BOARD ASSESSMENTS MUST IMPROVE PERFORMANCE, NOT MAINTAIN THE STATUS QUO

Current board assessment methodology is too static to be useful

 One of the common frustrations amongst the Chairs of Boards is determining just how their Board can become more effective and influential in the performance of the company. While the Board Directors individually are insightful and have a strong understanding of how the business they govern can improve its performance, finding ways to convert that intelligence and know how into company performance can often be difficult.

 Much commonly-accepted Board assessment methodology is too bureaucratic in nature to be of any use in improving a Board’s effectiveness.

 These assessment tools maintain the status quo of a Board by focusing on compliance issues such as the composition of committees, the ratio of independent to executive directors, and years of service. By comparison, newer assessment methodologies are available that actively identify and shape where a Board can improve its performance.

Board performance assessment should measure how well the Board ensures that the company meets expectations. Having an audit committee means you can tick a box and improve the ‘governance score’. But the committee may engage in a lot of audit activity with findings that don’t improve business outcomes, which entirely misses the point. You need an audit committee that adds value by understanding the leading activities that underpin performance and ensuring that these are implemented without disruption and that they do, demonstably, lead to the desired outcomes.  

For an Australian listed company are mandatory, the scope of the audit (beyond a legal minimum) is where the leading companies invest to get value and the lagging companies scrimp to save cost. The time and money spent to deliver the assessment is put to better use if the findings add value to the Board’s or the company’s performance in a meaningful way.

True Board assessment methodology must extend well beyond structural compliance. It should tell you that the Board is adding value to management by designing and implementing appropriate business controls. It should help management make the right decision every time, even when the Board is not involved directly in that decision.

 A good Board assessment, like a good audit, will also provide insight to management and set an appropriate strategy to improve the business’ performance, and therefore generate better outcomes for shareholders.

 As a result of years of research in interviewing hundreds of Board directors, and in understanding and quantifying Board effectiveness, it is clear that an alternative methodology specifically aimed at small to mid-cap and unlisted companies must be developed. I nominate these type of firms because their Boards tend to be interested in better governance outcomes if these lead to better corporate performance, and not willing to spend shareholders’ money on corporate window dressing that adds no value.

The features of this new methodology focus on the role of the Board in strategy and risk, which are the areas that add value. Although there are guidelines that stipulate that a board should “Recognise and manage risk” these, and the underlying practice recommendations, can elicit a response that gives good form but little substance to the processes and structures by which the board operates.

What is needed is an individually tailored assessment of the practices in place and the level of performance that these practices support. This is a dynamic assessment and will depend on the skills available within the board and the executive teams as well as the preferences for how those skills are used in this organisation. 

Information from the audit should lead to changed practices and increased performance. Otherwise the cost is just spending, rather than  investment.

Traditional governance advisors recommend a board committee, composed entirely or principally of independent non-executive board members, established to provide detailed overview and assessment of the risk management policies and their implementation.

 This is not always possible in smaller organisations. If the only independent director is, for example, a well respected geologist, then the risks recognised would be heavily skewed towards geotechnical and operational risks with, perhaps, some assessment of the risks of misstatement and potential misunderstanding of performance and prospects.

 One person, however good, does not bring enough perspectives to substitute for a complete committee. Under this circumstance the risk review should be undertaken by the whole board unless the company can afford to expand its board until it can adequately resource a committee.  The board review should not attempt to impose a 'standard' structure but - instead - to look at the resources available and help create a structure that will work best for this board at this time.

 This is where, in a well performing organisation, boards will seek assistance from a governance advisor with practical experience to develop their own processes and practices. These will ensure that integrity and ethics will outweigh expediency and self interest to give a balanced review and drive good outcomes.

 Board members are chosen because they have demonstrated good judgement. A good board will use that judgement to improve corporate decision-making and outcomes. An effective modern board performance assessment looks at

• what the Board has decided to focus on,
• where it is gathering information,
• how management is delivering information to the Board,
• how the board is providing oversight and insight to management,
• why items have been reserved for the board or delegated to management,
• how the board interacts with shareholders,
• where the board is learning and what it needs to learn,
• how well members of the board understand each other and the value they bring,
• and what changes would make it easier for the Board to add value to the management.

Consistent use of these practical measures would enhance Australia’s international reputation for board performance, consolidating our position in the upper echelon of governance practice worldwide, whilst enhancing corporate competitiveness on a global scale.

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Julie Garland McLellan is a consultant who works with boards and directors to give them the practical skills they need to build better businesses. She is famous for her practical and pragmatic approach to the real problems that face boards and directors and for her ability to bring sanity and solutions to even the most vexed boardroom.

She has first-hand experience on 18 boards across three continents — including listed, private, government, and not-for-profit boards — and has helped boards to lead successful organisations for over 22 years. Julie has written and facilitated director education for leading governance institutions, including the Australian Institute of Company Directors, The Governance Institute of Australia, The National Association of Corporate Directors (USA), The Taiwan Corporate Governance Association, etc.

Julie is the author of six books for directors and is publisher of The Director’s Dilemma newsletter.