Kiel and Nicholson (2005) CG

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EVALUATING BOARDS AND DIRECTORS 61

Blackwell Publishing Ltd 2005. 9600 Garsington Road, Oxford,OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. Volume 13 Number 5 September 200

Blackwell Publishing Ltd.Oxford, UK

CORGCorporate Governance: An InternationaReview0964-8410Blackwell Publishing Ltd. 200

September 2005135613631EVALUATING BOARDS ADIRECTORSCORPORATE GOVERNANCE

*This paper was presented the 7th International Confeence on Corporate Governanand Board Leadership, 11October 2004, at the Centre fBoard Effectiveness, HenlManagement College.**Address for correspondencSchool of Business, Universiof Queensland, Brisbane, QL4072, Australia. Tel: +61 7 336758; Fax: +61 7 3365 698E-mail:[email protected]

Evaluating Boards and Directors*

Geoffrey C. Kiel** and Gavin J. Nicholson

The challenge for boards is to prevent crises in the organisations they govern. Performanceevaluation is a key means by which boards can recognise and correct corporate governanceproblems and add real value to their organisations. Our paper provides a practicalintroduction to board and director evaluations. We discuss the reasons for governance failuresand how board evaluations can help prevent them from occurring. We then review theperformance pressures facing boards and the benefits of board evaluations in meeting thesepressures. Finally, we introduce our framework for a successful board and/or individual

director evaluation, whatever the company type. In this framework, we suggest there are sevenkey questions to consider when planning a board evaluation and discuss each of these sevendecision areas.

Keywords: Boards of directors, performance evaluation, corporate governance

Introduction

Behavioral psychologists and organizationallearning experts agree that people and organiza-tions cannot learn without feedback. No matterhow good a board is, its bound to get better ifits reviewed intelligently. (Sonnenfeld, 2002,p. 113)

orporate governance issues continue toreceive a high profile in the business

press. Recent problems at Disney and FannieMae in the United States, and the massivelosses at Marconi plc in the United Kingdom,add to the litany of governance failures and

scandals that have characterised big businessin the 21st century. These failures underscorethe fact that boards must be concerned withmore than organisational and managementperformance: they also need to review theirown performance. Board evaluation is a signi-ficant way for boards to show they are seriousabout their performance, and as Sonnenfeldastutely observes in the above quotation, evengood boards can benefit from a properlyconducted evaluation. Unfortunately, while[m]ost people are interested in doing an

C

evaluation . . . theyre quite ignorant abouthow to do it (Bob Garratt in Bingham, 2003).This paper provides a practical introduction toboard and director evaluations.

To begin, we discuss reasons behind gover-nance failures and how board evaluations canhelp prevent them. We then highlight the sig-nificant performance pressures boards nowface and the benefits of board evaluation inhelping meet these pressures. In the third sec-tion of the paper, we introduce our frameworkfor a successful board and/or individualdirector evaluation. In this framework, wesuggest there are seven key questions to con-

sider when planning a board evaluation anddiscuss each of the seven decision areas for theboard evaluation process. Whether a companyis listed on the stock exchange, a small familycompany or a not-for-profit organisation, theframework can be used to develop an evalua-tion process appropriate to the organisation.

Governance failures

Governance failures may result in either a sig-nificant reduction in, or total destruction of,


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Blackwell Publishing Ltd 2005

Volume 13 Number 5 September 2005

shareholder wealth. There are also a broaderset of economic and social ramifications thatcome with the closure of businesses and lossof jobs and retirement benefits. Given thewidespread implications of corporate failure,it is important to understand how boardscontribute to this failure. We provide fourcategories for these failures: strategic, control,

ethical and interpersonal relationship. Oftenthese failures are interrelated. For example,at Enron, the board failed in the areas of stra-tegy, control and, arguably, ethics, while atHollinger International there were failures inthe areas of control and ethics. The followingexamples illustrate the four categories of gov-ernance failure:

1.

Strategic failure

: with full board approval,the managing director of UK corporationMarconi plc disposed of the companysengineering, electrical and defence pro-ducts businesses despite these being the

foundation of the companys success. Thecompany, again with board approval,launched into an ill-considered and ill-timed strategy aimed at turning Marconiinto a cutting edge technology firm (Court,2003);

2.

Control failure

: the board of Barings plcoversaw an inadequate risk managementsystem that resulted in losses estimated tobe in the vicinity of 927 million. As aresult, rogue trader Nick Leeson broughtdown the merchant bank (Hogan, 1997);

3.

Ethical failure

: in an attempt to removepotential asbestos liabilities from the com-panys books, Australian building productscompany James Hardie Industries restruc-tured its business through the incorpora-tion of a new parent company in theNetherlands. During the process it trans-ferred responsibility for asbestos compen-sation to a medical foundation that wasfound to be under-funded (Buffini, 2004).The company is still battling the reputationdamage of the boards decision; and

4.

Interpersonal relationship failure

: the board ofWalt Disney Co. has earned the ire of insti-tutional investors for its lack of an indepen-

dent board. Boardroom battles betweenthen chairman and CEO Michael Eisnerand dissident board members Roy Disneyand Stanley Gold, who subsequently re-signed to lead a campaign to oust Eisner,have become the stuff of legend (CB-SNEWS.com, 2003).

We could continue this litany of examples ofcorporate failure and even debate the categor-isation of each failure. But it is not our inten-tion to document corporate failures, rather itis to assist boards to improve themselves, so

as to minimise failure from strategic inepti-tude, lack of controls, dishonesty or poordynamics.

Board evaluations provide a process forboards to identify sources of failure. Theyallow boards to diagnose areas of concernbefore they reach crisis point. For example, aboard evaluation can ask the directors how

well the board is performing the strategy roleand whether they feel comfortable that theyare adding value in the strategy generationprocess. Similar questions can be asked aboutthe monitoring and control role of the board.A well-designed evaluation, covering bothboard-as-a-whole and individual directorevaluation, is likely to raise the issue of ethicalconcerns among some directors in relation toothers or management. The same commentscan be made for interpersonal relationshipfailure. A well-designed board evaluation canserve to highlight potential issues and pro-mote discussion and resolution before con-cerns become major crises. Board evaluationsare not a universal panacea for all board ills.However, used correctly and regularly, theymay play a major role in averting a gover-nance failure.

The pressure to perform

Averting corporate failure is not the only pres-sure faced by boards; increasing demands fororganisational performance are also increasingperformance pressures on boards. There are

number of reasons for this. First, as boards areheld increasingly accountable for corporateperformance, they become increasingly moreproactive in the leadership of the companiesthey govern. Effective leadership is seen ascritical to establishing the tone of a corpora-tion (i.e. its culture and values), developing astrategic direction, guiding change and formu-lating corporate objectives, and ensuring ef-fective implementation takes place. Holdingboards accountable in these areas represents afundamental shift in organisational thinking.For close on 100 years, the chief executive,supported by his or her management team,was largely seen as totally responsible forthese areas. Today, underpinned by theoreticaldevelopments in agency theory (e.g. Hendry,2002), and fuelled by tales of corporateexcesses such as Hollinger International(Aylmer, 2004) and Tyco (Bianco et al

., 2002),shareholders, legislators and society at largeare increasingly demanding that boardsdemonstrate leadership and control. After all,they are the peak body in organisations. Inshort, the role of the board has changed frommanagement support to organisational leader-


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ship. This represents a paradigm shift in man-agement thinking, the full implications ofwhich are just dawning upon companies andcommentators alike (Pound, 1995).

