Board of Directors is critical in shaping the strategy of a company. Given the importance of the role played by the Board, it is necessary to periodically assess whether it is performing its role well. In today’s rapidly changing business environment, a strong and effective Board is critical to a company’s success. To ensure this, an annual Board evaluation, which is robust, is a must.
Understanding Board Evaluation
Board evaluation is a structured process through which the Board reviews its own performance, with the objective of improving its effectiveness. A robust process helps to identify what is working well, and highlights areas that may require improvement. The evaluation extends to the functioning of the Board as a collective, the performance of Individual Directors, the performance of the Chairperson of the Board, and that of each mandatory Board committee.
Mode of Evaluation
When undertaking Board evaluation, a company may choose between conducting this process internally or with the help of an external facilitator.
Each of these have pros and cons.
Internal Board Evaluations
Internal Board evaluation involves conducting the evaluation exercise through an in-house process, without engaging any external facilitator.
Pros:
- Budget friendly: Internal evaluations are peer evaluation, facilitated by an in-house team, such as the HR team or the Secretarial team, making them relatively inexpensive.
- Convenience and ease: The timing of the process can be aligned with the Board’s availability. It is usually questionnaire-based, and completed at the convenience of Directors.
- Confidentiality: Since information remains within the company, some persons feel that this process promotes confidentiality. This perception may not always hold true since those with access to the responses to such questionnaires can potentially misuse them.
Cons:
- Biased Judgement: Questions may be framed conservatively, avoiding sensitive or probing areas to respect the comfort level of Directors.
- Limitation in questionnaire design: In-house teams may rely heavily on regulatory guidance and standard templates, missing out on deeper insights that an experienced external professional could bring.
- Limited Expertise: In-house facilitators may not possess specialized knowledge or boardroom experience, resulting in a process that focuses more on reviewing past actions, rather than driving future improvement and performance.
- Could miss improvement areas: Without an independent perspective, some important gaps or potential improvement areas might be overlooked or remain unidentified.
- Lack of sharing of best practices: Internal evaluations do not typically benefit from sharing of good practices that other Boards may be following.
External Board Evaluations
External Board evaluations are conducted by independent professionals, engaged specifically to carry out evaluation processes. Ideally, such facilitators should possess practical boardroom experience, so that the insights offered are based on practical experience, and not on theory.
Pros:
- Unbiased Exercise: The process is unbiased.
- Actionable Insights: External evaluators offer practical, experienced-based feedback, based on real boardroom dynamics.
- Specialised Expertise: Professional facilitators bring structured tools, comparative insights and exposure to best practices across Boards.
- Improvement-focussed Approach: The emphasis is on enhancing Board effectiveness, and not ticking the box.
- Greater Credibility: External evaluations are often viewed more favourably by investors, Regulators, and other stakeholders.
- Confidentiality: Sensitive responses are handled by an independent expert, rather than by internal management.
Cons:
- Higher Cost: As External Board evaluation involves professional fees, they are generally more expensive.
- Time-Intensive: As these evaluations go beyond questionnaires, and include discussions and analysis, the exercise usually takes more time and efforts.
Hybrid Approach
Some companies have adopted a blended model, wherein external facilitator designs evaluation framework and questionnaires, and the administration of those questionnaires, as also the compilation of responses, is handled internally. This approach allows companies to take advantage of expertise of an expert, while managing cost and time effectively.
Conclusion
Board evaluation plays a vital role in strengthening Boards framework and performance. Both internal and external evaluations have their respective strengths and constraints. The appropriate approach will vary based on the company’s complexities, budget considerations, challenges and the level of development.