Evaluating board performance

Evaluating the performance of a board and the contributions made by individual board members can be a challenging process. But as Katrina Clifford reports, many boards fail to follow through on recommendations arising from these reviews.

Marking the board’s report card

Over the past decade, companies such as WorldCom and Enron in the United States, and HIH in Australia, have become household names, synonymous with corporate failure and scandal. Examples such as these provide a stark reminder of the dangerous speed with which the fallout from the mushroom cloud of a corporate crisis can spread – especially once news of a company’s negligence or unscrupulous activities reaches international headlines.

Corporate disasters such as these continue to underscore the driving necessity for boards to be concerned solely with scrutiny of more than just management’s performance. The now habitual focus on corporate governance – rapidly brought to bear, in part, by these very same antecedents – and increased shareholder activism has clearly established a need for directors to hold account of not only their own performance, but also the performance of the entire board.

In fact, Principle 8 of the ASX’s Principles of Good Corporate Governance and Best Practice Recommendations advocates the regular review and broad disclosure of board, committee and director performance, as a measure for encouraging enhanced functioning and mitigating the risk of potential corporate crises. While the principles are aspirational, rather than prescriptive with regard to achieving ‘best practice’ corporate performance and accountability, companies are obliged to meet the ‘if not, why not?’ disclosure requirements in instances where they have not followed the ASX recommendations.

The Australian Prudential Regulation Authority (APRA) has also recently bought into the dialogue on board performance with the release of its own new prudential standards on good governance for authorised deposit taking institutions, and life and general insurance companies. Reportedly developed after “extensive industry consultation”, the new standards recommend at least annual reviews of both board and individual director performance for companies operating under the regulator’s watch.

This, in itself, goes against the grain of much of the conventional thinking in the marketplace, which tends to suggest that a bi-annual cycle represents a more reasonable, realistic and workable schedule for boardroom performance evaluations. For this reason, Fiona Harris, president of the Western Australian division of the Australian Institute of Company Directors (AICD) and a director in her own right of several organisations, including Alinta Limited and the West Australian Symphony Orchestra, admits she was “horrified” to read the APRA recommendations, saying: “You’d hardly have time to implement the recommendations of the last evaluation.” Harris claims: “To be overly prescriptive on this won’t be productive. Boards must be allowed time to identify areas of improvement and to rectify any problems in their structure and processes.”

No doubt, the benefits of regular board, committee and director performance evaluations are numerous and far-reaching – provided the evaluation is executed effectively. Says Peter Kronborg, chairman of strategic human capital advisory firm, Oppeus: “A lot of people place a great deal of attention on performance evaluation as being the end play.” In actual fact, says Kronborg, “the critical issue is not about conducting board performance evaluation. It’s about developing proper governance initiatives. The review is but one step in that development process.”

While the benefits of board performance evaluation may be largely self-evident, lesser understood perhaps is the fundamental question of just how a board effectively and productively measures its leadership and performance by way of a formal evaluation process. This is an especially pertinent point, given that poorly executed performance evaluations can potentially give rise to tension between directors, as well as the board and management.

Books such as Board, Director and CEO Evaluation by Professor Geoffrey Kiel, Gavin Nicholson and Mary Anne Barclay, and related courses within the AICD’s educational program, offer a rich starting point for boards seeking to demystify the mechanics of performance evaluation. They also offer invaluable access to the tools and templates that boards can subsequently refine and modify to match their own objectives and competitive environment, should they choose to conduct an internal self-assessment of board and director performance.

It goes without saying, of course, that any decision to outsource the management of a board’s performance evaluation process – particularly for smaller organisations – remains dependent to a large degree on the pragmatics of time and money.

Nonetheless, anecdotal evidence suggests that an increasing number of publicly listed companies, not-for-profit organisations, government agencies and second generation-run family companies are now favouring engagement of the services of an external board performance evaluation consultant – if only to supplement existing internal reviews. For many high-performing boards, employing the services of an external consultant to drive the evaluation process furnishes an added credibility with regard to the governance practices of the board. Not to mention a perception of independent validation in the eyes of company shareholders and the broader market.