Second, and related to the first reason, therehas been a dramatic rise in shareholder activ-ism over the past two decades. The main rea-son for this increased activism is the increase

in power of large institutional investors, whoare becoming far more demanding of boards.This trend is seen internationally with largepension funds in the US (such as CalPERS)being vocal advocates for governance reform.Thus, despite mixed findings on the empiricallinks between corporate governance and firmperformance (e.g. Dalton et al

., 1998, 1999;Rhoades et al

., 2000), there is a discernable andgrowing belief in the investment communitythat good governance will enhance corporateoutcomes. Institutional investors perceive thatthe board can directly enhance shareholdervalue by intervening in the case of corporatecrises, providing strategic guidance and select-ing and monitoring the CEO (Conger et al

.,2001). As a result, more than 80 per cent ofEuropean and US institutional investors saythey will pay more for companies with goodgovernance (Economist Intelligence Unit,2001). The onus on boards to improve perfor-mance is further strengthened by the ability ofshareholders and investors to assess the cor-porate governance practices of major corpora-tions through ratings systems such as thosedeveloped by Standard & Poors GovernanceServices (2003) and the Corporate Library

(2004), which rate board effectiveness usingfactors such as board composition, directortenure and CEO compensation.

In addition to leadership responsibilitiesand shareholder activism, there is an increas-ing media and community scrutiny of allaspects of corporate life. Names such as Enron,WorldCom and Tyco International in the US,along with Marconi and Barings in the UK andHIH Insurance in Australia, have come tosymbolise a breakdown in corporate ethicsand boards are squarely in the firing line.Society at large is beginning to lay the blamefor poor corporate decision making (such as atMarconi) and systems failures (such as Bar-ings risk management controls) directly at thefeet of the board. It appears this scrutiny willcontinue and only serves to intensify com-munity expectations that boards need to bebrought to account for the performance of thecompanies they govern.

For these reasons boards are turning toboard evaluation as a major tool to assist themin improving their performance. This globaltrend sees specific board evaluation recom-mendations forming a key component of

nearly every major corporate governancereview or report. For example, the Principles ofGood Corporate Governance and Best PracticeRecommendations

(ASX Corporate GovernanceCouncil, 2003) in Australia, Beyond Compliance:Building a Governance Culture

(Saucier, 2001) inCanada, the Combined Code on Corporate Gover-nance

(Financial Reporting Council, 2003) in

the UK, and the Principles of Corporate Gover-nance (A White Paper from the Business Round-table, May 2002)

(Business Roundtable, 2002) inthe US, all make specific recommendations forthe regular review of board performance.

The benefits of an evaluation to a board arenumerous. If conducted properly, board eval-uations can contribute significantly to perfor-mance improvements on three levels theorganisational, board and individual directorlevel. Boards who commit to a regular evalu-ation process find benefits across these levelsin terms of improved leadership, greater clar-ity of roles and responsibilities, improvedteamwork, greater accountability, better deci-sion making, improved communication andmore efficient board operations. Table 1 sum-marises the potential benefits of board evalu-ation to the organisation, the board as a wholeand to individual directors. It must bestressed, however, that these benefits can onlyarise from a properly executed board evalua-tion. Board and director evaluations, if incor-rectly executed, can lead to distrust amongboard members and between the board andmanagement.

The board evaluation framework

Following is a framework for conductingpositive board and director evaluations.Although boards differ in the severity of theirperformance problems, the competitive envi-ronment in which they work and the range ofperformance issues they face, there are a num-ber of key decisions that are relevant to allboards implementing an evaluation process.Our framework for a successful board or indi-vidual director evaluation relies on the boardreaching agreement on the answers to theseven key questions illustrated in Figure 1(Kiel et al

., 2005). While the seven questionsmust be asked for all board evaluations, thecombined answers can be quite different. As aresult, while the questions are common toeach, board evaluations can range markedly intheir scope, complexity and cost. While wedescribe our framework as a sequential seriesof events, in practice most boards will not fol-low such a linear process. Some of these deci-sion areas will be reached simultaneously, forexample, who will be evaluated may be


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Table 1: Potential benefits of board evaluation

Benefits To organisation To board To individual directors

Leadership

Sets the performance tone andculture of the organisation

Role model for CEO and senior

management team

An effective chairpersonutilising a board evaluationdemonstrates leadership to

the rest of the board

Demonstrates commitmentto improvement at anindividual level

Demonstrates long-termfocus of the board

Leadership behavioursagreed and encouraged

Role clarity

Enables clear distinctionbetween the roles of the CEO,management and the board

Enables appropriatedelegation principles

Clarifies director andcommittee roles

Sets a board norm for roles

Clarifies duties of individualdirectors

Clarifies protection ofdirectors

Clarifies expectations

Teamwork

Builds board/CEO/

management relationships

Builds trust between board

members

Encourages individual

director involvement Encourages active

participation Develops commitment and

sense of ownership Develops commitment and

sense of ownership Clarifies expectations

Accountability

Improved stakeholderrelationships, e.g. investors,financial markets

Improved corporategovernance standards

Clarifies delegations

Focuses board attention onduties to stakeholders

Ensures board isappropriately monitoringorganisation

Ensures directorsunderstand their legal dutiesand responsibilities

Sets performanceexpectations for individualboard members

Decision making

Clarifying strategic focus andcorporate goals

Improves organisationaldecision making

Clarifying strategic focus Aids in the identification of

skills gaps on the board Improves the boards

decision-making ability

Identifies areas wheredirector skills needdevelopment

Identifies areas where thedirectors skills can be betterutilised

Communication

Improves stakeholderrelationships

Improves boardmanagement relationships

Builds personal relationshipsbetween individual directors

Improves boardmanagementrelationships

Builds trust between boardmembers

Improved boardCEOrelationships

Board operations

Ensures an appropriate top-level policy framework existsto guide the organisation

More efficient meetings Better time management

Saves directors time Increases effectiveness of

individual contributors

Source: Kiel et al

. (2005).


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decided at the same time as who will conductthe evaluation. Similarly, external issues maydominate the approach (e.g. scarce resourcesmay dictate an internal review). However, atsome point, each of these questions will needto be answered.

What are our objectives?

The first stage of the board evaluation processis to establish what the board hopes to achieve.Clearly identified objectives enable the boardto set specific goals for the evaluation andmake decisions about the scope of the review.

Such issues as the complexity of the perfor-mance problem, the size of the board, the stageof organisational life cycle and significantdevelopments in the firms competitive en-vironment will determine the issues the boardwishes to evaluate. Similarly, the scope of thereview how many people will be involved,how much time and money to allocate willbe determined by the severity of the problemsfacing the board and the availability of suffi-cient resources (human, financial and time) tocarry out an evaluation.

