Philip Sidney, Senior Associate, Lintstock Ltd, shares a number of insights into the benefits of board evaluations, and how corporate secretaries and governance professionals can more effectively help unlock the value of board reviews.

Board effectiveness reviews are now an established part of the corporate cycle across the globe. Assessment of the performance of directors is mandated in Articles 55 to 57 of the PRC Code of Corporate Governance for Listed Companies, while a regular evaluation of board performance is a recommended best practice under the Hong Kong Corporate Governance Code – and is expected to become a requirement on a ‘comply or explain’ basis in the future. In the UK, where the requirement to undertake an annual effectiveness evaluation has been in place for over 20 years, the board review is fully integrated into the calendar of FTSE 350 businesses, with a requirement to undertake an externally facilitated review every three years.

While they may have originally been instituted as a result of regulatory requirements, board reviews – certainly in the UK – are accepted as best practice and are valued by the boards that undertake them. There are undoubtedly some boards who feel the requirement to be a burden (compared by board evaluator Dr Sabine Dembkowski to ‘eating cabbage before you can get to something more appealing’), but they would seem to be in the minority. Research on the state of the sector undertaken by Lintstock in 2018 found that 86% of FTSE respondents would undertake a board evaluation even in the absence of a regulatory requirement to do so and evaluations are increasingly being undertaken by organisations for whom it is not mandatory – unlisted companies, government bodies and charities to name but a few.

As board review practitioners, it is encouraging to see evaluation exercises becoming increasingly sophisticated across the sector – board members’ engagement with the process is continuing to grow as they come to recognise the benefits beyond ‘ticking the box’ and satisfying regulatory requirements. A virtuous circle is being created whereby directors expect more from the process and are consequently willing to provide more input with greater enthusiasm, encouraging board evaluators to up their game in turn.

This article will explore some of the main benefits of board evaluations, and how corporate secretaries and governance professionals can assist the process to extract as much value from the exercise as possible.

Reflecting and raising issues

A key function of board reviews – and one that directors find highly useful – is to provide a space, outside the board’s regular meetings, in which issues can be raised and problems identified. Boards are busier than ever, and their packed agendas cover a vast range of issues from big-ticket strategy to employee well-being to ESG. It is very easy for issues to fall by the wayside, especially potentially awkward or challenging topics such as succession.

The board evaluation is a point at which issues can be addressed, rather than being left to simmer and possibly boil over at a later date. While it should not be a forum for whistleblowing (we would hope that directors would immediately raise or report any serious concerns around misconduct or financial irregularity, for example, rather than waiting for the evaluation to come around), a review allows the board to stand back and consider potential challenges both in relation to its own effectiveness and the company in general, enabling it to resolve problems before they develop or deteriorate further.

As well as issues within the board or the company, the board review is also a valuable opportunity for directors to identify potential developments in the wider environment that may need further thought or focus. At a time of radical uncertainty for businesses, it’s a chance for the board to ensure that it is current on the latest challenges, be they geopolitical, regulatory, environmental or otherwise. An exercise this year for a Hong Kong listed company, for example, might include consideration of climate reporting and the board’s readiness for the new Scope 3 emissions disclosure requirements in January 2025.

Corporate secretaries can play a crucial role in maximising a review’s potential to highlight key issues and prompt open discussion. When the exercise is being scoped, they can assess whether it covers the most pressing areas of sensitivity and, as keepers of the board agenda, they will have a sense of issues that may not have received adequate airtime. For maximal engagement, it is vital for directors to be asked thought-provoking questions that encourage them to reflect on the fundamental issues. When designing surveys, the emphasis should be on open-ended questions that leave plenty of room for commentary, rather than binary judgements of whether a particular aspect of board performance is satisfactory or unsatisfactory.

Directors (particularly independent directors) also ought to be given a chance to bring their experience of other companies and the external environment to bear, to make sure the board and the organisation are abreast of leading-edge issues. External facilitators can come into their own here, as their knowledge of wider markets can help to form the line of enquiry and ensure that it is relevant and up to date.

Defining the board’s focus and priorities

As well as raising issues and bringing potential challenges to the surface, evaluation exercises can help to orient boards around the issues that matter most to them. A review offers an opportunity to recalibrate the board’s focus and agree priorities – both for its own improvement and for the future of the underlying business. It is increasingly common for boards to schedule their evaluation after their annual strategy day, so that – as well as assessing the usefulness of the day itself while it is fresh in the mind – they can align themselves around the strategic direction that has just been decided upon or reaffirmed.

