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Who reviews the bosses? Every board’s responsibility to evaluate its own performance

posted 29 Jan 2020, 15:21 by Michelle Stewart   [ updated 29 Jan 2020, 15:46 ]

“Whenever you are about to find fault with someone, ask yourself the following question: What fault of mine most nearly resembles the one I am about to criticize?” – Marcus Aurelius

“Of all deceivers fear most yourself!” – Søren Kierkegaard

It is no accident that the quotes I chose to head this article are from philosophers – although Aurelius was also a Roman emperor and knew more than most about serious matters of state. Separated in time by fifteen hundred years, the message of Aurelius and Kierkegaard is the same: the failings and deceptions we see in others are likely to be replicated at some level in ourselves. This advice has particular application in the corporate world and applies equally to for and not for profit entities. Philosophers spend their lives looking inward, reflecting on meaning, motives and core principles whereas in corporate world, it’s the active, outcome-driven life that is valued; there is often little time for deep reflection.

In addition, the higher you go up the corporate ladder the more difficult it is to get accurate feedback on your performance. The reasons are obvious: it can be career limiting to speak truth to those in power, particularly when you are a board of directors and hold ultimate power over everything from capital allocation to executive remuneration. Boards can easily come to see themselves as above criticism and even above the need to learn and improve. Management, for the reasons stated above, will rarely hold a mirror up to the board or criticise its performance openly – although it is not uncommon for senior staff to fairly or unfairly hold jaundiced views of their board! In order to avoid self-deception, every board needs to have processes in place to give performance feedback to itself. That is the purpose of a board self-evaluation.

What is board self-evaluation?

Board self-evaluation is a collective commitment by directors to regularly reviewing their own performance in a manner not dissimilar to the way they go about reviewing the CEO. The difference being that the CEO is directly accountable to the board for her or his performance whereas the board is largely accountable to itself. Shareholders can of course remove a board or individuals directors, but any such action, and even how and when a meeting is called to eject directors, is governed by corporations’ law and the company’s constitution. For the large part, boards are responsible to themselves and must therefore hold themselves accountable through agreed processes.

Why should boards review themselves?

Boards should regularly review their own performance for the same reasons they review management. Just as no individual executive is perfect, no board is perfect. Every board can learn from reflecting on its successes and its failures, how it uses its time, what contribution it makes to the success of the enterprise and how it goes about taking decisions. Without reflection and evaluation even, the best boards fall into complacency or just start believing their own rhetoric. To paraphrase Kierkegaard, they come to deceive themselves.

Who conducts board self-evaluation processes and how should reviews be undertaken?

Board review and evaluation processes are not mandated in corporations’ law although companies listed on the Australian Stock Exchange (ASX) are strongly encouraged to review governance performance. The ASX Corporate Governance Principles and Recommendations note that “monitoring the effectiveness of the entity’s governance practices” is a key role of the board.

It is directors, under the guidance of Chair, who decide when and how a self-evaluation is conducted and who leads the process. For example, with the consent of board colleagues, the Chair may simply create a time for the directors to informally review themselves once or twice a year. Large organisations often have in place a governance committee that is delegated with facilitating the self-review task. In other cases, the board may retain the services of an external consultant or even a senior director from another organisation to conduct a more independent style review. Leading company chair, David Gonski, writes:

I believe that the idea of an external person appraising a board, say, every two years, is a good one. The choice of person is also important. That person should not just be a box-ticker, but rather someone who can look at the team and see how it might function better as a whole, rather than focussing just on technical governance questions.  It should also be an opportunity to ascertain directors’ view on how the board works.

It is recommended that directors adopt a self-evaluation policy that outlines how the board goes about reviewing their performance on, say a 3-year cycle. Year one might consist of an informal board discussion, year two each director responding to a set of questions from the Chair or the governance committee, while in the third year, the board may retain an external reviewer. Periodic engagement of a competent, independent reviewer will assist a board to identify and focus on its faults not just its strengths, as noted by the emperor-philosopher, Marcus Aurelius.

It should be remembered that an independent reviewer is not evaluating the board, the board is evaluating itself with the assistance and insights of the reviewer.  The distinction is important.

Should board reviews focus on compliance or performance?

The answer is “yes” but with a strong emphasis on reviewing the board’s performance in driving the enterprise’s vision, mission and objectives. As a company director and chair, I believe that governance reviews should primarily focus on areas where board effectiveness can improve and positively impact organisational performance rather than “nit picking” minor areas of compliance and policy. One key outcome of any review must be an agreed list of governance changes or improvements signed off by directors and supported by an explicit timetable for implementation

I have learned a great deal from taking part in board self-evaluations and from being invited to conduct external reviews. If you are on a board that does not regularly review its own performance, it is never too late to start.

Philip Pogson FAICD, January 2020.

Philip has been a company director, Chair and business owner for more than 20 years. He consults and advises on strategy and governance across a range of business sectors.