The first decision for most boards to con-sider is the overriding motivation for the eval-uation process. Generally, the answer to thisquestion will fall into one of the following twocategories: (1) corporate leadership (for ex-ample, We want to clearly demonstrate ourcommitment to performance management,We believe reviewing our performance isessential to good governance, We want toprovide directors with guidance for theirlearning and growth) or (2) problem resolu-tion (for example, We are not sure if we arecarrying out good governance, Our gover-nance (or some specific aspect) is ineffective

and/or inefficient, There are problems in thedynamics in the boardroom, We do not seemto have the appropriate skills, competencies ormotivation on the board).

Many boards find that establishing thespecific objectives for the review is best dele-gated to a small group (such as the governancecommittee or nomination committee if you

have one) or an individual (such as the chair-person or lead independent director). In thiscase, the first step is for the board to requestthe group or person to document the specificobjectives for the process. At this stage youmay also wish to consider consulting with anexternal adviser to overcome any board blindspots or biases. The second approach in-volves the board as a whole discussing andagreeing the objectives of the board evalua-tion. Generally an individual, usually thechairperson or chair of the governance ornomination committee, is delegated the task ofleading the process.

With clear objectives, it is relatively easy todecide whose performance will be evaluated,who the most appropriate people are to assessperformance and the person or group bestsuited to conducting an evaluation.

Who will be evaluated?

With the objectives for the evaluation set, theboard needs to decide whose performance willbe reviewed to meet them. Comprehensivegovernance evaluations can entail reviewingthe performance of a wide range of indivi-

duals and groups, as illustrated in Figure 2.Boards need to consider three groups: theboard as whole (including board committees),individual directors (including the roles ofchairperson and/or lead independent direc-tor), and key governance personnel (generallythe CEO and corporate/company secretary).Pragmatic considerations such as cost or timeconstraints, however, often preclude such awide-ranging review. Alternatively, a boardmay have a very specific objective for thereview process that does not require thereview of all individuals and groups identifiedin Figure 2. In both cases, an effective evalua-tion requires the board to select the mostappropriate individuals or groups to reviewbased on its objectives. To make this decision,we recommend a four-stage process thatgradually filters a comprehensive list ofpossible review participants to a pragmaticselection of review subjects.

The first stage in the process involves iden-tifying the roles that clearly impact on theboards review objectives and compiling acomprehensive list of individuals or groupsthat affect this objective. For instance, a review

Figure 1: Framework for a board evaluation

What are our objectives?

Who will be evaluated?

What will be evaluated?

Who will be asked?

What techniques will be used?

Who will do the evaluation?

What will you do with the results?


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designed to improve the flow of informationto the board will have a long list of possiblecandidates for the review. The CEO is an ob-vious candidate, as he or she will be respon-sible for developing and delivering the bulk ofboard papers and information. The board willalso need to consider its own role in specifyingits information requirements to the indivi-duals and groups responsible for meetingthose requirements. The board also needs toconsider the role of other personnel such as thecorporate/company secretary.

The second stage involves assessing thepotential benefit(s) of including each candi-date (group or individual) in the review.Documenting these benefits ensures the boardwill have a common understanding of the rel-

ative merits of reviewing each candidate whendeciding who to include. Categorising thespecific advantages of each candidate ascritical, useful or ancillary will assist in yourdecision making. For the third stage, it isnecessary to estimate the time and cost impli-cations of evaluating the performance of thecandidates in question.

The final stage in deciding who to evaluateinvolves balancing the benefits and costs ofreviewing each of the candidates. While it isnot possible to provide universal, prescriptiveguidance, the principle is to ensure that allcandidates with a major impact on the desiredobjective are reviewed. The relative impor-tance of each candidate will need to be con-sidered in light of the importance of the reviewobjective, the relative importance of potentialcandidates and the relevant cost implications.

The most common issue in deciding who toevaluate is whether to concentrate on board-as-a-whole or individual director assessment.Regular evaluation of the board as a whole canbe seen as a process that ensures directorsdevelop a shared understanding of their gov-ernance role and responsibilities. Although

board-as-a-whole evaluation is excellent as afamiliarisation tool for inexperienced boards,one disadvantage is that group evaluationmay give only limited insight into perfor-mance problems. Consequently, some boardschoose to progress to the evaluation of boardcommittees, individual directors and thechairperson to gain greater insight into howtheir board is functioning.

Individual evaluation, in particular, pro-vides the board with an opportunity to probeparticular issues in depth. To evaluate indivi-dual directors, either self- or peer-evaluationtechniques can be used. The aim of self evalu-ation is to encourage directors to reflect ontheir contributions to board activities and havethem identify their personal strengths and

weaknesses. However, while useful for per-sonal reflection and development, self assess-ment is inappropriate when the board wantsan objective view of the individuals perfor-mance. An objective view is best gainedthrough peer evaluation, whereby directorsidentify each others individual strengths andweaknesses. By having members of the boardevaluate each other, it is possible to gain amore rounded picture of the strengths andweaknesses of each director and their contri-bution to the effectiveness of the board. It canalso be used to identify skills gaps on theboard. Peer assessment is also more likely toreveal why the board is experiencing teamperformance or ethical dilemmas.

There is the potential, however, to createserious conflict within the board if individualperformance evaluation is introduced whensome directors are opposed to the process.Board members are entitled to hold differingviews on the benefits of individual directorevaluation, but consensus must be reachedbefore introducing the process. If directors arewilling to at least trial this approach, researchevidence suggests that many directors find

Figure 2: Who will be evaluated?

Establish objectives and

scope of evaluation

BoardGovernancepersonnel

Board as awhole

Boardcommittees

Directors

ChairpersonLead

independentdirector

Individualdirectors

CEO

Companysecretary


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individual director evaluation an extremelybeneficial process (Conger et al

., 2001, p. 112).

What will be evaluated?

Having established the objectives of the eval-uation and the people/groups that will beevaluated to achieve those objectives, the next

stage involves the evaluation becomingspecific. It is now necessary to elaboratethese objectives into a number of specifictopics to ensure that the evaluation (1) clarifiesany potential problems, (2) identifies the rootcause(s) of these problems and (3) tests thepracticality of specific governance solutions,wherever possible. This is necessary whetherthe board is seeking general or specific perfor-mance improvements and will suit boardsseeking to improve areas as diverse as boardprocesses, director skills, competencies andmotivation, or even boardroom relationships.

When an organisation is facing a significantgovernance issue or a board is seeking toimprove its performance, there is rarely asingle issue that requires review. The vastmajority of governance concerns are, in fact,the result of the interplay between individualskills, experience and motivations; the rela-tionships between the board and manage-ment; and the effectiveness of supportinggovernance policies, procedures and processes(Kiel and Nicholson, 2003). Consequently,while there may be a single objective for aboard review, it is imperative for the evalua-tion process to examine a wide range of poten-

tial causes or influences on this objective.We suggest that boards consider theirspecific objectives in light of a best practicecorporate governance framework. The frame-work acts as a lens through which to viewthe objectives and allows the board to developa comprehensive list of potential areas forinvestigation. Of course, a comprehensive listof areas for investigation will need to be bal-anced with the scope of the evaluation and theresources available for the project. This stagerequires the person leading the evaluation totake a realistic assessment of the resourcesavailable, a key component of which is thetime availability of directors and other keygovernance personnel, such as the CEO andcorporate/company secretary.

