Board Performance and Effectiveness Assessments
Board performance and effectiveness assessments enable organisations to get new perspectives on the functioning of the board and the culture of the board in executing its duties.
For organisations under APRA regulation, a requirement of the Prudential Standard CPS / SPS 510 Governance is a process for assessing the board’s performance against its objectives and the performance of its individual directors. This is required to be completed at least annually.
APRA’s Prudential Practice Guides for 510 Governance ask Boards to consider whether the annual assessment is best undertaken by a party who is free from any connection to the organisation and preconceived views. We are increasingly seeing companies opt to use an external party annually. At a minimum, APRA’s expectation is that every three years the Board assessment is conducted by an independent and appropriately skilled external party.
Once the overall objective of the review is determined, the specific areas for evaluation must be decided on. Along with assessing performance against the Board objectives, other key areas to assess include Board governance processes, skills, meeting attendance, meeting operations, decision-making processes, relationship building and director dynamics. This is where the assessment can be tailored to individual company needs. Some organisations may include specific individual director assessments as part of this process and others prefer that the Chair undertake this process. It is better practice to also consider the assessment of the Board Committees’ performance as a part of the assessment process.
There are a range of techniques that can be used. Generally, we see a mix of qualitative and quantitative components, such as a survey of questions to directors, document analysis, and individual one on one discussions with directors, either by the Chair of the Board or an external party where one is being used. Some organisations choose to expand the feedback process to include the CEO or other key Executives, although it’s common for only the directors to provide feedback. Depending on your needs, there is also merit in considering whether the assessor attends a Board meeting to observe operations and dynamics.
Hall Advisory’s Model
Hall Advisory assesses Board governance, effectiveness and performance using our six pillar model to guide the assessments, which can be tailored to individual company needs.
The Six Pillars of Board Performance
Our survey questions for directors are based on the six pillars and can be tailored to suit the specific requirements and dynamics of individual organisations. If the performance and effectiveness of the board committees are being assessed, a number of questions tailored to each Committee are included in the survey.
Once the survey results are collated, Hall Advisory conducts trend analysis and a comparison of aggregated scores by pillar. This makes it easy to identify which areas the board operates most effectively in and which areas could benefit from some improvements.
We also like to conduct individual director interviews after the survey to delve into responses and identify any concerns or deficiencies. We value the interviews and find them a highly beneficial piece to the process.
Board performance reviews enable organisations to get new perspectives on the functioning, operation and culture of the Board in executing its duties. Generally, we find with well-functioning boards there is still room for improvement in the operation or formalisation of certain processes. In our experience, where boards are not functioning as well as would be expected it is often due to one or more of the dynamics of the group, passiveness of the majority of the directors, poor decision-making processes, personality clashes and even dominance and influence of an individual director, or in some cases the CEO.
Recurring Areas for Improvement
From our involvement in board performance assessments and governance reviews, we generally see many of the same common areas needing improvements.
Processes and Frameworks
Generally, the documenting of the internal Board performance assessment processes in intervening years to external assessments, including the Committee review component, need improvement. As part of this, the formalising of reviews of performance relative to charters is important, both periodically and in response to risk events and identified issues.
Formalising processes for feedback to individual directors for ongoing improvement, in terms of their contribution to the Board, is also an area that is lacking in many organisations.
Another broad area that can lack is the adequacy of the governance framework documentation and the adequacy of the Boards’ involvement in and understanding of risk framework and risk appetite statement. These are major frameworks guiding the decision-making of an organisation and need to be clear, comprehensive and understood.
Duties and Composition
Improvements to areas within this pillar usually relate to:
· Implementing some better practices around nomination and appointment policies, and staggering appointments, terms and reappointments to facilitate continuity of knowledge along with renewal.
· Identifying skills gaps on the board and actively seeking nominees with skills the Board needs.
· Adequately formalising and documenting policies and documentation pertaining to multiple directorships.
There’s always room for operational efficiencies and the areas we have repeatedly observed requiring some enhancements have been:
· The operational efficiency of meetings, with adequate agendas, earlier distribution of papers and quality Board papers with the right information and level of detail.
· A need for skills and compositional assessments to be completed at the committee level in addition to the board, as well as differentiated Boards / Committees for other entities within the organisational structure.
Contribution and Participation
Usually any issues within this pillar are due to personality clashes or dominating personalities, and it highlights the importance of accommodating different styles while encouraging continuous improvement. The other areas for concern can be a deficiency in skills or training, and a lack of participation or passiveness amongst the Board. We assess whether the concerns highlight a process or policy that could be improved, a concern to be acted upon or just an individual opinion that does not justify further action.
Meeting Board Objectives
Although board objectives may differ at each organisation, there are always some common areas that fall within this remit that could be improved.
We see some boards are very focussed on strategic direction. For those that do not score highly in this regard through the survey, it’s always beneficial to consider the adequacy of focus on strategic issues and opportunities to facilitate improved strategic decision-making.
Deficiencies in the executive succession planning and performance assessment processes is another common theme. Sometimes the key is clearer communication on the processes to ensure they are understood.
Committee member tenure limits and rotation arrangements can add value in terms of continuity of knowledge across the board and fresh perspectives on individual Committee matters, and it’s a better practice process that isn’t common across all industries yet. It can come with implementation issues, such as how to deal with key Committee members with specialist knowledge, but it can expose directors to other Committees, providing experience and expanding skillsets and knowledge.
Overlaps and gaps between Committee charters, resulting in misunderstandings and oversights, is another common area often needing improvement.
Need Help with your Board Performance Assessment?
Assessing the effectiveness and performance of a Board is a great opportunity to not only identify those areas for improvement but also to highlight the Boards’ strengths.
If you’re approaching your three-yearly independent Board assessment, or maybe just wanting a fresh perspective for your next annual Board performance assessment, Hall Advisory can help. Contact us to see how we can tailor our assessment process to suit your needs.