Obviously, it is important to bear in mind that all boards remain distinctive creatures with regard to their size, the competitive environment in which they operate, the gravity and breadth of their concerns over issues of performance, and in relation to what Harris – also chairman of board and strategic advisory firm, Barrington Consulting Group – terms their “appetite for assessment”. In spite of this, it seems most external consultants worth their salt, fail to differ significantly with regard to the broader methodologies they apply when conducting a board performance evaluation.

The first priority is to develop a clear understanding of the objectives of the board – not just in its everyday operating environment and strategic dialogue, but also what it hopes to achieve as a consequence of undertaking a performance review. This process will typically involve an initial debriefing with the chairman of the board.

For some consultants, the next phase of primary engagement with their clients revolves around the establishment of a steering committee, consisting of the chairman of the board, the company secretary, and a representative from the external consultancy. The principal function of this committee, according to John Barrington, managing director of Barrington Consulting Group, is to monitor the schedule of the evaluation program – which, incidentally, can take anywhere from four to six weeks through to three to four months, according to whichever industry account you follow – and functions as “a working example of good
corporate governance.”

Most consultants tend to apply a combination of quantitative and qualitative techniques when executing a performance evaluation. On the quantitative side, directors will usually be asked to complete a questionnaire, which is typically designed around a five-point sliding scale (with, for example, one being the ‘most valuable’ and five being the ‘least valuable’). In some instances, an opportunity will also be afforded for respondents to add further comments at the end of the questionnaire in a more open and free writing style.

Qualitative methodologies, on the other hand, characteristically involve in-depth interviews with individual directors – conducted with a view to not only exploring in greater depth the issues canvassed in the questionnaires, but also with acquiring a more candid and unguarded personal response as to how directors view the performance of the board and their peers. These interviews, says Barrington, are usually scheduled to be anywhere from one to one-and-a-half hours in length.

While key performance indicators (KPIs) may well be an important measure of company performance, the directors and consultants interviewed for this feature were at something of a loss to provide any cast-iron bullet point list of KPIs for board and director performance. Instead, says Warren Tapp, founder and managing director of professional consulting services company, Directors Australia Pty Ltd: “Since each question in an evaluation is geared towards and informed by the specific functions of the board, all boards should be benchmarking against their own performance – as measured by their previous evaluation.”

Quantitative and qualitative methodologies adopted as part of the board evaluation process will typically solicit the individual perspectives of directors with regard to the board’s performance in areas such as corporate governance and compliance, financial and risk management, director development and selection, board succession, and the importance placed on strategic dialogue. When it comes to director level evaluations or peer reviews, Harris says, questions asked of board members will typically expand to include matters such as “director commitment, director understanding of the company’s industry and operating environment, director contribution to each of the board’s areas of involvement, participation in networking for the company, and perceived levels of personal time invested in mentoring the company’s CEO.” These results will typically be aggregated and compiled into a summary report of recommendations to be discussed at an imminent meeting of the board, at which the external consultant may or may not be present.

However, “asking the right questions is only part of the equation,” says Tapp. “The robust nature of the process is vitally important.” As a director and the driver of performance evaluations for a number of boards over which he presides, Tapp says he prefers his fellow directors to provide frank and honest responses – particularly about his own performance as a chairman.

This is not necessarily a view shared by all board members. According to Tapp, many directors actually perceive board evaluation to be something akin to “taking medicine” – especially where peer reviews are involved. He explains: “There aren’t many directors that are comfortable with being under the microscope, or that are necessarily used to having to be…Having the respect of your colleagues at a board level is vitally important for most directors. To have a process in place that has the potential to reveal that some directors don’t have the respect of their peers that they thought they had, can be a very unsettling proposition.”