There are a number of frameworks againstwhich boards can assess their performance.Specific examples of governance frameworksthat boards can use to refine their evaluationobjectives include John Carvers (1997b)Policy Governance model, the UKs Com-bined Code on Corporate Governance

(FinancialReporting Council, 2003), the OECD Principlesof Corporate Governance

(OECD, 2004), the Aus-

tralian Stock Exchange (ASX) Corporate Gov-ernance Councils (2003) Principles of GoodCorporate Governance and Best Practice Recom-mendations

and Kiel and Nicholsons (2003)Corporate Governance Charter framework. Itis worth reviewing each in turn.

John Carver (1997b) recommends frequentboard self-assessment in his Policy Gover-

nance model. This is done by comparing theboards performance to the policies it hasdeveloped. Under Carvers model, the boardis responsible for the job of governing, notmanaging the organisation. In order to carryout its leadership role, the board producesfour categories of policies:

1. Ends: the policies which specify organisa-tional outcomes for the recipients and costsof the intended outcomes;

2. Executive limitations: the policies that limitexecutive authority;

3. Governance process: the policies that

define how the board operates, and expec-tations of the board as a whole, individualdirectors, executives, and committees; and

4. Boardmanagement relationship: policieson the boards delegation of power andmonitoring of its use by the CEO.

The aim of the Combined Code is to enhanceboard effectiveness and to improve investorconfidence by raising standards of corporategovernance in the UK. The Combined Codesmain and supporting principles provide aframework through which a board coulddevelop a set of topics or questions for board

evaluation. For example, Section 1A.3 (Boardbalance and independence) could form thecore criterion for the evaluation of a board onthe question of whether it has the proper struc-ture (which includes the skills and experiencethat should be represented on the board) andsize to adequately discharge its responsibili-ties and duties. This section could also be usedto clarify what those responsibilities andduties entail. The Combined Code also pro-vides specific advice on board evaluations(Financial Reporting Council, 2003). It sug-gests boards should be asked to considerHow well has the board performed againstany performance objectives that have beenset? and What has been the boards contri-bution to the testing and development of stra-tegy? (Financial Reporting Council, 2003, p.77). Similarly, the OECD Principles outlinehow to implement a corporate governanceframework and as such are a suitable modelaround which to develop evaluation criteria.

In Australia, the ASXs Principles of GoodCorporate Governance and Best Practice Recom-mendations

contains ten principles of goodgovernance which are voluntary; however,


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ASX-listed companies that do not follow themare expected to explain why they do not. Cor-porate governance statements in the annualreports of companies listed on the ASX indi-cate that these principles are being given closeconsideration. The principles and best practicerecommendations developed by the Councilprovide another example of a framework

through which a board could develop a set oftopics or questions for board evaluation. Forexample, the ASX Principles encourage organ-isations to structure their boards to add valueto the company (ASX Corporate GovernanceCouncil, 2003, p. 19). This could form the corecriterion for the evaluation of a board on thequestion of whether it has the proper structure(which includes the skills and experience thatshould be represented on the board) and sizeto adequately discharge its responsibilitiesand duties, and to clarify what those respon-sibilities and duties entail.

The final example, Kiel and NicholsonsCorporate Governance Charter framework,illustrated in Figure 3, is conceptualised as awheel divided into four quadrants repre-senting the essential elements of corporategovernance. The first quadrant Defininggovernance roles helps boards to define theirroles and responsibilities, the second,Improving board processes, encouragesboard members to consider the effectivenessof their meeting procedures, agendas, boardpapers and minutes as well as the board cal-endar of events and ensuring efficient pro-cesses for board committees. The third

describes Key board functions and the finalquadrant, Continuing improvement, deals

with the processes and procedures necessaryfor ensuring continuing improvement andcorporate renewal.

The following example highlights how aboard can use a framework to address theirparticular evaluation objectives. Boards oftenset an objective of identifying any skills gapson the board. Generally, this topic arises when

there have been major changes in the strategyor competitive environment of an organisationand the board sees a need to review its skillset. Choosing what to evaluate in these cir-cumstances will depend on such issues asboard size and structure, as well as how theboard executes its key functions (e.g. strategyformulation, service, monitoring, complianceand risk management). Only by reflecting onthese topics can a board understand whatskills it needs.

When the evaluation objective is to identifyskills gaps, the board may also need to con-sider how it will resolve any gaps. Does theboard adequately promote director develop-ment? Is there a director development budget?Or would it be more appropriate to appointsomeone with the appropriate skills to theboard? If recruitment is an option, does theboard have in place selection and inductionprocedures that will enable the board torecruit a new board member with suitableskills? Table 2 provides a selection of questionsdeveloped from the Corporate GovernanceCharter model to be used in evaluating theboard as a whole.

Deciding what to evaluate is one of the most

difficult and yet critical components of theevaluation process. The evaluator faces adelicate balancing act between ensuring thequestioning is extensive enough to identify theroot cause(s) of the issue, yet manageableenough to satisfy the scope and resource con-straints of the review.

Who will be asked?

In our experience, the vast majority of boardand director evaluations concentrate exclu-sively on the board (and perhaps the CEO) asthe sole sources of information for the evalua-tion process. As Figure 4 illustrates, this dis-counts numerous potentially rich sources offeedback on the performance of the gover-nance system. As the diagram highlights, par-ticipants in the evaluation can be drawn fromwithin or from outside the company. Inter-nally, board members, the CEO, senior manag-ers and, in some cases, other managementpersonnel and employees may have the neces-sary information to provide feedback on ele-ments of a companys governance system.Externally, owners/members and even finan-

Source: Kiel and Nicholson (2003).

Figure 3: The Corporate Governance Charter model

Role of the boardBoard structure

Role of individual directorsRole of the chairperson

Role of the corporate/companysecretary

Role of the CEO

Director protectionBoard evaluation

Director remunerationDirector developmentDirector selection and

induction

Board meetingsBoard meeting agendaBoard papersBoard minutesThe board calendarCommittees

Strategy formulationService/advice/contactsMonitoringComplianceRisk managementCEO evatuationDelegation of authority

Defininggovernance roles

Continuingimprovement

Improving boardprocesses

Key boardfunctions


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cial markets can provide valuable data for thereview. Similarly, in some situations, govern-ment departments, major customers and sup-pliers may have close links with the board andbe in a position to provide useful informationon its performance.

