Board evaluation is a formal periodic, often annual, evaluation of the Board as a whole, its committees and individual Directors (including the Chairperson). This process seeks to identify areas of improvement, so that the Board can consciously work on them for improving its processes and practices, and delivering better outcomes.
The concept of Board evaluation has been around for a while now, and all companies which have to conduct Board evaluation exercises, report in their Annual reports of doing so. However for it to be meaningful, the exercise should be carried out in spirit, and not in a letter alone.
An evaluation exercise, if done properly, is without argument, an excellent tool to enhance Board effectiveness. Some of the important parameters to be decided by the Board/ NRC for conducting an effective Board evaluation exercise are –
1. What will be the methodology – A questionnaire approach, an interview approach, or a combination thereof. While a questionnaire approach is simple as compared to the other approaches, it may result in a box-ticking exercise as it would usually involve ranking on a scale of 1 to 5, with limited scope for qualitative aspects to be captured. An interactive approach may factor in qualitative aspects, but there could be reluctance on the part of a Director to share his/her views, especially if they are not comfortable with the person conducting the interview. A mix of both these approaches could ensure that the conversations remain focused and constructive.
2. Questionnaire approach – In case questionnaires have to be administered, the questions have to be meaningful, and not focus only on items such as the composition of the Board and committees. They should cover topics such as processes and participation. Also, they should be finalised at an appropriate level within the company. The secretarial or HR department may not be ideal for this.
3. Who will conduct the exercise – Internally, by an external agency or jointly by both of them. Internal persons may not have the experience of conducting such an exercise. Also, the confidentiality of responses from Directors may be compromised. An external agency, with persons having Board experience handling such assignments, can factor in Board dynamics and cultural aspects, that a sensitive exercise like this need to respect. Companies may use the services of external agencies for either only administering the questions or for having interactions too. The major advantage of getting an external agency is that the exercise is likely to be independent, and the agency is likely to suggest ways of improving Board effectiveness.
4. Choosing an external agency – If the Board decides to hire an external agency, due care should be taken to choose an agency which has boardroom experience. Also, the same agency should not ideally conduct the exercise year after year.
5. Sensitising the Board – It is very important to sensitise the Board that the objective of the Board evaluation exercise is improvement of Board processes and performance of the Board as a collective. Trust of the Board members, and honesty while responding, are vital for this process to be successful. This becomes very important for companies that are using an external consultant for Board evaluation for the first time.
6. Feedback – An evaluation exercise is incomplete without feedback. While responses are collated, the Chair of the Board must take the extra step and provide feedback to the Board as a collective on its strengths and areas of improvement. A similar process should also be followed for committees (to be done by Committee chairs), and individual Directors (to be done by the Chair of the Board or of the NRC). The feedback to the Chair of the Board can be given by the Chair of NRC or the Lead ID, if the Board has one.
7. Action plan – On the basis of areas of improvement, the Board must develop its action plan for improvement in the future.
Over the years, more and more companies have started seeing value in Board evaluation, and recognize the several advantages of this exercise. If done right, it provides valuable input on areas of improvement for the Board and its committees. A few companies have also started using the result of individual Director evaluation as a factor when determining individual profit-linked commission. The way forward for India could be to disclose the result of the evaluation for each Director, and action plan, in the Annual report, as done in the UK, so that shareholders, who appointed the Directors, know where each Director stands. This is an important step in the shareholders holding their representatives accountable.