In order that, having been identified, these priorities ‘land’ with the board, and changes in focus are recognised and embedded, it is important to schedule time for all board members to discuss the evaluation output together. Having been discussed and agreed, the key points can then be incorporated into a programme of continuous improvement to be carried out over the next year and beyond. As the guardian of good governance, this is a golden opportunity for the corporate secretary to step up by formulating and implementing a robust action plan that ensures all salient recommendations are followed up. The action plan can help to frame the next year’s board review, helping to guarantee that it builds upon and evolves from the previous exercise.

In an externally facilitated exercise, providers should not simply deliver a report and then skip off into the sunset – in the interest of supporting the board and maximising the value of the process, it is best practice for a member of the facilitation team to brief the full board on the results, as well as to conduct individual feedback sessions with principal project sponsors such as the Chair and the company secretary. This will often involve peer comparison. From conversations with Chairs and board members in Hong Kong, we know that one of the most highly prized benefits of a good facilitator is the ability to compare and contrast performance with peers and to share best practices, and we will often put clients in touch with other boards that have experienced similar challenges.

Facilitators ought to support the creation of an action plan, bringing in their knowledge of best practice to give the plan the best chance of success, and facilitators should also remain available to clients to discuss the progress of the plan. Boards should, however, be wary of providers using the review to sell on other services such as recruitment. Independence has become a critical ingredient for successful providers in the UK and this is increasingly the expectation overseas – and certainly among the boards we have spoken to in Hong Kong.

Improving board dynamics and engagement

The impact of board reviews on dynamics and cohesion is also appreciated by directors. Assessment of board performance can of course bring with it the potential for conflict, particularly when it touches on the contribution of individual directors. In addition, the potential for confrontation or an atmosphere of accusation and condemnation to arise as a result of a review has historically been a notable concern for board members in Hong Kong. But a well-run process, where there is assurance of anonymity for respondents and confidentiality for the results, can help to unite the board.

By affirming their strengths and recognising areas they need to work on, as well as aligning around priorities and a programme for continuous improvement, board members can create a sense of teamwork through their engagement in the board review exercise. Indeed, the change of terminology from ‘board evaluation’ to ‘board performance review’ in the most recent update to the UK Corporate Governance Code reinforces the sense of the board getting better, together.

Participation in a board evaluation can strengthen board dynamics by ensuring that all parties have a chance to contribute. A director who is more reticent in meetings owing to time constraints, or who is feeling bound by conventions of hierarchy or respect (often the case when multiple generations of a family sit on a board), can come to the fore and have their voice heard. The knowledge that all directors’ contributions are valued helps to build enduring, productive relationships around the board table.

Consideration of the board’s performance promotes openness and honesty, and – providing that criticism is constructive – this makes boards more effective and better able to focus on material issues that might otherwise be swept under the carpet for fear of creating conflict. Clearly it is essential to make certain that the process is kept confidential and that the anonymity of respondents is assured, as a lack of trust in the process will lead to minimal engagement. Corporate secretaries and external facilitators alike must be scrupulous in safeguarding these aspects of the review.

One highly prized aspect of board reviews is the assistance they provide in helping management to understand the concerns of independent directors, both inside the boardroom and – increasingly – beyond. While executive directors have always taken part in board evaluation exercises, more and more companies are adopting a ‘more the merrier’ approach and asking top management personnel (typically the executive committee) to assess board performance in an ‘upward review’. As well as pointing out any gaps in the board’s oversight (often a board that is highly confident can benefit from management challenging their level of understanding in certain areas), an upward review exercise can add lasting value by promoting executive understanding of the non-executives’ point of view, and inviting greater openness on both sides once the review process is over.

Conclusion

In all cases, it is important for participants – be they board members, governance professionals or external facilitators – not to lose sight of the central purpose of a board review, which is for boards to gain a clear picture of their own effectiveness, as well as their challenges and priorities for the future, and to thereby safeguard their organisation’s governance, resilience and ongoing success. It should be an engaging and business-focused (even enjoyable!) process, and each exercise is an opportunity to build on the last, both continuously improving the performance of boards and enhancing the practice of board reviews themselves.

Philip Sidney, Senior Associate

Lintstock Ltd

Lintstock is a London-based corporate governance advisory firm that specialises in board reviews. The firm conducts research into topical governance issues and hosts webinars and workshops for company secretaries around the world.

For more information on the firm and its research activities, or to receive a copy of the 2018 Lintstock publication mentioned in this article, please contact Lintstock Partner Neil Alderton at na@lintstock.com.