In each board evaluation, the facilitator willneed to decide the appropriateness of eachpotential participants knowledge to the par-ticular performance issues being evaluated.Generally, boards consult internal sourcesfirst. One way of delineating between internal

and external participants is to revisit the eval-uation objectives and clarify whether the focusof the evaluation is on the skills, processes andrelationships of the board or on the boardseffectiveness in carrying out its key roles. Forexample, investigating the effectiveness ofintra-board relationships is likely to be anexclusively internal process, where directorsgive their impressions of the performance ofthe board as a whole, their personal perfor-mance and possibly that of their peers. In thissituation, the board members themselves are

Table 2: Skills of the board: topics and sample questions

Topic Sample questionnaire items

Defining governance roles

Role of the board 1. Is the role of a board member clearly defined?2. Is the role of a board member well understood?

Board structure 3. Does the spread of talent within the board reflect the companysneeds?4. Do all board members bring valuable skills and experience to

the company?5. Is the board large enough to carry out the work required of it?

Improving board processes

Board meetings 6. Do the board papers contain the correct amount and type of information?

7. Are board members diligent in preparing for meetings?8. Are matters relating to the company discussed in a structured

manner?

Key board functions

Strategy 9. Does the board know and understand the companys mission,vision and strategy?

10. Does the board know and keep abreast of trends and issuesaffecting the market in which the company competes?

11. Does the board understand the business it is governing?Service/advice/contacts 12. Do board members actively engage in networking for the

benefit of the company?Monitoring 13. Do board members have sufficient financial skills to ensure the

board can discharge its governance responsibilities?Compliance 14. Does the company have relevant internal reporting and

compliance systems?Risk management 15. Are board members aware of their risk assessment duties as

directors?16. Is there a clear understanding of the companys business risk?

Continuing improvement

Director development 17. Does the board encourage directors to pursue opportunities forpersonal development?

Director selection andinduction

18. Does the board have a succession plan in place for thechairperson?

19. Does the board have a director succession plan in place?20. Are there clear and well understood policies and procedures in

place for director selection and induction?


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the most qualified to comment on how theyfeel they work together as a team. However, ifan objective of the board is to improve stake-holder relationships, this will best be achievedby gathering information from the stake-holders themselves. Depending on the natureof the business, these may be owners, financialanalysts, customers or suppliers critical to theorganisations success.

While these examples of intra-board rela-tions and stakeholder relations representclear-cut instances of the value of internal orexternal data sources, the boards performanceis often best evaluated by a combination ofinternal and external sources. Table 3 describes

potential benefits and drawbacks of asking thevarious participants.After examining all potential sources of

information along with their relative advan-tages and disadvantages, the facilitator mustdecide which sources to include in the review.This requires an understanding of three issues:

1. in light of the specific questions identifiedin the previous step, who has the knowl-edge needed to make a valid and reliableassessment;

2. what is the level of board experience with,and openness to, the evaluation process

and what is the impact on who should beasked; and3. what resources are available to collect the

information from the required sources.

What techniques will be used?

Depending on the degree of formality, theobjectives of the evaluation, and the resourcesavailable, boards may choose between a rangeof qualitative and quantitative techniques.Quantitative data are in the form of numbers.

They can be used to answer questions of howmuch or how many. Qualitative data are notin the form of numbers and will be requiredfor any other type of research question. Putsimply, a question of how much should em-ploy quantitative research methods, whereasquestions of what, how, why, whenand where should employ qualitativeresearch methods. Figure 5 provides an over-view of the major qualitative and quantitativetechniques used in board evaluations.

Most boards undertake evaluations withouta clear view of the issues before them. Whenthe evaluations objectives are to identify thekey governance problems, screen alternative

solutions and/or uncover new approaches,qualitative research comes to the fore. Quali-tative data does have several drawbacks, how-ever. The major drawback is that interpretingthe results requires judgement on the part ofthe person undertaking the review and analy-sis. Consequently, conclusions can be subjectto considerable interpreter bias, even (or par-ticularly) where the person conducting thereview is a board or company member. This isbest addressed by using experienced research-ers for the task and having several participantsreview the conclusions for bias. Bias can alsobe mitigated by using both quantitative andqualitative techniques (e.g. using a survey inconjunction with interviews).

While there are many different techniquesfor collecting qualitative data (e.g. projectivetechniques, word associations and role play-ing to name just a few), the three mainmethods used in governance evaluations areinterviews, board observation and documentanalysis.

The interview is the main qualitative datacollection tool because it provides a uniqueopportunity to collect complex and rich data.

Figure 4: Who will be asked?

Establish objectivesand scope of evaluation

Internal evaluations External evaluations

Board

members

CEO andsenior

management

Other

management

andemployees

Shareholdersand financial

markets

Government(local, state

and federal)

Customers/

suppliers

Other

stakeholders


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It is an excellent way of assessing directorsperceptions, meaning and constructions ofreality by asking for information in a way thatallows them to express themselves in theirown terms. Interviews may be conducted indi-vidually or in a group situation. While inter-

views are essentially about asking questionsand receiving answers, the key to uncoveringrich information is a professional, well-designed interview process.

By far the most common form of qualitativetechnique is the individual in-depth interview.

Table 3: Who has the knowledge?

Category Informationsources

Knowledge benefits Potential drawbacks

Internal sources

Board members Should have key knowledge onskills, processes, relationships,

level of shared understanding

Suffer from biases (such asgroupthink)

Little understanding of externalperceptions of the board Do not provide a set of fresh eyes

with which to examine governanceprocesses

CEO Should have a different perspectiveon all elements of board activity

Key insight into the advice role ofboard

Key insight into succession issues

Potentially suffers from biases Potentially impression manages for

the board, particularly on issues ofmanagement activities

May have a limited or biasedunderstanding of externalperceptions

Senior managers Generally good insights intocommunication between the boardand management

May not have enough exposure to thboard

May be tainted by internal companypolitics

Other employees Should have insight into the cultureof the organization

Limited exposure to the board

The further removed from theboard, the less likely employees cancomment on actual performance

External sources

Owners/members Understand ownership aims Will depend on the ownershipstructure (may be disparate)

Customers Can have unique insights,particularly if the company hasvery few customers

Most likely will have little insight inthow the board operates

Potential to game the system

Government Can have insightful views,particularly in certain areas ofcompliance, if these are critical

Often limited interaction with mostcompanies

Suppliers Can have unique insights,particularly if the company hasvery few suppliers

Most likely will have little insight inthow the board operates

External experts Useful benchmarking or bestpractice insights

May not understand companyscontext

Other stakeholders Will depend on nature of thecompany

Will depend on nature of the compan

Source: Kiel et al

. (2005).


