Corporate collapses, the global financial crisis and a more stringent regulatory landscape have placed corporate directors under intensified scrutiny, adding complexity to their portfolio of responsibilities and accountabilities to stakeholders. While regulatory developments create complexity and risk for directors, they also present an opportunity for boards to revisit practices that ensure effective board performance.

An effective board knows what competencies are needed to perform effectively. It selects or nominates directors who possess those competencies, and continuously evaluates the full board and its members based on the defined competency set. Together, these activities represent the continuum of board effectiveness (see Figure a), ensuring the board fulfills its stewardship accountabilities to stakeholders for the long-term success of the company.

Figure A - Continuum of Board Effectiveness

An understanding of leading practices relating to board competencies and evaluation systems can help boards increase their effectiveness.

THE COMPETENCIES MATRIX

Board competencies refer to the body of knowledge, skills and behaviours possessed by the board and its directors. To develop the board’s competency set, leading practices suggest building a competencies matrix using a three-step process:

1. Determine the implications of the organization’s strategic objectives on the board’s required competencies.
2. Review and inventory current board competencies (background, skills and experience of each director).
3. Compare current board competencies to the competencies required pursuant to the strategic plan.

The end product is a clearly defined competencies matrix – including chair, director and full board competencies – tailored to the company’s environment.

When building the board’s competencies matrix, exercise caution to ensure that it is not based solely on meeting regulatory requirements or to address current topical issues, such as independence or financial expertise. This approach neglects the dynamics of board behaviour. Instead, leading practitioners, academics and governance organizations (e.g., the Institute of corporate Directors and the U.S.-based National association of corporate Directors) suggest including the leading-edge behavioural, skills, knowledge and expertise competencies (see table on page 42) that can be adopted by all boards. The table excludes technical competencies, as those are specific to each company’s nature and strategy.

Full Board (Behavioural Competencies)

Full Board (Skills Competencies)

Full Board (Knowledge & Experience Competencies)

Chairman (Behavioural, Skills, Knowledge & Experience Competencies)

Individual Director (Behavioural Competencies)

Individual Director (Skills & Knowledge Competencies)

BOARD EVALUATION SYSTEMS

In 2011, the practice of board evaluation is common – a major shift from a decade earlier. This shift can be attributed to changes in jurisdictional rules for publicly listed companies (e.g., CSA’s National policy 58-201). As these rules continue to evolve, it is critical that the board adopt leading jurisdictional practices that are relevant to its environment. Regardless of external expectations, the main benefit of board evaluation is performance improvement, which is necessary to ensure that the board continues to fulfill its responsibilities and be effective. Another emerging benefit is the role of board evaluations in increasing transparency of board performance, particularly in the U.S., given the majority voting and proxy-access practices in that jurisdiction. This extends the value of evaluations beyond that experienced in the past.

But who should evaluate the board, and how should evaluations be conducted? To answer these questions, leading practices suggest four structural approaches:

Board-to-Board

In this approach, the evaluator and addressee (the recipient of the evaluation) are internal to the board (director self-assessment or peer assessment), and stakeholders are not informed of the result. The primary purpose of the evaluation is to change the conduct/behaviour of the board in the performance of its tasks. Research indicates that this is the most commonly used approach. Evidence also suggests that while self-reviews can be a valuable tool for board improvement, they tend to be ineffective due to participants’ desire to maintain collegiality.

Market-to-Board

Here, external evaluators are used to overcome the lack of knowledge, tools (e.g., benchmarking capabilities) and experience of internal evaluators. The results of the external evaluation are intended for internal purposes; therefore, collegiality issues can arise, as in the board-to-board approach.

Board-to-Market

This approach uses an internal evaluation agent, such as a board committee, and an external addressee, such as a stakeholder community. It can be undertaken voluntarily or performed to meet legal requirements. This approach gives boards an opportunity to enhance their reputation and external legitimacy through compliance with governance rules.

Market-to-Market

Market-to-market evaluations are externally driven, providing objectivity, and intended to enhance board accountability, transparency and credibility in the investment community. External evaluation (including certifications of board effectiveness) is a leading trend in the U.K., due in large part to the U.K.’s corporate governance code, which requires that FtsE 350 companies undertake external evaluations every three years, and include a statement in their annual reports on how board performance was evaluated.

Regardless of the structure employed, board evaluations should be based on the desired competencies matrix and include an evaluation of the full board, chair and individual directors. Overall, companies would do well to employ the following top 10 tips suggested by Norman Broadbent PLC, a leading U.K. board-advisory firm:

• Use the process to improve board performance.
• Use both quantitative (e.g., questionnaire) and qualitative (e.g., interview) techniques.
• Evaluate only key responsibilities and measurable outcomes.
• Evaluate individual directors and board performance.
• Take multiple ratings of director performance.
• Maintain appropriate confidentiality.
• Commit to follow up on the evaluation outcomes (e.g., have clear and measurable plans for improved performance).
• Evaluate effectiveness of board dynamics.
• Consider independent evaluators to ensure impartiality.
• Evaluate resources available to the board to enable its members to achieve these goals.

CONCLUSION

To be effective, boards need the right people, the right culture, the right issues, the right information, the right process, and the right follow-through. Leveraging best practices pertaining to competencies and evaluation systems helps the board on its effectiveness journey while positioning it to readily adopt evolving jurisdictional requirements.

Ingrid Robinson, MFAc (cand.), CPA, CIA, is a Senior Manager, Enterprise Risk Services, with MNP LLP. She can be reached at 416.515.3934 or ingrid.robinson@mnp.ca

References

Gabrielsson, J., Huse, M., Minichilli, A. July 2007. Board evaluations: Making a fit between the purpose and the system. Corporate Governance: An International Review, Vol 15 (4): 609-622.

Leblanc, R. 2009. Getting the right directors on your board, in Conger, ed., Boardroom realities: Building Leaders Across Your Board. San Francisco: Jossey-Bass, 2009.

National Association of Corporate Directors. 2010. Report of the NACD blue ribbon commission on board evaluation: Improving director effectiveness.

This article originally appeared in the Director Journal, a publication of the Institute of Corporate Directors (ICD). Permission has been granted by the ICD to use this article for non-commercial purposes including research, educational materials and online resources. other uses, such as selling or licensing copies, are prohibited.