Board Evaluation - Introduction and Best Practices

Board Evaluation

The recent failures of corporate throughout the world have led the regulators to closely review the mechanism and guidelines that govern the functioning of the Board. The Board evaluation process is of utmost importance as it relates to the long term objectives of the company.

The following information provides in - depth information on Board Evaluation, the Methods available, and related information

Global Best Practices
FINANCIAL REPORTING COUNCIL (UK)  - THE UK CORPORATE GOVERNANCE CODE---> Download

B.6 Evaluation - Main Principle:
"The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors."
Walker Review of Corporate Governance of UK Banking Industry ---> Download

Recommendation 12
"The board should undertake a formal and rigorous evaluation of its performance, and that of committees of the board, with external facilitation of the process every second or third year. The evaluation statement should either be included as a dedicated section of the chairman’s statement or as a separate section of the annual report, signed by the chairman. Where an external facilitator is used, this should be indicated in the statement, together with their name and a clear indication of any other business relationships with the company and that the board is satisfied that any potential conflict given such other business relationship has been appropriately managed."
CORPORATE GOVERNANCE VOLUNTARY GUIDELINES 2009 (MCA- India)---> Download

D. Evaluation of Performance of Board of Directors, Committees thereof and of Individual Directors
The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.
Riskpro's Summary of MCA Guidelines
 
Evaluation Methods

Peer to peer performance evaluation
In this method, each of the Directors performs a peer evaluation of the other directors. The responses are then aggregated to arrive at a comprehensive evaluation of each director.  The evaluation results are then presented to the Full Board and action taken accordingly.


Present to Peer Method
In this method, each of the Directors take turn to present to the Full Board on how they have performed / added value to the company. Every Board member then evaluates the presenter based on pre-defined performance indicators or a questionnaire.

Online evaluation tools

This method is a comprehensive and automated process whereby full Board evaluation is done using the services of online tool companies. The survey / questions are designed by the external company and the Company's Directors complete this for the full Board. Areas of weakness
and strengths are then reported to the Board for necessary action.
 
Board Evaluation Policy / Program
It is a good idea that the corporate could formulate and implement a structured board evaluation program. The program could be designed in variety of ways.  Either it could be designed in-house program or it could be designed with the help of external advisers who are expert in the field like consulting firms.

 
Evaluation Programs typically cover 1) Full board evaluation, 2) Evaluation of Individual Directors, 3) Evaluation of Chairman/CEO, 4) Evaluation of Board Committees  - (Remuneration, Nomination and Audit Committee) 5) Aggregation of evaluation results and reporting to Board for review and 6) Steps or action plan developed to enhance weak areas.
 
Disclosure Requirements relating to Board Evaluation
CORPORATE GOVERNANCE VOLUNTARY GUIDELINES 2009 (MCA- India)
The Board should state in the Annual Report how performance evaluation of the Board, its committees and its individual directors has been conducted.