For this reason, Harris – a self-confessed “fan of board performance evaluation”– advocates a ‘softly, softly’ approach as the best tactic for tackling the sensitivities of individual director performance. Equally important, she says, is an emphasis on confidentiality, with the anonymity of responses of individual directors remaining paramount.

In spite of these sensitivities, Tapp says, of the boards for which Directors Australia Pty Ltd has conducted performance evaluations, very few have actually registered any major deficiencies related to director behaviour. Instead, he claims, one of the greatest failures actually comes once the results are in, with many boards “failing to follow through on the recommendations made as a consequence of the evaluation process.” To help overcome this impediment, Tapp defines a whole-of-board commitment – even before the evaluation process has begun – to implementing the recommended changes as essential.

Another common performance challenge facing many contemporary boards, says Barrington, is “the lack of time dedicated to strategic dialogue” – a priority issue to which “a company should dedicate up to 50 per cent of its time”, he says. But, as Barrington explains: “To get people to engage in that conversation is very challenging. For all the best intentions in the world, strategic dialogue is still one of the key performance issues that manages to consistently get squeezed out.”

BOARD PERFORMANCE CASE STUDY

Universities, by their very nature, operate in the everyday grip of a matrix of divergent and competing stakeholder interests and demands. “It’s a matter of course,” says Hendy Cowan, long-serving parliamentarian, former Deputy Premier of Western Australia and the current chancellor of Edith Cowan University (ECU), “that government wants a series of checks and balances in place with regard to the distribution of funding to higher education providers, so there’s a pre-existing need for constant monitoring and review of how the University Council delegates its authority.”

Like any other board, the Council is responsible for the management and control of the operations, affairs and property of ECU – a university that each year plays host to in excess of 3,000 international students, originating from over 80 countries, spread across three campuses in the metropolitan suburbs of Perth, and another in the city of Bunbury. The Council’s membership reflects the representative nature of its functions and powers, consisting of 21 members, including persons having specialist experience and expertise in education, the professions, industry and commerce (as appointed by the Governor of Western Australia), co-opted members, academic staff and representatives of the university’s alumni and student guild.

“Like any entity, we’re a business,” says Cowan. And, a reasonably healthy one at that, with around $250 million generated in university income each year.

Similar to any other commercial organisation, ECU’s Council remains subject to a statutory framework consisting of sound corporate governance practices – reflected by the government’s national governance protocols for higher education providers and the Council’s own corporate governance statement. In recent years, Cowan says, the Council has undertaken a particularly critical appraisal of its performance – coming to the realisation that, further to its obligations to provide direction to the executive management of ECU, the Council had “delegated almost every responsibility except delegation itself.”

This prompted the Council to “review what powers it should be reserving for itself and, in the case of delegation, whether the reporting structures between Council and ECU management were adequate” by way of a formal performance evaluation process – the first of its kind since Cowan’s appointment as chancellor in January 2005. Contracted to the services of external consultant, Barrington Consulting Group, following an extensive tender process, Cowan says the formal evaluation (currently in train) has been designed to address and move through seven key issues, including strategic dialogue between Council and management, the Council’s delegatory powers and board composition, and its contribution to raising the academic profile of the university.

To offer “a taste of where you can go if you discharge your authority correctly”, Cowan says the Western Australian division of the Australian Institute of Company Directors (AICD) also recently customised an in-house educational presentation for Council members. “The seminar reinforced many of the governance issues the University Council is seeking to address,” he explains, “and gave us some insight into how we might deal with those matters.”

On the topic of anticipated outcomes of the current performance evaluation, Cowan says: “That’s easy – to build a better and stronger relationship between Council and executive management. Although, there will also no doubt be an added appreciation of the need to commit to ongoing performance evaluations moving forward.”

Katrina Clifford is a Sydney-based freelance journalist and editor, specialising in small business, corporate and trade issues. During her career, she has worked for several niche publishing houses and as a contract communications consultant for PricewaterhouseCoopers. She is the former editor of export magazine, and most recently, Company Director.