The Board is an important organ of every corporate entity. Apart from ensuring that the company is run properly by executive management, the board guides the company to achieve its strategic objectives whiles complying with relevant laws and legislations. Research has shown that effective boards are associated with high performing companies, however companies with lower than average board effectiveness cannot deliver shareholders’ value since their boards would not be responsive to the strategic needs of the company. The recent happenings in the Ghanaian financial sector relating to the withdrawal of operating license of some banks by the Bank of Ghana (BoG) as a result of liquidity challenges emanating from poor corporate and risk governance has elevated the necessity for more pragmatic approach to board effectiveness practices in Ghana. Such a need has become greater in recent times due to the increasing regulatory requirements for the need for high-quality performing boards.
Board effectiveness and efficiency relate to the wide range of board activities, processes, and structures which ensure that the board functions and operates strongly through the following: board structure, board dynamics, induction training and continuous development, board committees, re-election of board members and performance evaluation. Though many of these board processes are familiar to many boardrooms, a critical look at the effectiveness and efficiency process of Ghanaian boards seems to suggest that the issue of board performance evaluation which assists in solving the people and process issues of the board by bringing it to speed with current requirements and actual board performance seems to be largely ignored. This article therefore looks at board performance evaluation, its benefits, and how board evaluation can be undertaken in-house with minimum board conflicts.
Board Performance evaluation
Board performance evaluation is simply an assessment of how well the board has performed on its general roles; i.e. strategic, control and oversight, and advisory. It appraises the board as a whole, its committees, non-executive directors, and the chairperson against the objectives and responsibilities the board has set for itself if any and how well it has performed with respect to those objectives. Board performance evaluation is quite a recent practice in corporate governance because for example, the requirement for directors to undergo formal performance appraisal each year was introduced into the UK corporate governance code in 2003. Nevertheless, the globally growing regulatory and stakeholder expectations have brought the quality of board of directors under greater scrutiny, and pushed boards to assess their performance against goals and objectives they have set for themselves.
How Board Performance Evaluation is Conducted
Board performance evaluation is an annual exercise which can be conducted in-house or by an independent external expert. Whether evaluation is conducted internally or externally by independent external experts, the process is largely the same. The difference here is that engaging an independent external expert to conduct the evaluation makes the process more independent and transparent. However in-house board performance evaluation with the guidance of an external expert has proven to be a preferred choice in corporate governance for companies embarking on the exercise for the first time. This is because the in-house method causes the least concern to directors who are nervous of the whole idea. The in-house method is also advisable because the facilitator may have knowledge of the history and the different nuances that may exist in board relationships which an external consulting firm cannot pick up. The following steps may be adopted when conducting an in-house board performance evaluation:
- The chairman must first of all table the issue of board performance evaluation and obtain consensus of the board about the need for the evaluation and whether the exercise should be conducted in-house or by external independent experts.
- The process should be led by the chairperson and a competent board secretary with the guidance of an external expert.
- The in-house process usually involves the use of questionnaires on rating scale centred on the responsibilities of directors and committees, administered to individual directors for their response.
- A structured or unstructured interview with individual directors is then organised by the chairperson and the board secretary to solicit further responses on the areas of the evaluation which the questionnaire cannot or does not adequately address.
- The chairman and the board secretary would analyse the results, at times with the guidance of an external expert.
- The chairman reports to the full board
- The board deliberates on the report and develops an action plan on implementation of the findings or results.
To obtain value from an annual evaluation of the board, its committees, and individual directors, the board, should be prepared to act on the resulting findings whenever it is revealed that the relevant performances are not as good as they should be.
What Is Evaluated
A vexing question regarding what should be evaluated has been around for quite some time now. Various rationalizations have been advanced to justify why certain aspects of the board should or should not be evaluated. In general, and under best practice, at the minimum, the following should be comprehensively evaluated on a period basis:
- The board as a whole
- The chairpersons of the board and of the various committees of the board
- The secretary of the board
- The CEO of the company
- The individual members of the board
- The individual members of the various committees of the board
Benefits of Board Performance Evaluation
There are several benefits of performance evaluation, some of which are the following:
- Non-Executive Directors (NED) spend limited time with the company even though they form majority of membership of the board and committees. Performance evaluation unearths the time commitment of NED to board and committee activities and if adverse findings are revealed, corrective measures are instituted. There is the possibility that some NEDs will lose some of their enthusiasm for the company or will not have enough time for the company and may get into the habit of missing board and committee meetings.
- Performance evaluation when conducted in an objective manner tends to benefit the company by revealing the mix of skill, experience, knowledge and diversity of the current board vis-à-vis the challenges facing the company and the capabilities expected on the board.
- Performance evaluation assesses whether the chairperson has provided successful leadership as expected of him/her comparing his/her responsibilities with achievements.
- Board work is concentrated in committees so successful boards have effective committees. Hence performance evaluation assesses how effectively the committees have performed in their specialised functions.
- Performance evaluation assesses the quality of information provided, as well as board papers and presentation which assist in the decision making process.
Challenges associated with the board performance evaluation
There are however some challenges associated with board performance evaluation and boards must beware of these. These challenges are as follows:
- It is likely that some directors will be reluctant to provide a fair assessment of sensitive issues involving colleague directors or the entire board.
- The coverage may not be comprehensive as the answer to one question may lead to more unanswered questions not a-priori included on the standard questionnaire.
- The board does not benefit from any comparison, even at a high level, of its performance with the board of another company.
- The approach may not be entirely acceptable to investors, since they are unlikely to be able to ascertain the rigour of the process used.
In spite of the challenges, board performance evaluation is still highly recommended as a better alternative to a failure or refusal to conduct board performance evaluation all together. Presently, Bank of Ghana (BoG) Corporate Governance Directive of 2018 has directed that Banks, Savings and Loans Companies, Finance Houses and Financial Holding Companies must conduct an in-house evaluation annually and an evaluation of its performance with external facilitation every two years, board performance evaluation has come to stay at least in the financial sector and boards in the financial sector would have to be familiar with the process. I recommend a similar practice for listed companies and public sector boards by calling on the Securities and Exchange Commission (SEC), Ghana Stock Exchange and the Public Services Commission (PSC) to consider initiating Board Performance Evaluation directives to improve the efficiency and effectiveness of Ghanaian boards.
Prof. Albert Puni is a Chartered Secretary and Associate Professor in Corporate Governance and Leadership from the University of Professional Studies Accra (UPSA), Ghana
