Evaluating boards

Written by Lawrence Zammit, 13 May 2013

One often asks what makes a board of directors an effective one. The answer could be that it makes the best use of its time, it is comprised of the right people, it has effective processes in managing risk, in evaluating the performance of the CEO and in developing strategy, and it provides effective leadership to the company.

Directors are used to evaluating other people’s performance; however they may not be accustomed to evaluating how they themselves are performing as a board. The 1992 Cadbury Report had recommended conducting an annual assessment of the board’s performance as a best practice in corporate governance.

Today the guidelines on corporate governance for public interest companies of the Malta Financial Services Authority mention that the board should regularly review and evaluate corporate strategy, major operational and financial plans, risk policy, performance objectives and monitor implementation and corporate performance within the parameters of all relevant laws, regulations and codes of best business practice. In addition the code of principles of good corporate governance of listed companies states that the board should undertake an annual evaluation of its performance and that of its committees.

The ultimate objective of such evaluations is that the board draws up an action plan of around three items that would enhance its performance. These evaluations can take the form of a survey, or a focus group or one-to-one interviews or even having a third party attend a board meeting and providing feedback. There is no need to use the same process year in year out.

Even though the guidelines and principles published by the MFSA refer only to public interest companies and to listed companies, an evaluation of the performance of the board of directors is of benefit to any company.

However the key point remains. Is the board fulfilling effectively its responsibilities? How effective is the board of directors being? Does it provide insight and support to the CEO and the rest of management? Is it capable of judging the performance of the CEO? Are board meetings characterised by sufficient and useful two-way discussions on the issues facing the company?

An objective and transparent board evaluation process can give meaningful answers to these questions.

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