Sparking a cycle of continuous improvement
Thursday, 30 November 2017
By Parmi Natesan and Prieur du Plessis
Evaluation is a critical tool to help governing bodies become more effective ̶ an important consideration given that the effectiveness of its governing body directly affects an organisation’s performance.
Governing bodies sit at the apex of any organisation. They set and monitor its strategy, choose and oversee its executive team and oversee governance and ethics ̶ to name just a few of their vital tasks. Clearly, the quality of a governing body and its performance have a direct relationship on the organisation’s ability to achieve its goals.
No surprise, then, that shareholders are starting to pay attention to how well governing bodies perform. We foresee that this scrutiny will deepen, and engaged shareholders will increasingly also look at what measures the governing body has in place to evaluate its own performance, and then to use that evaluation to spark a cycle of continuous improvement.
This growing interest in governing body performance, and how to improve it, is not confined to shareholders. The wider circle of stakeholders, including regulators, the media and civil society, is also turning the spotlight on governing body performance.
In short, then, evaluations are something every governing body should undertake. But care needs to be taken to ensure the exercise yields the desired, positive results and does not degenerate either into an empty box-ticking exercise or, worse, a report card that actually ends up demotivating members.
Maximising the benefits
In order to maximise the benefits from evaluations, we recommend integrating them into a programme of continuous improvement. Such an approach is much more likely to lead to a governing body that works well together and is genuinely committed to improving its performance into the future.
It would seem that while the rationale for doing evaluations is well accepted, we still have some way to go in realising its full potential. The IoDSA Directors’ Sentiment Index shows that while the majority (56 per cent) of members of governing bodies is positive about the value of evaluations, only 16 per cent of the total is strongly positive. A further 28 per cent is neutral.
Looking at governing body evaluation through the lens of continuous improvement has many specific benefits. One is providing governing bodies with an opportunity for introspection. In fact, King IV recommends that a formal evaluation process to be conducted at least every two years. Every alternate year, the governing body should schedule an opportunity for consideration, reflection and discussion of its performance.
Individual member evaluations also provide governing body members with invaluable direction in terms of what new skills they need to acquire, and how they can contribute better to the governing body. And, of course, evaluations can also provide guidance as to whether a particular member should be reappointed and what gaps exist on the governing body.
Evaluations also make it easier for governing bodies to compare themselves to their peers. The IoDSA’s Board Appraisal Benchmark Study provides the control data for such an exercise.
Crafting an evaluation
Spencer Stuart, the executive search consultants, offers five useful questions the governing body should consider when commissioning an evaluation:
- What is the scope?
- What is the most appropriate assessment approach for this governing body?
- Should the leaders of the governing body be assessed?
- What areas do members want to delve into more deeply?
- What gaps exist in the current assessment process?
Typically, governing body evaluations would use a combination of questionnaires and interviews to perform quantitative and qualitative assessments. There are many guidelines for what should be covered, but the IoDSA has developed assessment questions across six broad areas: composition, responsibilities, committees, relationship with shareholders and other stakeholders, relationship with management, and meetings.
The consensus is that an independent party should ideally be engaged to perform the evaluation in order to make it as objective as possible. Members would be more willing to be frank with a third party, especially when a governing body is dysfunctional. But even when an internal process is chosen, we follow the Financial Reporting Council in recommending that an independent valuation be undertaken at regular intervals.
Realising the value
It needs to be stressed that an evaluation is an end in itself. The governing body must have the intent to act on the findings, and put processes in place to do so. One of the committees, such as the nominations committee, would be best placed to create and implement a plan of action to address weaknesses, formulate a continuous professional development plan to keep members’ skills current, and fine-tune the evaluation programme itself.
Finally, governing bodies should not forget to include information about the evaluation ̶ how it was conducted, what it showed and how it was acted on ̶ in the integrated report. In this way, the organisation will demonstrate to all its stakeholders that it sees the link between good governance and high performance, something that remains a clear differentiator.
Parmi Natesan and Dr Prieur du Plessis are Executive Director: Centre for Corporate Governance and Chairman of the Institute of Directors (IoDSA) respectively.
Better Directors. Better Boards. Better Business.