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The key advantage of the individual interviewis that it provides the conditions most likelyto encourage candid disclosure of sensitiveissues, particularly where confidentiality isassured. The confidentiality of the situationoften encourages directors to disclose infor-mation that they may feel uncomfortable dis-

cussing in a group situation. Thus, individualinterviews can be a useful technique for cer-tain subjects such as individual director eval-uation. The interview technique is particularlysuitable for boards wanting to explore one ortwo major issues in some depth. In-depthinterviews are potentially a much richersource of information than quantitative databecause the range of any discussion is open-ended. They also prove useful when discuss-ing soft issues, personal concerns and pointsof view that are not readily disclosed in awritten questionnaire (Conger et al

., 2001).In a group situation (often called a focus

group), the interviewer works with severalpeople simultaneously rather than individu-ally. The key difference for the interviewer isthat he or she takes on the role of a moderatoror facilitator, rather than that of an inter-viewer. Rather than the question and answerpattern of the traditional interview, the inter-viewer uses group dynamics to stimulate dis-cussion of the questions and topics of interest(Punch, 1998). The key benefits of group-basedinterviews are that they are less resource inten-sive and can stimulate the participants to pro-

duce data and insights that would not befound without the group interaction. Con-versely, these benefits need to be balancedwith possible problems of group culture anddynamics that may inhibit candid disclosure.It is also more difficult for the interviewer toestablish rapport in a group setting. We would

not normally recommend employing groupinterviews where there are potentially sensi-tive issues under review.

Another useful qualitative technique to con-sider is observation, particularly observationof a board meeting. This technique involvesthe researcher observing the participants intheir natural environment the boardroom.The researcher neither stimulates nor manipu-lates the participants (i.e. no questions areasked, etc.), but rather takes note of the parti-cipants behaviours, activities and points ofinterest to the research question.

Observation has a number of advantages asa data collection technique. Since the data iscollected as events occur and is a record ofwhat actually

occurred, rather than what adirector thought

occurred, it is free fromrespondent bias, but is still subject to observerbias. It is also easier to identify environmentalinfluences (such as seating arrangements inthe boardroom) on behaviours and can also bean effective way of seeing all board membersin action at the one time. Our experience is thatobservation can be especially useful when theevaluation objectives relate to issues of board-

Figure 5: Evaluation techniques

Establish objectives and scopeof evaluation

Qualitative

techniques

Quantitative

techniques

Interviews Observation Documentanalysis

Surveys

Group Individual

Face-to-face Telephone

Face-to-face TelephoneMail/

facsimile

Email/internet


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room dynamics or relationships between indi-viduals. The observer can notice how boardmembers relate to each other, if one or twopeople dominate discussions, whether thechairperson demonstrates a strong leadershiprole, if there is tension between board mem-bers, how the agenda works in practice and soon. This information is valuable when used in

conjunction with information gained from thedirectors themselves.Documents, both contemporary and his-

torical, can be a rich source of information inthe governance evaluation process. While it ispossible to categorise and/or directly codegovernance documentation, we recommenddocument analysis as a method of triangula-tion for use in conjunction with other data col-lection techniques. Reviewing key documentssuch as board papers, board minutes, policymanuals and governance charters, providesvaluable insight into a governance system anda context in which to view the results of otherdata collection techniques (Punch, 1998). Akey benefit of document analysis is the ques-tions it raises. It can be as basic as why does aparticular document not exist? What level ofdetail is included? What is recorded? What isomitted? What is the writer taking forgranted? Another benefit is that a review andcategorisation of documents can assist anexperienced facilitator to benchmark differ-ences between the boards documentation andthat of other best practice boards.

While quantitative data lack the richness ofqualitative data, they have the key advantage

of being specific and measurable. This enablesthe evaluation to count, compare and contrastindividual responses both over time andbetween individuals. Surveys are by far themost common form of quantitative techniqueused in governance evaluations and can be animportant information-gathering tool. It isvital to understand, however, that surveys areattitudinal instruments. Surveys measure indi-viduals subjective assessments of particulartopics and are subject to responder bias. Theresponses are no more or less valid thanqualitative research.

As with qualitative techniques, surveys canbe used as the sole source of information forthe evaluation, or as one of several data-gathering techniques. If the survey is the onlymethod employed to gather data, it willnecessarily be more extensive than if it is usedin conjunction with other techniques. If it isbeing used as a component of a governanceevaluation, the facilitator will have a key deci-sion to make about the timing of the survey.Will the survey draw on the results of inter-views (i.e. will the questions in the survey bebased on what directors identified as key

issues) to quantitatively assess what has beenidentified qualitatively, or will the survey beadministered as a stand-alone tool? Theanswer to this question will depend on theobjectives of the evaluation and the context ofthe review. Often, pragmatic issues such asresources or time constraints dictate theresponse.

In order to conduct a survey-based boardevaluation we suggest following a seven-stepprocess:

1. Specifying the objectives of the survey, inlight of the evaluations overall objectives.

2. Deciding the composition of the surveysample, that is, who will be asked to com-plete the survey? Is it intended just forboard members, or will others, such as thesenior management team and the CEO, orexternal stakeholders be involved?

3. Determining how the survey will beadministered. A common way to adminis-

ter the survey is face-to-face, in a situationwhere the survey is just one part of evalu-ating the boards performance. Survey datacan also be collected by phone, fax or email,or via the internet, which means that direc-tors can complete them at a time and placesuitable for them.

4. Designing the questionnaire. Excellent sur-veys support the purpose of the evaluation the topics chosen are relevant to theevaluation requirements, the questions areworded in such a way as to gain the maxi-mum relevant information and to avoidbias, and the measurement techniquechosen is most appropriate for the infor-mation being sought (Kraut, 1996).

5. Administering the questionnaire. Thisinvolves the fieldwork necessary to under-take the board survey, including advisingparticipants of the time and place for themeeting (if a group survey is beingconducted), scheduling appointments (forindividual surveys) or sending thequestionnaires by mail, fax or email (as anattachment).

6. The coding and analysis stage of the surveyprocess transforms raw data (the recorded

measures in the responses) into informa-tion that can be used for decision making.7. Presentation of the results. Once the coded

data have been entered, it is a simple pro-cess to generate histograms and othercharts to present the data.

What is the best methodology? Research tech-niques need to be adapted to the evaluationobjectives and board context. In particular, theresearch designer needs to be aware of theadvantages and disadvantages of the varioustechniques. Qualitative techniques provide


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rich data, but the logistics of collecting andanalysing the data are difficult. Further,qualitative data are generally interpreted bythe researcher, which makes the results moreopen to criticisms of bias and lack of validity.Quantitative analysis, on the other hand, isbased on reducing the data or phenomena inquestion to numbers. This is not nearly as

informative as qualitative data, but can bereadily collected from a large number of peo-ple or other sources. It is also very easily con-solidated, compared and/or benchmarked.

The choice of techniques will depend on theboards objectives. If the board is trying toidentify the source of a performance problem,qualitative data can help to identify the cause.Similarly, if the objective of the evaluation isto understand member or owner views on aparticular subject, qualitative data will be themost appropriate. However, if the boardwants to compare its performance with otherboards or over time, then quantitative tech-niques may be best. Most boards will explorea range of techniques as a means of investi-gating different performance issues and tokeep the evaluation process fresh and interest-ing. In this way, a regular evaluation cyclewill continue to benefit the board.

Who will do the evaluation?

The next consideration in establishing yourevaluation framework is to decide who themost appropriate person is to conduct theevaluation. If the review is an internal one,

the chairperson commonly conducts the eval-uation. However, there are times when it maybe more appropriate to delegate either to anon-executive or lead director, or to a boardcommittee. In the case of external evaluations,

specialist consultants or other general adviserswith expertise in the areas of corporate gover-nance and performance evaluation may leadthe process. Figure 6 illustrates the choices fordetermining who will perform the evaluation.

