concerns amongst other round table attendees. They believed that if the Chair were to identify the outlier this time, it would almost certainly discourage directors from providing candid responses in the future.
A notable question raised by an attendee was how to enhance rigour without imposing additional time constraints on the company secretariat and directors. If directors are to engage in a survey, it might as well be a comprehensive and well-designed one. Even better if it provides benchmarking against similar types and sized organisations. And especially advantageous for the company secretariat and board if it is carried out by an independent third party and includes a well-designed and action-oriented report.
Several attendees noted that improvements in scale and technology, provided by organisations like Board Benchmarking and Board Surveys, had significantly reduced the costs associated with third-party board surveys. These advancements also mean that the surveys and the related reports can be benchmarked against similar organisations.
Deep dive and lighter touch reviews
Whilst the UK Corporate Governance code refers to a formal annual rigorous review, many noted that their organisation adopts a rigorous board effectiveness review cycle. Such a review cycle often includes a deeper dive review every second or third year, with a lighter touch review in the intervening year(s).
This approach is also common in Australia and many other jurisdictions. The deeper dive review typically includes a well-designed survey that is completed by directors and executives, plus interviews with both. It can also include a review of documentation, such as Charters or Terms of Reference, meeting agendas, information packs and minutes for the board and/or committees. Observing the board and/or committees in session can also be included.
The above review procedures normally culminate in a comprehensive expert report of findings and recommendations.
A lighter touch review in the intervening years is often carried out using the same comprehensive board survey used for the deeper dive review or a shorter version thereof. Whilst most of these lighter-touch reviews have previously been conducted by way of an internal survey, it is becoming more common for them to be outsourced and include a well-researched survey and benchmarked report.
If an external party is used, they often prepare an Executive Summary for the board and provide the Chair and then the board with an appropriate debrief of their findings and recommendations.
If you would like to discuss this further, please feel free to get in touch. I would love to hear from you.