Contemporary boardrooms are significantly different environments from those prior to the GFC, and boards that do not keep pace with both regulatory and stakeholder expectations do so at their own peril.
Boards are expected to be more engaged, more knowledgeable and more effective than in the past.
In doing so, boards cannot continue to drive the board evaluation process simply from a technical focus on compliance factors and ignore the critical issue of the behavioural performance of individual directors and the culture of the board as a team.
• The board evaluation process is an important tool for monitoring the performance of boards of directors.
• Board evaluations that emphasize conformance and do not properly account for the behavioural contribution of directors are not adequate.
• An effective board assessment should combine both technical factors (conformance oriented) with behavioural considerations (performance oriented).
Regular evaluation of a board’s performance is now considered an integral part of an organisation’s corporate governance structure. Regulators, shareholders, corporate litigators and other major stakeholders have long attributed the failure of organisations during the Global Financial Crisis to the oversight failure of their boards.
What is less understood in the board evaluation process is the type of evaluations required to provide stakeholders of organisations with sufficient information about the performance of their boards.
An effective board evaluation must combine regulatory responsibilities (conformance) with performance based evaluations.
Most board evaluation frameworks tend to examine board performance from a compliance perspective. Inadequate board performance is often explained from the perspective of non-compliance with established regulatory frameworks.
In Australia, compliance frameworks include the Australian Prudential Regulation Authority (APRA), the Australian Corporations Act 2001 and the ASX Corporate Governance Principles for Publicly listed companies.
ASX Corporate Governance Council Governance Principles
Recommendation 2.5 of the ASX CGC Principles and Recommendations states that ‘Companies should disclose the process for elevating the performance of the board, its committees and individual directors’.
Australian Prudential Regulatory Authority
The APRA Prudential Standards APS 510 – Governance, states that the board ‘of a regulated institution must have procedures for assessing, at least annually, the board’s performance relative to its objectives’.
Corporations Act 2001
The Corporations Act 2001 of Australia regulates directors’ duties and the fiduciary responsibilities they have to their shareholders.
The performance of any board is a function of the character of the board members and the effectiveness of the culture of the board as a team.
Crucially, board performance is derived from the quality of the human interactions within the boardroom.
Thus, boards intending to increase performance must begin by evaluating their own performance and how they function as a team.
It is only when boards objectively, intellectually and effectively evaluate their own performance can they grow and improve.
This leads to better performance through stronger leadership, resilience and cohesiveness.
A board assessment framework that incorporates both conformance and performance factors is essential for effective board evaluation.
However, current approaches to board performance evaluations are heavily focused upon compliance without regard to specific behavioural factors, such as the culture within the boardroom.
This includes the character of the team and the relationship between the chairperson and the chief executive.
The characteristics of individual members of the board will also provide an assessment of the board’s overall quality.
An increasingly prescriptive oversight regime by regulators has had a major impact on the focus of board evaluations.
Consequently, compliance to standards and regulations is the prevailing theme in terms of board evaluations.
There is little regard for assessing the issue of behavioural factors in the context of broader board performance.
Traditional reliance on board control processes (conformance) is only part of the solution.
The incorporation of specific behavioural factors when evaluating board performance, namely the culture of the board as a team and the characteristics of the individual directors are also critical considerations.