Board Performance Evaluation and Director Appraisal
Good governance requires that the performance of the board be evaluated once a year. The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.
Evaluation of the board should consider the balance of skills, experience, independence and knowledge of the company on the board, its diversity, including gender, how the board works together as a unit and other factors relevant to its effectiveness.
A well conducted evaluation helps the board, committees and individual directors perform to their maximum capabilities.
- Assess the balance and currency of skills within the board
- Identify attributes required for any new appointments
- Review practice and process to improve efficiency and effectiveness
- Consider the effectiveness of the board’s decision making processes
- Recognise the board’s outputs and achievements
The evaluation process is a mechanism to improve board effectiveness, maximise strengths and tackle weaknesses, leading to an immediate improvement of performance throughout the organisation.
Individual evaluation should aim to demonstrate whether each director continues to contribute effectively and to demonstrate commitment to the role (including commitment of time for board and committee meetings and any other duties).
The non-executive directors led by the senior independent director, should be responsible for performance evaluation of the chairman, taking into account the views of executive directors.
The chairman should act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the board and, where appropriate, proposing new members to be appointed or seeking the resignation of directors.
The board should state in the annual report how performance evaluation of the board and its committees and individual directors has been conducted.
A performance evaluation can play a key role in helping give the board: -
- Clarity of purpose that can be communicated throughout the organisation
- More productive board meetings that look forwards and outwards rather than inwards and backwards
- Faster and more effective decision-making, that can be translated onto the bottom line
- Better personal relationships and appreciation of individual roles, leading to a more collaborative approach within the board and with internal and external stakeholders
- Better succession planning, recruitment, induction and appraisal of directors
- Increased personal satisfaction with less stress
The UK Corporate Governance Code requires evaluation of boards of FTSE 350 companies to be externally facilitated at least every three years and for the external facilitator to be identified in the annual report with a statement as to whether they have any other connection with the company.
The New York Stock Exchange requires annual board evaluations, although companies retain great flexibility around what to assess and how, as well as how to apply the results.
This article is an extract from The New Directors Handbook. You can purchase the book or download three free chapters at: https://threeticks.com/books
Author Richard Winfield is the independent authority on director development. He works internationally as a corporate governance trainer, and provides career coaching to C-Suite level candidates.
