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Board performance assessments are still a work in progress.
Eila Rana, CFO Europe Magazine
October 1, 2007
It's like having children mark their own homework, quip governance experts at ICSA International, a professional body for company secretaries, after recently studying a number of corporate board self-assessment programmes in the UK. They say many "in-house" programmes being run by companies are not "sufficiently rigorous" — not only do they suffer from subjectivity and the cynical support of chairmen, but they also tiptoe around serious problems and shy away from being too critical of individual board members whose work is not up to snuff.
So much for the good intentions of this post-Enron governance reform. Starting in the US and picked up across the Atlantic, the idea of having boards undergo annual performance reviews to help them do their jobs better is certainly worthy. Today, according to a 2007 corporate governance report from headhunter Heidrick & Struggles, the use of board evaluations varies greatly across Europe. Most countries fall somewhere in between Italy, where reviews are nonexistent, to Sweden, where they're standard practice at all but a few companies. (See "Open Up" at the end of this article.) Yet a spying case at Hewlett-Packard and corruption charges at Siemens are just a few reminders why a growing number of stakeholders will be crying out for more board performance reviews.
For the most part, boards — more accustomed to giving than receiving feedback — have yet to either shed their reluctance about putting their work in the spotlight or get to grips with how best to run their performance reviews, as CFOs who work with their group board or sit on boards of companies as non-executive directors know. More often than not, reviews keep the bar low, requiring directors to fill out general questionnaires on a range of broad issues, from whether the board spends enough time discussing business strategy to whether it is receiving enough information about the company. Beyond that, board members might be required to undertake peer reviews and anonymously assess each other's work. The big problem is that many evaluations are so generic that they "don't get under the skin of a lot of issues," says Richard Sheath, a director at corporate governance consultancy Independent Audit.
Outside Looking In
One solution is to supplement self-assessments with reviews led by external help from headhunters, academics, consultants and other performance experts. With third-party reviews — which cost between €60,000 and €90,000 and can take up to six weeks to complete — individual directors should expect to spend around three hours each, for a one-to-one interview and a few feedback sessions.
Although not used as frequently as self-assessments (see "Do It Yourself" at the end of this article), such reviews have several advantages over self-assessments, says Sheath, whose firm is among the boutique consultants offering boardroom evaluations. For one thing, they go a step further than questionnaires, using interviews to a third party lets members "actually express a view" and critique the work of other members anonymously. For another, external consultants aren't entrenched in boardroom politics, allowing them to be more objective.
Those were compelling enough reasons for Hays, a £1.8 billion (€2.7 billion) UK recruitment company. This year, for the first time, it hired a third party — executive recruiter Egon Zehnder — to lead the annual evaluation of its seven-member board, including CFO Paul Venables.
Venables says any scepticism that he had about using a third-party assessor soon faded as the programme got under way. The Egon Zehnder assessor, he explains, "had done ten of these reviews in the last year and was able to compare and contrast how he felt Hays' board worked with how he felt other boards worked, and give an independent view on best practice on, for example, setting up committees or board cohesion."
The evaluation started with a questionnaire, which Venables reckons accounted for only "about 10%" of the value of the overall exercise. "The real value came when each of us did a two-hour session with Egon Zehnder," he says. "When you use someone independent, they tend to probe a bit more and they use common themes coming out of the other interviews to question you on those issues as well. They can also ask questions that perhaps we hadn't thought of." One-on-one sessions were followed by a board meeting, at which Egon Zehnder presented the findings. The final step, which will take place soon, involves Hays' chairman, Bob Lawson, relaying feedback to individual directors about their performance.
Despite his enthusiasm, Venables reckons a company shouldn't use the same provider twice in a row in order to get a fresh perspective every time. He also does not advocate conducting an external evaluation annually. Every other year suffices, he says, noting that a two-year break — with self-assessments conducted in the interim — gives boards time to follow through on action points raised during the evaluation.
For its part, ICSA says that there are certain circumstances when a company should consider more frequent external evaluations, such as when there's a new chairman or when shareholder lobby groups are constantly questioning the board's governance.
But whether boards undergo their own assessments or hire third-party help, one big issue remains: how much of their evaluations should they disclose outside the boardroom in, say, the annual report. In the Heidrick & Struggles 2007 study, nearly half of the companies that undertook board evaluations did not say how their evaluations took place, and only 7% published the subjects discussed during the evaluations and the measures taken afterwards.
Disclosure is indeed a murky area, with governance experts providing little, if any, guidance, says Sean O'Hare, a partner in the HR services practice at PricewaterhouseCoopers. "If the board is dysfunctional, you don't want to feed that back. Equally, if you identify your risk mechanisms are not as effective as they should be, how do you express that in the annual accounts? Or if the chairman is getting six out of ten, you don't want to say the chairman is weak."
Until disclosure rules tighten, as experts expect they will, perhaps the best advice to offer board members is not to wait until an annual review to air concerns if, say, they believe another board member is underperforming, notes Blythe McGarvie. A US-based consultant and non-executive director at Accenture, Pepsi Bottling Group, Travelers and Viacom (and a former CFO of Bic, a French manufacturer of pens, razors and lighters), she says: "Talk to other board members to see if they're sensing the same things. Once you've determined that they are, speak to the chairman. He or she can feed back the criticisms in a softer manner." As she puts it, "You never go jump off the pier on your own."
Eila Rana is a senior editor at CFO Europe.