COVID-19 has affected every sector of our economy and an important element of the 2020 board evaluation will be identifying and reporting on how reactive and resilient the board has been throughout the pandemic.
Board performance has been under increasing scrutiny from shareholders over the past few years and the situation with the global pandemic has only enhanced the need to review the performance of board members.
As a result there is now an increased importance placed on board evaluations to create and uphold transparency in the boardroom with not only the shareholders, but also colleagues around the table.
COVID-19 has created a turbulent year with the focus of 2020 being on trading through a global pandemic, so an effective evaluation should aim to include these key areas:
- how did the board perform as a leader during the pandemic?
- was the company ready to react to an event such as COVID-19?
- what key skills were missing in the leadership team in 2020?
- what are the key lessons learned from 2020?
How do we evaluate? Quantitative v Qualitative
Traditionally, board evaluations have used a quantitative method for questionnaires - a prompt way of gathering data on board members and a method favoured by some directors given time pressures. However, with COVID-19 bringing directors’ competencies into sharper focus, a more comprehensive review may well be warranted and a lot more boards are opting for a more detailed and qualitative process this year.
The use of qualitative questionnaires allows the opportunity for greater understanding of director behaviour, but with information limited to the topics covered within the questionnaire there is often little opportunity for the director to elaborate. Interviews instead, could be the answer enabling board members to candidly disclose information on sensitive subjects and expand on themes contained within the questionnaire. In order to truly assess capabilities in the wake of COVID-19, it is crucial to obtain a true reflection of the board members’ experience, positive or negative to enable the board to build in past experiences when considering the future.
A successful evaluation could well result in incremental and valuable changes to board processes and composition. And in order for the process to be as valuable as possible, it is vital that the information is fed back to the board. Consensus on key identified concerns and where and how the board believes improvements can be made should then be passed on to the chairman and company secretary to enable a suitable action plan to be created ensuring any points are tracked and actioned. For example, the evaluation may expose a crucial skills gap so perhaps the recruitment of an additional director who holds the relevant skill, or further training can be arranged for the board in order to up-skill members could be the answer.
An effective board evaluation is an organic and dynamic tool and should continually adapt. Being at the centre of the evaluation, it often falls to the company secretary to conduct an appropriate post-mortem of the process. This could simply be carried out by recording their personal experience of the evaluation and seeking feedback from board members.
A review provides an opportunity for the board to provide insight on the key themes of the evaluation and highlight if a theme potentially requires further probing in future evaluations.
A repeating reported issue during board evaluations is a lack of engagement and obtaining responses from directors. This can be hugely frustrating for the company secretary, but the evaluation process may help uncover the reasons behind this non-engagement and provide useful insight to how efficiencies could be created to streamline the process for future years.
Alongside a resulting action plan it’s now also a good time to review the board’s current succession plan, traditionally reviewed following the departure of a board member. However if a skills gap has already been identified during the evaluation, it may be wholly appropriate to revisit the plan earlier or to even adopt a new plan to ensure that any gaps are covered in the future.
All companies should have an appropriate succession plan, which according to the FRC’s Guide on Board Effectiveness, should cover the following different time horizons:
- contingency planning – for sudden and unforeseen departures
- medium-term planning – the orderly replacement of current board members and senior executives (e.g. retirement)
- long-term planning – the relationship between the delivery of the company strategy and objectives to the skills needed on the board now and in the future.
A different year may call for a different approach to board evaluations. It is recommended FTSE 350 companies undertake an independent review of their boards every three years; but given the year all companies have been through, it is probably worth considering whether now is the time to consider whether a full independent review conducted by the third party is more appropriate.
There are many independent reviewers that offer a professional service to conduct a board evaluation, which gather qualitative and quantitative data, and allows boards to benchmark its performance against its peers. Independent reviewers can also bring broader, different sector experience which could help boards identify topics that they had not considered previously or areas which are pertinent to their business or sector and as such can be a valuable addition to the process. Even more so in the wake of the pandemic.
2020 and beyond
During this past year, COVID-19 has undoubtedly tested boards across the world. Consequently, a detailed board evaluation will be even more key to measure performance during 2020; what lessons have been learned; and, what changes should be implemented for the future in order to improve board governance.
Interviews will play a large part in board evaluation, providing opportunities and a space for board members to open up and share their views on what went well during the year and what could have been done better.
It’s important that the company secretary and the chairman take the lead on ensuring the results of any evaluation are reported back to the board and incorporated in the company’s future strategy. Whilst COVID-19 is heavily regarded as an anomaly for the moment, its ability to unearth which companies were prepared for a crisis is undeniable; therefore a 2020 board evaluation with a particular focus on COVID-19 will be a useful tool to help prepare for an unpredictable future.
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