Board Evaluation: A Tool for Enhancing Board Effectiveness

In the current world, the Board faces with numerous new challenges amid rapidly changing contexts. It is essential to ensure the Board still performs their duties effectively, with members having appropriate knowledge to cope with ongoing change and lead the company toward sustainable growth. Board Evaluation is an important mechanism to maintain and enhance Board effectiveness. It is a tool that will help the Board review its elements, performances, strengths and points that can be developed to drive up efficiency.

The Board Evaluation plays a role as corporate governance mechanism since failure of many companies generate widespread adverse effect on the business environment. It indicates how performance and elements of the Board affect governance efficiency while its benefits are recognized in present corporate governance principles. In the G20/OECD Principles of Corporate Governance 2015, the OECD specified that one of the Board’s responsibilities is to evaluate its performance and appropriateness of Board composition.

Board Evaluation in the international level
Many countries worldwide recognize the significance of Board Evaluation. According to a study by OECD in 2018, most OECD member states (Thailand included) supported the Board Evaluation of listed companies by recognizing it as part of corporate governance principles. However, certain countries even made Board Evaluation mandatory by law. For instances, listed companies in the U.S. are required by NYSE regulations since 2004 to conduct Board Evaluation while India imposed similar requirements in 2014. Although some countries did not mention Board Evaluation in their CG Codes and regulations, many are starting to recognize the benefit in doing so. For example, Israel conducts Board Evaluation in its financial sector. Various levels of international practices show in the figure.

Board Evaluation in Thailand
According to the Securities and Exchange Commission’s Corporate Governance Code 2017, the Board should conduct a formal annual performance evaluation of the Board, its committees, and each individual director. The evaluation results should be used to strengthen the effectiveness of the board.

However, the IOD’s Corporate Governance Report of Thai Listed Companies 2019 showed that most Thai listed companies evaluated the Board collectively while evaluation of individual director and committees were rather limited. Details are demonstrated in the figure.

Guidelines for enhancing Board effectiveness through Board Evaluation
The Board Evaluation is the common responsibility of Chairman and all members of the Board. They should discuss evaluation guidelines, starting by consideration of evaluation elements as follow.

Evaluation Objectives

The key objective in Board evaluation is continuous improvement of Board performance. The CG Code stipulated that the Board should use evaluation result to consider both performances and problems for further resolutions.
In each evaluation, the Board may emphasize on any particular issue such as sustainability, risk management, CEO succession planning, or Board diversity.

Evaluation subjects and issues
The CG Code specified that the Board, committees, and each individual director should be evaluated through determination of clear benchmark for performance comparison.

The Board Evaluation should take into account Board effectiveness in the following aspects:
• Performance Role – The strategic role in setting strategies and policies, offering guidance to Management, and monitoring implementation.
• Compliance Role – The role in ensuring the company has operating procedures that comply with the laws, regulations, accounting standard while also responsible for stakeholders.
• Structure and Composition of the Board – Having committees as well as skilled and experienced members with various characteristics in alignment with corporate strategies will enhance Board effectiveness of both Performance and Compliance Roles. Solid structure and composition are useful for development of the current Board and recruitment of new directors.
• Board Process – Covers meeting agenda that accommodate balanced conduction of Performance and Compliance Roles, meeting quality, received information, and collaboration between the Board and Management.

Individual director evaluation is the assessment of each director’s contribution to Performance and Compliance roles of the Board as well as dedication, time allotment, ethics, communications and interpersonal skills. It also involves evaluation of the Board Chairman and Committee Chairman which include their leaderships and how well they ensure the Board works in harmony.

The committee evaluation should assess the composition and performance efficiency to ensure they fully meet the roles stipulated in the Charter.

Evaluation Method
The Board could conduct internal evaluation by assigning the Chairman of the Board or Chairman of relevant Committee to take charge. Alternatively, the Board may hire external advisor to determine evaluation guidelines. The latter method may be expensive but it will offer wider perspective from external experts with experiences in evaluating other Boards while it will also stimulate individual director to express their opinions more freely.

Besides having each director evaluating the Board collectively, the CG Code also recommends that each director should at least conduct self-evaluation and cross-evaluation. Survey is one commonly used method which will allow time for directors to ponder each evaluation topic and compare with their direct experiences. Another one is interview, which will yield qualitative result that is suitable for thorough performances of each director, between director, and between the Board and Management. The Board may combine the two evaluation methods to avoid repetition and lead to in-depth and comprehensive result.

It is essential that the Board exchanges views and discusses issues mentioned in the evaluation. Senior management should also get to express their opinions on the effectiveness of the Board. This will help the Board identify development issues from views of those working with them and prevent sole evaluation by the Board itself.

Frequency of evaluation
CG Code suggests annual Board Evaluation and that an external advisor is hired to evaluate the Board every three years.

Besides official annual Board Evaluation, many companies have started to conduct brief unofficial post-meeting Board Evaluation. Led by the Chairman of the Board, this evaluation is an opportunity for the Board to consider the effectiveness of meeting elements to improve in future meetings.

Another interesting trend is the Board Evaluation after major business incidents or events concerning corporate governance such as CEO replacement, director replacement, M&A deal. Such occurrence provides opportunity to evaluate the effectiveness of the Board while the situation remains present.

Evaluation Result
The CG Code suggests using the evaluation result to improve performance of the Board and consider appropriateness of the Board composition. Three potential outcomes that should derive from the Board Evaluation are a plan to improve Board effectiveness, a plan to develop the current Board, and guidelines for improvement of future Board composition.

The plan to improve Board effectiveness and the plan to develop the current Board should include clear and measurable indicators. The Chairman of the Board or Chairman of relevant committees should collaborate with the Corporate Secretary to ensure the outcomes are being discussed in meetings and led to actual development and improvement in the following year. Meanwhile, the guidelines for improvement of future Board composition should be applied with director recruitment.

Furthermore, the CG Code also indicates that the Board should disclose criteria, process, and result of Board Evaluation in the annual report to communicate with stakeholders.

Since Board Evaluation benefits the company in the long run, the Board should allot adequate time to evaluate and use the result to improve performance and Board composition. Directors may consider discussing the following six questions to consider if the Board Evaluation contributed to Board performance improvement.

Reference
• The Securities and Exchange Commission (2017), CG Code 2017
• Thai Institute of Directors (2019), Corporate Governance Report of Thai Listed Companies 2019
• AICD (2016),Board Performance – Board Evaluation and Director Appraisal
• NACD (2018),Considerations for Enhancing the Board Evaluation Process
• OECD (2018), Board Evaluation: Overview of International Practices
• OECD(2015), G20/OECD Principles of Corporate Governance 2015

Charawi Chiramakara
Senior CG Analyst – Training and Facilitators
Thai Institute of Directors (IOD)