The useful effect of the external assessment procedure largely depends on the volume of analytical procedures carried out within its framework – in fact, the readiness of the board to conduct a full-fledged, unrestrained analysis.
The Main Parts of Board Evaluation
Regulators, shareholders, and independent directors generally consider board performance assessment as an essential element of global best corporate governance practice. The board evaluation recommends that boards of directors conduct an annual self-assessment procedure and at least once every three years conduct an independent assessment of the board’s effectiveness.
The board’s ability to effectively fulfill its three core functions depends on eight factors, represented in the outer circle of the chart. It is these factors that determine the perimeter of our analysis. Check the main parts of a board evaluation:
- Composition of the Board of Directors: Members of the Board of Directors have the necessary combination of skills, knowledge, and experience to effectively manage the company.
- Board involvement: The board of directors engages in a timely manner with internal and external stakeholders in the company.
- Board structure: The structure of the board committees is transparent and provides confidence in the effective performance of functions by its members.
- Board Agenda and Work Plan: With the meeting agenda and roadmap, the board’s attention is focused on the right areas at the right time.
- Information Provided to the Board: Information received by members of the board of directors is complete, accurate, easy to understand, timely, and appropriate.
- Board dynamics: Board members work effectively as a team, achieving a reasonable balance of trust and criticism.
- Role of the Chairman: The chairman of the board of directors is an effective leader of the board of directors.
- Board evaluation procedure: Board members are constantly developing personally and as a team as a whole.
Evaluation Results of the Board Evaluation
The integrated use of all board evaluation tools will provide a comprehensive analysis, but in many cases, it is possible to focus on those procedures that will provide a critical mass of information necessary to comply with the relevant norms of the evaluation. We distinguish five factors – we call them the “five Ks” – that determines the bottom line of the board assessment, that is, the real benefit from its implementation:
1. Context.
It is important to consider that each board is unique and depends on a range of internal and external factors, such as the company’s life cycle, corporate structure, and culture, industry, regulatory environment, and relationships with shareholders.
2. Communication.
Board members and evaluators should be able to communicate and interact openly. There is a need to ensure the collective commitment of all board members to focus them on active participation in the assessment process, openness, and sincerity. Assessors should have good communication skills and the ability to manage emotions when discussing sensitive issues.
3. Confidentiality.
Board members must be confident that the information they provide will remain confidential and thus be able to express their views openly.
4. Constructiveness.
Once the evaluation procedures are complete, it is imperative that the board members discuss the findings and agree on the next steps. This is the starting point for addressing key issues identified during the analysis, determining their causes, and possible solutions.
5. Quality: Continuous Improvement.
An effective board of directors uses the evaluation process as a starting point for continual improvement of its performance, for example by regularly reviewing its action plan throughout the year and informally discussing its performance.