In today’s rapidly evolving business landscape, a strong and effective Board is more critical than ever before, for an organization’s success. But how does a Board ensure that it is performing at its best? Annual Board Evaluations are the key!
Board Evaluation
Board evaluation is a process where the Board assesses its own performance with the objective of improving its effectiveness. In the process, it identifies what works well for it and what are the areas for improvement. It involves reviewing how well the Board as a collective, each Director, including the Chairperson of the Board, and each mandatory committee are performing.
When it comes to Board evaluations, companies have a choice between having them done internally or externally, with the help of a facilitator. Let’s dive deep into the pros and cons of both kinds of Board evaluations.
Internal Board Evaluations
Internal Board evaluation simply means that the process is conducted in-house, without the aid of any external facilitator.
Pros:
- Budget-friendly: Internal evaluations are peer evaluations facilitated by in-house persons, usually from the HR team or the Secretarial team. So, they are virtually free.
- Comfort and Convenience: They are conducted as per the convenience of Directors, and usually take up lesser time since they involve only the answering of questionnaires by Directors.
- Confidentiality: Some believe that this process is more confidential since information stays within the organization. However, this could be misplaced because those with access to the responses to such questionnaires can potentially misuse it.
Cons:
- Biased Judgement: Questions could often be simpler, or those amounting to scratching the surface. The more probing questions may be kept out, depending on the comfort of Directors.
- Questionnaire and documentation limitations: In-house teams may struggle to create the right set of questions, with the focus mostly being on guidance notes from SEBI and Institute of Company Secretaries of India. A fresh perspective or specialized insights, that an external expert can bring to the exercise, may potentially be missed.
- Limited Expertise: In-house persons may not have the specialized knowledge or experience to make this process an improvement-oriented process. The focus of the internal team could be on postmortem of what has been done before.
- Missed Opportunities: Without an outside perspective, some important issues or potential improvement areas might be overlooked.
- Lack of sharing of best practices: External facilitators can share best practices being followed by other Boards, that can help improve the performance of the Board or its committees. This would get missed.
External Board Evaluations
External Board evaluation means that evaluation is conducted by an External facilitator, who is specifically hired to execute the evaluation process. Ideally, such facilitators should be persons with practical boardroom experience so that the insights offered are based on practical experience.
Pros:
- Unbiased exercise: The process would truly be independent.
- Real Insights: External evaluators provide an unbiased review, and give a real and practical perspective.
- Expertise: Experienced consulting and first-hand boardroom experience provides practical, relevant perspectives and brings best practices to the process.
- Focus on improvement: The objective of such evaluations is improvement, and not ticking the box.
- Credibility: External evaluations are often viewed as more credible by investors, stakeholders and Regulators.
- Confidentiality: Access to honest responses to questionnaires stays with the expert, and not with the management persons.
Cons:
- Expensive: External Board evaluations are generally more expensive.
- Time-Intensive: It usually takes more time for such processes, since they are not restricted to questionnaires.
Some companies have also started doing a mixed approach, wherein they invite external facilitators to create the questions that can be administered to the Board. As a result, the responses to the questions can point in the direction of areas of improvement.
Conclusion
Board Evaluation is an essential practice that helps the Board do better. Both internal and external processes for Board evaluations have their advantages and disadvantages. Which one of these is best for you depends entirely on factors such as the company’s needs, budget, challenges and the level of development. Happy evaluations!