Board Effectiveness Reviews A critical assessment

It was the sort of corporate implosion that should have come with more early warning signals, more red flags, to assist those in charge so they could react and potentially avert the crisis.

What happened at Carillion, along with the boardroom scandal that has engulfed Post Office Limited, serve as tragic examples of why the Corporate Governance Code was updated in 2010 to ensure boards appoint an independent, external firm to evaluate board performance every three years. It was hoped that these thorough, periodic external board evaluations would come to be viewed like a car MOT – a process to identify and treat potential issues before they became existential threats.

It hasn’t worked. Since then, there have been a string of high-profile corporate breakdowns and boardroom scandals, including BHS, Patisserie Valerie, Carillion and the Post Office. Two of these – Carillion and the Post Office – were even given a clean bill of health by the same board evaluation consultancy just before both organisations imploded.

There were no red flags raised or alarm bells sounded by the evaluator. Instead, those businesses failed, mired in claims about a rotten boardroom culture and poor decision making.

The market for board evaluation reports, as it currently operates, is not working as it should. Too many board effectiveness reviews are ineffective; they ignore the ‘difficult’ issues and paint too rosy a picture of the culture of the companies and the boardroom behaviours they are supposed to critique and challenge.

From The Top

So, what has gone wrong? As far as board evaluation is concerned, it starts and ends with the chair.

Kieran Moynihan, founder and managing partner of Board Excellence, a boardroom consultant and one of the firms that conducts evaluation reports, said that often boards, and the chair, “don’t want a robust external evaluation. They say they do”.

Moynihan believes that the sector needs more experts that “tell it like it is”. However, too many chairs are still reluctant to expose the board to that level of scrutiny and constructive criticism.

“If we had 1,000 random chairs, about 95% would say ‘absolutely’ to a deep dive evaluation. If you handed them a report that was up to that standard the percentage would drop down.”

He said too many chairs still “react very badly to a tough board evaluation”.

“What that has led to is a number of board evaluation [firms] who are very happy to do ‘nuanced’ reports and don’t call out the elephants in the room.”

Asked whether evaluators provide this sort of ‘light touch’ report because they want to be asked back to do the next one, Moynihan said: “It’s not even to go back to do the next one, it’s to be recommended to another chair of another company.”

Producing these reports can be quite lucrative for consultancies. Moynihan said an evaluation firm would expect to bank somewhere in the range of £50,000 to £100,000 for a FTSE company board report.

If done properly, Moynihan said it will sometimes mean having tough conversations with the chair. This ‘warts and all’ approach has often led to him losing out on work.

“If we don’t think the board chair is doing a good job, we are going to say that. The bar should be set really high for board evaluation. It should access all areas. Let the board evaluator do their job without being adversely impacted by the fact the board don’t like what they [the evaluators] see.”

Conversely, Moynihan said his firm will also attract businesses that want to improve and embrace the constructive criticism that comes with a rigorous evaluation report.

“When you get a good board and executive team, they are up for it. It’s like night and day,” he said.

Conflicts of Interest

Mary Campbell, OBE, founder of Resilient Corporates, a corporate finance and boardroom development strategist, believes the board evaluation sector is “clearly not dominated by players who do a very good job. If it was, we would have fewer corporate scandals”.

She believes headhunters and the big accounting firms “should not be allowed to do board evaluation work” where they are using board performance reviews as a means of securing more lucrative contracts, because it creates potential for conflict of interest.

It is a view shared by another industry expert, who said: “The problem when you get auditors to do it is it can be process driven – they will see things more through a technical lens, take a more technical approach. But the challenges which arise in boards stem more from people and personalities, the ‘soft stuff’ as Sir David Walker once termed it.”

Campbell agreed, insisting that aspects of the culture and behaviour of the board are too often overlooked or missed by board evaluators.

“The behaviour stuff doesn’t lend itself well to a board evaluation because [directors’] behaviour changes when the lights are on,” she noted.

“Governance works if you have good people, good processes and a true understanding of risk. What we’ve got in the Post Office is poor people, poor processes and an abysmal understanding of risk.

“If there were more effective board performance reviews, we’d have fewer company failures and the best people would get to the top jobs. Well, we don’t have either. Are we having fewer corporate collapses? No. The system isn’t working. The root of the problem is not coming to the surface.”

Campbell and the industry expert are convinced there is too much of a ‘tick box’ approach to board evaluation, which is perhaps intentionally designed to gloss over the warning signs of a weak board or a domineering chair.

They believe a truly rigorous, access all areas style of board evaluation should get to the bottom of any looming issues. The resulting report may include some critical and challenging observations, which the board should use as a guide to improvement for the next internal evaluation, which happens every year and is usually conducted by the chair or company secretary.

However, boards that don’t want to see a ‘warts and all’ external review are even less likely to conduct their own deep dive. So, the resulting internal reviews into boardroom practice are often a meaningless whitewash.

Moynihan said: “I would say 90% of them don’t add much value. The problem with internal board evaluation is that people say ‘I can’t say that because the chair will know it’s me’.”

Unfinished Business

The world of independent board evaluation is an immature industry that has only been going since 2010.

There is now a growing consensus that the government must step in and use the Post Office experience in order to emphasise that board evaluation ‘hasn’t worked’. It is thought the current spectrum of evaluation ‘styles’ – some very thorough and others with a more nuanced or light touch approach – is damaging to the entire process.

So, what can be done?

“We need another turn of the handle. Does that mean having practitioners who can really get into the deeper behavioural and cultural issues? That’s the conversation we need to have,” the industry expert said.

He wants to see more truly independent practitioners, more skilled and experienced people involved, those who have lived experience of the boardroom – such as former directors and company secretaries.

The Chartered Governance Institute has introduced an initiative, giving official accreditation to those firms that provide a board evaluation service. Moynihan said this was “really helpful”.

However, that accreditation scheme needs to be beefed up as the take up has been underwhelming – there are just 16 firms on the approved list.  It also needs policing and perhaps firms should lose the accreditation if they fall below a minimum standard threshold.

Moynihan favours imposing minimum standards across the sector, saying: “I think we need to take a leaf out of the [IoD’s] Directors’ Code of Conduct and mandate a minimum board evaluation process. Some [evaluators] don’t interview the board at all. What’s the point of a board evaluation? They need to be a little more prescriptive.

“This is a critical role. If you have serious behavioural issues, any board evaluation should uncover them. The majority of scandals occur when people, starting with the board, start driving towards the cliff edge.”

He noted that the best boards are the ones where the chair encourages a proper evaluation and embraces challenge.

Campbell concluded: “In sport, you see the difference a good coach makes and that’s not where we are with board performance reviews.”

IoD Board Evaluations

The IoD has been conducting independent board evaluations for a number of years. Our process is informed by leading guidance and principles of corporate governance including our own Director Competency Framework and the Directors’ Code of Conduct. The IoD’s diverse team of board evaluators are all practicing directors with extensive experience conducting board reviews across all sectors and industries worldwide. More information on our process and how to get in touch with our review team can be found here.