Should we be rating boards as good or bad?
By James Bagge | 26/06/2019 in Blog posts
With boards under ever-increasing levels of scrutiny, is The ICSA, The Governance Institute right to ask if a board can ever be assessed as good or bad?
In the wake of the large-scale failures of firms such as Carillion and BHS, the government is under pressure to crack down on ‘reckless’ directors who attempt to profit from dissolving companies at the expense of workers, pension pots and suppliers.
Amongst the new measures announced is a drive to improve corporate governance standards. The ICSA, has been tasked with carrying out a review of effectiveness of independent board evaluation in the UK listed sector, with a view to creating a code of practice for external board reviewers.
As part of their consultation on this code, the ICSA seeks to get to the very heart of what the purpose of a board review is, asking: is the purpose of a board review…
A: to guide directors through a process of self-improvement, which might include making changes to the board… to provide reassurance to others that it takes its responsibilities seriously
B: to provide an assessment of whether the board is or is not effective, in either absolute or relative terms, to provide assurance as to the future performance of the board and company
We agree with the ICSA’s concerns that it would be dangerous to assume that the process of evaluation can ever result in a 100% effective board. Not just because to rate boards as effective might lead to complacency, but because the idea that a board can ever be definitively assessed as being ‘good or bad’ is ludicrous.
To raise such an expectation would be very unhelpful and misguided because there is no way a board reviewer could give such assurance as to the future performance of a company based on a handful of director interviews and board observation once every three years.
Not only is there insufficient time to identify any fraudulent, reckless or even misguided behaviour in this time, let alone judge whether any decisions being made are likely to turn out good or bad in the years to come, but to place this responsibility on board reviewers would be most unwise.
What is the purpose of a board review?
In our experience of carrying out board reviews for FTSE 100 and other organisations, the role of a board reviewer is not to ‘evaluate’ the board – which literally means to ascribe a number or value – but rather to ‘review’ the six elements of its corporate governance. Not with a view to judging or grading it, but rather to provide its chairman and directors with the deep insights needed to catalyse debate into the ways in which they might go about making any necessary or desirable improvements to the way they operate, rather than the substantive issues they’re focused on. It’s about the how and not the what.
For example, it might be observed that the relationship between the executives and some of the non-executive directors is not as strong as it might be. This could mean valuable opportunities for highly skilled individuals to share their specific knowledge on issues ranging from cyber security to environmental threats are being lost, because the executives are not confident that the non-execs have the necessary familiarity with the business needed to make a meaningful contribution.
Does this make the board ‘bad’ or a board making unwise decisions but doing so collectively ‘good’? Of course not, there are a myriad of factors that if focused on can increase the effectiveness of the board, but none of them can be used to deliver a ‘fail’ in the way that a driving instructor might ‘fail’ someone for approaching a roundabout too fast.
The purpose of a board review shouldn’t be to try and catch the board out, but rather to provide the board with the insights needed to improve its preparedness to meet future challenges and safeguard the business for future generations.
Why we shouldn’t be rating boards as good or bad
Although it’s tempting to think of a board as being governed by charters, mandates and codes that can be easily reviewed and assessed, history proves this doesn’t amount to much. Several companies, with apparently good compliance have failed spectacularly. Board effectiveness is as much influenced by the informal culture, values and beliefs at play as the formal roles, processes and structures in place.
For example, directors’ beliefs in issues ranging from risk to business agility and diversity and inclusion, are as much influenced by their personal views as any formal targets in place.
These beliefs can remain undetected and will only emerge if directors on the board feel safe disclosing their concerns or values, critical to which is refraining from assessing, marking or evaluating directors or boards as ‘good or bad’ so that the reviewer can create a safe environment to help them identify any unconscious beliefs driving their behaviour. This safe environment is also essential for encouraging individual directors to raise sensitive issues, such as how to bring up the topic of chairman succession planning when the current chair clearly has no intention of resigning.
With so many subjective issues at play, the benefits of a good board review does not lie in ‘evaluating’ companies but rather giving them the space to think about how they’re operating on both a formal and informal level and flagging up areas they might want to give some thought to, along with practical recommendations they can put into practice.
In giving their feedback, it is also important for the board reviewer to be challenging and straight talking about how beliefs might be holding a board back, which behaviours are inappropriate and/or ineffective and which board processes simply aren’t working.
For example, if a review identifies that the board is unhappy with its strategy process, uncovering evidence as to why this might be could be useful. Perhaps the executives are excluding non-executive directors from the creation of strategy, by presenting strategy instead of inviting them to explore key strategic issues. Or maybe insufficient preparation has been done to identify the objectives and deliverables, and how the board will get there, meaning the strategy discussion feels insufficient and confused.
Either way, it’s the role of the reviewer to challenge the board to think about how it’s doing things, with practical recommendations, rather than ‘pass or fail’ the board or attempt to come up with a solution on its behalf.
Is a ‘warts and all’ approach the right solution?
As to the extent to which the recommendations arising from a board review should be made public, The ICSA is calling for clearer disclosure on the content and outcome of evaluations, with a view to publishing guidance for listed companies on how they should publish the findings of their board evaluation.
Our concern with encouraging companies to disclose their ‘warts and all’ findings is that where sensitive issues about relationship issues between directors, concerns about chairman performance or lack of succession planning have been identified, it could potentially do more harm to publish than not. Plus, if directors go into a review knowing any issues they raise will be published, they will inevitably be more likely to censor any concerns and much less open with reviewers.
Also, it’s often the case that many issues flagged up during the course of a board review offer an obvious solution, which is easily agreed upon and resolved before the review is even completed. It is only those much more sensitive issues, as to which there is no immediate and collectively acceptable solution, that require time and space for them to be resolved. In this case, it is totally acceptable for the chairman and CEO to work on these issues without public scrutiny. Best done with an action for the reviewer to revisit to make sure that they have been dealt with and not just brushed under the carpet.
The objective must be to empower and motivate boards to be the best that they can be, by creating the conditions needed for them to talk openly and honestly about what they need to do differently, rather than encouraging them to indulge in ‘tick-box’ paper reviews or less in-depth or taxing reviews, for fear of harsh scrutiny.
In this sense Bvalco welcomes the introduction of a code of conduct for board reviews so long as, at its heart, this code is focused on helping boards to become fit for the future, rather than simply attempting to ‘evaluate’ them on how they are now.
You can contribute to the ICSA’s consultation here.