Internal reviews are traditionally the mostcommon form of board evaluation and have anumber of key advantages. First, by conduct-

ing an internal review, the board is assertingits autonomy to set and apply its own stan-dards (Berenbeim, 1994). Board autonomy is akey source of power and conducting a self-evaluation demonstrates this authority at thesame time as establishing the standards andculture of performance evaluation that theboard expects of the rest of the organisation.An internally conducted review also has theadvantage of the confidentiality that comeswith a board member conducting the process.Ultimately, the value of the evaluation willdepend on the level of commitment thatparticipants bring to the process. Ensuringconfidentiality through the appointment of atrusted insider can be an important aspect ofgaining this commitment and ensuring thatfeedback is open and honest. Internally con-ducted board evaluations can be useful team-building exercises. The ability of the board tofunction effectively as a team is a fundamentaldeterminant of superior board performance.Finally, internal reviews generally have theadvantage of being a more cost-effectiveoption.

Although there are many benefits to internalevaluations, there are also a number of limita-

tions that may make them inappropriate incertain circumstances. The two major concernsinvolve issues of transparency and capability.In many circumstances, boards undertakeevaluations to demonstrate their commitment

Figure 6: Who conducts the board evaluation?

Externally conducted reviews

Generaladvisers

Specialistconsultants

Establish objectives and

scope of evaluation

Internally conducted reviews

ChairpersonNon-executive

director

Governancecommittee or

othercommittee of

the board


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to performance improvement to both externaland internal stakeholders. In these cases, thequestion of who watches the watchers is aserious one. If the board establishes the evalu-ation process, sets its objectives, evaluates itsown members and prepares the final report onits own performance, it may be perceived aslacking transparency.

Apart from transparency, boards need toensure the nominated person/group has thecapability to undertake the review. An internalreviewer often brings (unconscious) biases to

the process. It is difficult for the chairperson,directors or corporate/company secretary toprovide a totally objective view of the boardsperformance when they work so closelytogether. In particular, full and frank disclo-sure may be difficult for participants wherethe reviewer may be central to the governanceissue. Similarly, an internal reviewer may lackthe skill set and capacity to conduct thereview. There are a number of very specificresearch skills invaluable to the evaluationprocess that an internally nominated reviewermay not possess. For example, is the personcharged with leading the evaluation a skilledinterviewer and communicator? Does he orshe have sufficient experience in questionnairedesign? If the answer to these questions isno, an internal facilitator may not be the bestchoice. Similarly, even where the evaluatordoes possess the skills, do they have thenecessary time to carry out the tasks required?

As depicted in Figure 6, either an individual(chairperson or non-executive director) or acommittee (e.g. governance or nominationcommittee) can conduct an internal evalua-tion. Finding the right person to conduct the

process is an important part of determiningwhether an internal evaluation should beundertaken. Table 4 summaries the advan-tages and disadvantages of internal reviewers.

There are a number of situations whereboards find it preferable to engage externalconsultants or advisers to facilitate the boardevaluation. Boards tend to seek external eval-uation facilitators in two generalised circum-stances, namely where there is a significantrequirement for transparency and/or wherethe board does not have the capability to carry

out the evaluation itself. External consultantscan also prove valuable in a number of specialcircumstances such as when the evaluationprocess has become too mechanical over time.External consultants can recommend differentquestions and approaches, and assist theboard to find a new focus for each evaluation.Similarly, when a board is implementing anindividual director assessment for the firsttime, the board may wish to consider anexternal facilitator. An external facilitator canplay a useful mediating role if there arepersonality considerations in the review pro-cess. Using a third party as the messenger ofthe evaluation outcomes also assists in main-taining board dynamics, while addressingdifficult issues. Finally, an external facilitatorcan be useful if there has been a major boardreorganisation.

The major decision for boards deciding toimplement an external review is whether theyshould use a specialist consultant or trustedgeneral adviser. Some boards prefer to utilisea trusted adviser, such as the firms legal coun-sel or auditor, to conduct the evaluation. Thisallows the board to work with people they

Table 4: Chairperson, non-executive director and committee evaluations

Chairperson Non-executive director Committee

Advantages Disadvantages Advantages Disadvantages Advantages Disadvantages

Part of leadershiprole clear

acceptance byboard members Clear

accountability Can align process

with overallboard agenda

Possible bias Concentration

of power,particularly ifthe CEO ischairperson

Heavy workload

Clearaccountability

Moreindependentview

More time todevote to task

Otherleadershipexperiences/skills

Possible bias Possible effect

on boarddynamics Knowledge of

the companywill be less thanthat of thechairperson

Relieveschairperson/

non-executivedirector ofworkload

Less reliant onthe viewpointof one person

Less subject toindividual bias

Longerprocess

Demandsgreaterresources(time,money etc

Source: Kiel et al

. (2005).


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already know and whom they believe under-stand the boardroom dynamics.

In contrast, a specialist consultant has theadvantages of often possessing a higher levelof technical skill and being perceived as hav-ing a greater degree of independence. Thespecialised nature of a board review requiresskills often outside the customary scope of

many general advisers. Similarly, a consultantengaged specifically to carry out the evalua-tion can be perceived as more independentthan a reviewer with an existing relationshipwith the firm (such as a general counsel orauditor), if that is an important considerationfor the board. Finally, specialist consultantswill have a broad range of exposure to differ-ent boardroom practices and benchmarks, soif comparison and new ideas are key objec-tives, specialist consultants may be the answer.

Whether choosing between a trustedadviser or specialist consultant, there are someimportant questions the board needs toconsider:

Does the proposed facilitator have suffi-cient skills and experience to conduct anevaluation?

Has the facilitator conducted board evalua-tions for other boards like ours?

Does the facilitator have access to bench-marking information and alternative gover-nance ideas that will add value to theprocess?

Will the facilitator be able to form a bal-anced and objective view of our board?

Will the board trust the facilitator suffi-ciently to ensure a positive outcome?

What do you do with the results?

The reviews objectives should be the deter-mining factor when deciding to whom theresults will be released. Most often the boardscentral objective will be to agree a series ofactions that it can take to improve governance.Since the effectiveness of an organisationsgovernance system relies on people within thefirm, communicating the results to internalstakeholders is critical for boards seeking per-formance improvement. Given that virtuallyall governance reviews are conducted with aview to improving the governance system,boards are rarely faced with the decision ofwhether to communicate the results internally.Rather, the decision is who within the organ-isation needs to know the results.

Since the board as a whole is responsible forits performance, the results of the review willbe released to the board in all but the mostunusual of circumstances. Where the evalua-

tion objectives are focused entirely on theboard, board members will simply discuss theresults among themselves. This occurs, forexample, when the objective is to conduct ageneral review of the boards performance,with a view to improving board process orgaining a shared understanding among boardmembers as to roles or other items of interest.

Normally, the board and the corporate/company secretary will review the findingsaround the boardroom table, and there will beno need to communicate the results to anyoneelse.

