Governance Explainer Board evaluation

In April, Brian McBride, the president of the Confederation of British Industry, apologised for a spate of sexual misconduct allegations and a “toxic culture” that left the business lobbying group fighting for its future.

A key part of the lobby group’s attempt to move on from this difficult episode has been a board evaluation conducted by an external expert. The aim of this process is to assist the board in assessing how it can fix its issues and ultimately deliver better governance for the organisation.

Growing area

Until 2010, board evaluations were relatively uncommon. Up to that point, boards took the view that they were answerable only to their shareholders, not to each other or to external evaluators.

But since the global financial crisis, the world has changed, and boards have increasingly started asking ‘Is it possible to do things better?’ The UK Corporate Governance Code recommends that boards conduct an internal review every year, bolstered with an external review – done by an independent firm – every three years.

The latest proposed update to the Code recommends renaming board evaluations as ‘board performance reviews’. It may appear a semantic change, but it is meant to indicate an ongoing process, rather than a backwards-looking form of external assurance.

The board evaluation process is evolving at many companies, and a compliance-oriented ‘box-ticking’ exercise is increasingly seen as insufficient – although unfortunately, some board members may continue to view board evaluation in that way.

However, the experiences of Wirecard, the German payments processor, and Carillion, the UK construction group, provide a salutary lesson. Both posted glowing board effectiveness assessments in their annual reports shortly before they imploded.

Enlightened institutional investors, board members and executives increasingly demand more robust board evaluation practices. In 2022, 52% of companies in the S&P 500 disclosed that they conducted a combination of full board, committee, and individual director evaluations, up from only 37% in 2018.

The IoD’s process

At the IoD, we offer independent, external board evaluations for all kinds of organisations. We have developed a robust, and flexible methodology which delivers an objective review of a board’s effectiveness.

The starting point is the IoD’s Director Competency Framework, which is built around three key areas: knowledge, skills and mindset. These are competencies that boards should exhibit both collectively and at the level of each individual director.

At the heart of the IoD evaluation approach is a self-assessment and peer review questionnaire. This has been designed to incorporate all the major aspects of a board and its committees. These standard sections cover 18 elements of board activity and are customisable to suit the sector, industry and board size of the organisation under review.

The output of this questionnaire forms the basis of a series of confidential face-to-face interviews, plus observing any meetings of the board and its committees.

Throughout the process, IoD experts review and triangulate board effectiveness indicators from multiple sources, and benchmark them against comparable organisations. This analysis is used to measure progress and provide recommendations for further improvement.

It is a pretty thorough board MOT that provides assurance to stakeholders that the board is serious about its functioning. The focus is not only on the board’s processes and procedures, but also on behavioural dynamics within the boardroom.

Given the central role that boards play in the performance of any organisation, board evaluations are here to stay and now a represent a key driver of good corporate governance.