Do Board Evaluation Measure Board Effectiveness? Development of a Board Evaluation Model

Janicke L. Rasmussen, PhD Norwegian Business School,

Department Accounting, Auditing and Law

Riga Business School 19th September 2013

Published  with  acceptance  of  the  author.      No  use  without  acceptance  of  the  Author  

Content of presentation •  What is a Board evaluation?

•  Historical perspective on Board Evaluation •  Why Board Evaluation?

•  How Board Evaluations are conducted in large listed Norwegian companies

•  How Board Evaluations should be conducted – the board evaluation model

What is a board evaluation?

What is evaluated

Who evaluates

The Board Others The Board

Board self-evaluation Board evaluation

Others Boards evaluations Evaluations conducted on behalf of the board, but not defined as board evaluation.

•  Board  evalua+ons  are  defined  as  evalua+ons  where  the  boards  as  a  whole,  or  the  individual  directors,  are  evaluated.    

•  They  can  be  performed  by  the  board  itself  or  by  someone  on  behalf  of  the  board.    

•  In  a  corporate  governance  context,  board  evalua+on  is  about  assessing  boards’  work.    

Board evaluations – a recent development?

•  Although board evaluations are viewed as a recent development, they have been part of the corporate governance discussion over the last two decades.

•  As early as 1994, The Blue Ribbon Commission published the report, “Performance Evaluation of CEOs, Boards and Directors, followed by the report, “Board evaluation: Improving Director effectiveness” in 2000 (Long 2006).

•  Most European Codes which has mushroomed since the millennium recommend that board evaluations are performed.

•  Studies of listed companies in 13 European countries in 2009 show that, on average, 75 percent of boards conduct board evaluations.

Why board evaluation? •  The rationale behind implementing board evaluations in the different

Codes for Practice of Corporate Governance is based on their ability to contribute to board effectiveness (Berg, 2007). “Ensuring that the directors, their defined tasks and processes contribute to adding value, enabling the company to reach the goals set.”

Director

(Input) Processes (Doing the things right)

Tasks (Doing the right things)

Company goals

How board evaluation can be used to measure board effectiveness

Board composition, board structure, identified tasks, board processes

Expected task performance (accountability)

Actual task performance

Board evaluation

Rationale behind board evaluations •  it is necessary for boards to address this issue to maintain their competitive edge and to

meet the expectations of investors.(Cadbury, 2002).

•  introduction of board evaluations would enable the shareholders to better quality assure the decision-making boards make on behalf of them. (Long, 2006).

•  Board evaluations are considered an important corporate governance mechanism which may increase the possibility to get funding, and to influence the cost of capital (Jay A. Conger, 2002).

•  Board evaluations are useful to give stakeholders the possibility to observe what directors pay attention to, how they do their work, and how the board prepares itself to meet future demands. (Furr & Furr, 2005).

•  Evaluations can clarify the individual and collective roles and responsibilities of the board and its directors (Conger, et al., 1998; Graf, 2007; Julien & Rieger, 2003; Kazanjian, 2000; Leblanc, 2005c).

•  Other benefits are improved decision-making and delegation of work, enhanced communication and operation, in addition to improved leadership and teamwork (Long, 2006).

The system of board evaluation

What  is  the  purpose  of  the  board  evalua+on?  

Who  will  receive  the  result?  

Who  is  going  to  perform  the  evalua+on?  

How  is  the  evalua+on  going  to  be  performed?  

The  content  of  the  evalua+on  

When  should  the  evalua+on  be  performed?  

What  is  done  with  the  result?  

Prepare  Perform

 

Proper  follow

-­‐up  

How Board Evaluations are performed (findings from research project)

o  No clear purpose of board evaluation to enable measure effectiveness was identified. - «Development of boards» - «Building teams» - «Benchmark»

•  Most common recipients was the nomination committee or the board itself (or both) - Conflicting interest?

•  The board evaluation: - Quantitative evaluation (score between 1-6 ) - Either the Chairperson is very involved in the process, or he is not involved at all - Most of the evaluation is normativ (given no clear purpose) - About 30 % of the content is outside the definition of board evaluation - Little/no evaluation of Chairman, board prosesses, boards sub-committees. - No board evaluate individual Directors - Board evaluations are performed once a year, normally at the end of the year. - Board members are to a little extent involved in the process other than giving response to the

questions asked. Despite of this, they are very satisfied with the board evaluation process.

•  No systematic follow-up procedure - It is considered directors own responsibility to follow-up (if needed)

Conclusion – how board evaluations are performed

•  Instead of being used as a mechanism to enhance board performance, it becomes a congratulatory event that is performed once a year.

•  The following statement by one of the board members may be used to illustrate this:

“The first things we go over are, why are we doing so well? Are we really that good?”

Purpose  WHY  

Recipients  FOR  WHOM  

•  Transparency  •  Recruitment    •  Development  of  Boards  work  

The  Board  itself?  Shareholders?  Financial  markets?  Employees?  Management?  Government?  

The  evaluator  WHO  

Experience  Knowledge  Independence  ExperGse  Time  

Modality  HOW  Interviews  Survey  Board  collecGve  Individual  assessment  WriKen/oral?    

The  content  WHAT  

The  content  must  be  linked  to  the  purpose  and  should  enable  the  board  to  measure  effecGveness    

Timing  WHEN    

Should  be  linked  to  the  purpose  •  NominaGon  process?  

•  Strategy  away-­‐days?  

•  Change  Directors?  •  Improve  board  processes?  •  Ini+ate  educa+on?  •  Change  the  structures?    

Recipients  FOR  WHOM  

Model for board evaluation

Summary model for board evaluation to contribute to board effectiveness.

•  A clear purpose of the evaluation must be developed and understood. A general purpose to «develop the board» is not enough to establish a system of board evaluation which can measure board effectiveness.

•  Board Expectations must be identified ....Both for the board collectively and individual board members. This can be done either through the selection process (for individual board members) and through the strategy process (for the board collectively). This will enable a comparison between expected performance and actual performance.

•  The system which the board establish must enable comparisons between expected and actual work….in an objective way. It is also important that the different elements of the board work identified within the context of the purpose ARE in fact included in the board evaluation (Board composition, board structure, identified tasks, board processes).

•  If multiple purposes of board evaluation of the board evaluation, it is important to establish processes which meet the different purposes.

•  If gaps between expected and actual performance are identifies, it is important to establish processes to eliminate these gaps.

Thanks for your attention Any questions?  For  further  enquiries;    Janicke.rasmussen@bi.no