Where the results of the evaluation concernindividual director performance, the generallyaccepted approach is for the chairperson and/or facilitator to discuss them individually, witheach director. This approach has three advan-tages. First, it reflects good performance man-agement principles and ethics by respectingthe confidentiality of the process and the indi-viduals integrity. Second, it ensures that diffi-cult topics, often avoided in the boardroomsetting, have a venue for discussion. Third, itdoes not rely on director self-diagnosis; thereis a measure of objectivity and accountability,particularly where the director and chair-person/facilitator outline a development planto which the director can be held accountable.

The CEO has a significant influence on thegovernance system and is nearly always in-volved in the review of results. The key deci-sion here is whether informing the CEO wouldadversely affect board dynamics and soli-darity. Where board dynamics or individual

relationships are major governance concerns,the principle of board solidarity may requireit to hold an in camera session.

In circumstances where the objective of theboard evaluation is to assess the quality ofboardmanagement relationships, or wherethere are process issues concerning manage-ment input into board meetings and papers,results of the evaluation will generally beshared with the senior management team.Some organisations choose to communicate asummary of the board evaluation results morewidely in the organisation. This can be par-ticularly helpful where boards are seeking toinculcate a culture of performance manage-ment and accountability within the company.

In certain circumstances, the board willhave an objective of building its reputation fortransparency and/or developing relationshipswith key external stakeholders. In such cir-cumstances, the board should consider com-municating some or all of the results of itsreview to those stakeholders. Communicatingthe results of the evaluation demonstrates thatthe board takes governance seriously and iscommitted to improving its performance.


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Additionally, depending upon who partici-pated in the evaluation, the board may alsowish to communicate results to key customers,suppliers or other groups important for itscontinued success (e.g. unions, environmentalgroups). Sharing information with these majorgroups is likely to persuade them that theboard is committed to improving stakeholder

relationships. It also provides feedback tothose who have been asked for their views onthe boards performance and can serve tostrengthen their relationships with the board.

The performance evaluation cycle

Aside from the seven key questions in anevaluation, boards need to consider howoften they should evaluate their performance.Some boards decide to undertake reviews onan as needs basis. This approach may bebeneficial to boards that have a clearly articu-lated and understood policy on the triggersthat will prompt a review. The difficulty withthe as needs review is that, unless there areclear guidelines linking them to specific situa-tions, such as a change in board composi-tion, performance evaluation is liable to beoverlooked.

When choosing to institute a regular reviewprocess, boards can institute frequent orlonger-term cycles. Some boards choose tohold a regular performance evaluation everytwo or three years. These tend to be extensiveappraisal processes, combining interviews

and surveys and often involving an externalfacilitator. The chief disadvantage of two- orthree-yearly reviews is that most businessesoperate in a very dynamic environment andmany changes will occur during this timeframe.

The annual review is the most commonlyrecommended form of board evaluation. Thisis consistent with the annual planning cycleadopted by most boards. Some boards find ituseful to tie board evaluation to the strategyformulation process. This is a useful way ofadapting performance expectations to fit thestrategic needs of the organisation. For thoseorganisations operating in more dynamicbusiness environments, however, annual re-views may not be frequent enough. In hightechnology industries, for example, a reviewof the boards performance every six monthsmay be more appropriate.

Although the annual review is the mostcommon form of evaluation, this does notnecessarily make it the most effective. Thereis always a danger that the predictableannual event will become stale and nolonger add value. If evaluation becomes too

routine an activity, boards are in danger ofbecoming complacent. In these circum-stances, it is important to experiment withdifferent evaluation styles and techniques tokeep the process interesting and ensure thatit continues to lead to performance improve-ments. Notwithstanding the concern overthe process becoming stale through repeti-

tion, a set of questions that provide specific,measurable data against which the boardcan benchmark its performance over timecan further contribute to the boards continu-ing improvement.

Some commentators believe that perfor-mance evaluation should be an ongoing pro-cess, not just an annual event (e.g. Carver,1997a). High performing boards tend to deviseother mechanisms apart from an annualreview to ensure ongoing performance im-provement. One option is to review the ef-fectiveness of each board meeting. This can bescheduled as a regular agenda item, withdirectors taking turns to lead the discussion.The technique involves the appointment ofone board member to act as the meeting eval-uator. This person observes the participants,assesses the content and importance of itemson the agenda and the quality of board papers.The evaluator then gives his or her opinion ina five-minute review at the end of the meeting.The other board members are then asked fortheir comments on the effectiveness of themeeting and to offer suggestions for improv-ing performance. The whole process is in-tended to last no more than 10 or 15 minutes.

This is a simple technique for keeping perfor-mance issues front of mind for the board. Itis an easy way to gain quick feedback and toencourage discussion and interaction betweenboard members, and it requires little time oreffort to put in place.

Conclusion

Performance evaluation is becoming increas-ingly important for boards and directors. Pres-sure for improved evaluation is coming fromtwo main sources. First, some commentatorsare calling for mandatory performance ap-praisals to promote corporate transparencyand accountability. Second, there are clear per-formance benefits to companies when theirleaders are willing to engage in an open andhonest appraisal of their own performance.

While compliance pressures for improvedevaluations should be a consideration for allboards, we have concentrated on emphasisingthe performance benefits that are possiblewith rigorous board and individual directorevaluation processes. A key way for a board to


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demonstrate its commitment to continuingimprovement is through critical evaluation.Therefore, a regular board evaluation processis an important process that can really addvalue. It benefits individuals, boards and thecompanies for which they work.

Boards also need to recognise that the eval-uation process is an effective team-building,

ethics-shaping activity. Our observation is thatboards often neglect the process of engage-ment when undertaking evaluations; unfor-tunately, boards that fail to engage theirmembers are missing a major opportunity fordeveloping a shared set of board norms andinculcating a positive board and organisationculture. In short, the process is as important asthe content. In conclusion, implementing arobust and successful board and director eval-uation is one important way to ensure that aboard can avert governance failure and conse-quent organisational failure.

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Standard & Poors Governance Services (2003) Stan-dard & Poors Corporate Governance Scores and Eval-uations: Criteria, Methodology and Definitions. NewYork: McGraw-Hill.

Geoffrey Kiel is Professor of Management atthe University of Queensland. He has had anextensive career as a management consultant,senior manager, management educator andacademic researcher. He has been published injournals such as the Journal of MarketingResearch, Business Horizons and the EuropeanJournal of Marketing. His current researchfocuses on corporate governance and he is the
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co-author of the major Australian practicalguide to governance Boards that Work: A NewGuide for Directors and Board, Director and CEOEvaluation published by McGraw-Hill.

Gavin Nicholson is a director of CompetitiveDynamics Pty Ltd. He consults on corporate

governance to large Australian public compa-nies, government-owned corporations, not-

for-profit organisations, statutory authoritiesand research organisations. He is undertak-ing a PhD on the strategic impact of corpo-rate governance and regularly presents hisresearch findings to various groups through-out Australasia, Europe and North America.He is the co-author of Boards that Work andBoard, Director and CEO Evaluation. Gavin

has also co-authored numerous internationaljournal articles.