How private companies can build a strong and effective board and why it is important
February 24, 2023
The Wates Corporate Governance Principles aimed at large private companies, provide a corporate governance framework and an opportunity for all private companies to develop their approach to corporate governance and best practice in the interests of the long-term success of the business.
One of the six Wates principles is ‘Board composition’, which states that to be effective a board requires an effective Chairperson and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution to a company. The Financial Reporting Council’s ‘Guidance on Board effectiveness’ also focuses on board composition, succession, and evaluation which we will touch on below.
Once a balanced board has been appointed, the next step is to ensure that the board continues to grow and develop. Boards expect executive teams to demonstrate certain characteristics, including effective implementation, accountability and evaluation of results. The same should be modelled across the whole board. An important element in this process is board evaluation to assess and monitor performance.
Board evaluation can be done externally or internally. Internal evaluation methods include – written questionnaires, 360-degree feedback, one-on-one interviews, etc. The presence of an independent board leader, whether a non-executive chairperson, a lead independent director or the chair of the nomination and governance committee, plays an important role in a good self-evaluation process.
Objectivity, rigour, and confidentiality are critical in this process, as is the feedback. An external evaluation has the advantages that it is objective and the board cannot be criticised for marking its own homework. Surprisingly, in the MM&K 2021-2022 Life in the Boardroom Chair and Non-Executive Director Survey, in the section on board development and effectiveness, only 14% (of the total 358 directors who participated) confirmed that they had a robust external evaluation process in place.
Having gone through the process, the focus is on the actions taken as a result of the feedback. If the board is trying to improve, the evaluation process should result in an action plan to improve the board’s functioning. And at some point, there should be a report to the board on that action plan and the results – what changes have actually been made in response to the feedback and have those changes been effective.
In the Life in the Boardroom survey, only 55% (of the total 358 directors who responded) confirmed that their personal effectiveness and performance is assessed annually. There is room for improvement here, as individual assessments can enhance the contribution of directors and thereby improve the effectiveness of the board as a whole. The assessments are a method of realising the full potential of each director, rather than a method of remediating undesirable behaviour, which is best addressed by a board chair on a regular basis, as and when required.
It is important for board leadership to help build a board culture of trust, self-reflection and improvement. Board evaluation processes are about creating ongoing and constructive feedback that helps to improve the performance of each individual director and ultimately helps to build a stronger board and a successful business.
Our view is that all companies should operate within a proportionate and effective corporate governance framework. Should you wish to discuss any aspect of this article, please contact Yolanda Roach.