By Na Boon Chong and Dr. Grace Wu, Aon Hewitt

Every effective team working together should conduct a periodic review to take stock of how it is progressing: does it still have the right set of skills to tackle the challenges ahead; does it have the relevant information needed; is it deploying the most appropriate processes in order to address the pivotal issues, make decisions, follow through, and inculcate the sought-after culture; and has it achieved the desired results.

It is no different for the team known as the board of directors. Perhaps, boards need a periodic review even more so than other teams. Although boards have charters, defined accountabilities and authorities, they do not work like management in executing these on a daily basis.

The use of a self-evaluation process to improve board effectiveness seems to have an obvious advantage. The code of corporate governance in many jurisdictions, including Singapore, has recommended this in its Code of Corporate Governance for public companies.

The Singapore Institute of Director's Board of Directors Survey 2008/2009 shows that 72% of the respondent companies adopted collective board evaluation, 47% adopted committee evaluation, and 52% adopted director evaluation. Many reported doing these evaluations "in house" by the chairman, a lead independent director, the nominating committee, or each director using a structured questionnaire or open-ended format (such as an interview or group discussion). Only 6% reported using an external adviser to assist in the process.

Regardless of whether it is done in-house or externally facilitated, what is important is getting good data with sufficient depth and coverage, making astute interpretations, and acting on the findings. Based on our experience having conducted board evaluations for many leading companies since the early 2000s, we suggest some guidelines in this article.

Evaluation at Board Level

Each director's view counts in a board evaluation exercise. Directors' views can be gathered via a structured questionnaire covering the relevant areas of the board's charter and accountabilities, plus other areas that are key to board effectiveness, such as having the requisite skill sets, chairmanship, a culture of constructive dissent, quality of information, and interaction with management.

While pure quantitative data has the advantage of being specific, scalable, and comparable across questions, year after year, or with external benchmarks, it lacks the richness of qualitative data.

The use of a structured questionnaire is best supplemented by a dialogue with the information provider, during which his/her views can be probed and expounded on. With a skilled interviewer, the quality of the information gathered can be significantly greater than simply filling in a questionnaire.

Some supplementary practices at this level include seeking feedback from members of executive management who interact with the board regularly; the external advisers who work with your board as well as other boards, thereby having a good basis to offer a a comparison; financial analysts covering your company; and shareholders at large. Pulling these various sources of feedback together would provide a richer, more holistic view of the board's performance.

Evaluation at Committee Level

Similar to the board-level evaluation, each committee member should evaluate his/her committee's effectiveness. Committee evaluation is receiving greater attention as more and more of the important board work is being done at the committee level. The areas to evaluate are generally the fulfillment of the committee charter and accountabilities, relevance of the members' skill sets, effectiveness of their decision-making process, and conformance to best practices.

Non-committee members should also be given the opportunity to provide observations and suggestions to the committee as part of its evaluation process. This is because, even though an issue may be delegated to a board committee, the committee's role is to make a recommendation to the board, with the board owning the eventual decision.

Evaluation at Director Level

It is hard to assess individual directors who, unlike management, do not have executive accountability and performance measures associated with their role. Furthermore, board effectiveness is about applying the collective wisdom of the directors, and assessing individuals runs the risk of destroying the collegiality of the board.

In view of these challenges, the board needs to have a certain level of maturity as well as receptivity towards feedback for individual director evaluation to be useful.

As directors are often equals, with the chairman being "first among equals", peer evaluation tends to work better than a top-down evaluation. The origin of peer evaluation is rooted in professional services partnership firms where a managing partner is selected among other partners who are highly accomplished in their own right.

A board, just as any team, is only as good as the individuals comprising it; therefore, a proper board evaluation process renders the evaluation of individual directors necessary. As the board meets frequently behind closed doors, peer evaluation is probably the best source of feedback. Under some circumstances when a board is less open to peer evaluation, we have introduced self-evaluation as a first step in getting the directors accustomed to the idea of a review and reflection.

Post-evaluation Activities

With the right evaluators providing the quantitative and qualitative data, what should one then do with the findings? These must be communicated to the right parties in an appropriate manner, leading to greater insight into any underlying issues and generating an improvement action plan.

We would generally suggest the following steps for a collective board evaluation:

A similar process would apply to the evaluation involving the board committee members.
Where the results of the evaluation concern individual director performance, the generally accepted approach is for the board chairman and/or the nominating committee chairman, with or without an external facilitator, to discuss the findings individually with each director.

We have seen other practices, such as having directors discuss their own results around the board table, a process that can lead to much greater mutual understanding. The success of such an approach depends very much on the introspection, confidence and honesty of the individuals participating in the process and the degree of trust and collegiality in their board culture.

In circumstances where the objective of the board evaluation is to assess the quality of board-management relationships (as in an executive management's evaluation of the board), results of the evaluation should be shared with the executive management team.

Implementation Process

While the potential contribution of a board evaluation seems obvious, the implementation process requires careful consideration.

Just as in most management practices, there is no one best way to carry out the evaluation. This is perhaps even truer at the board level because of the unique group culture formed out of the relationships among board directors.

A good starting point is to have a firm commitment from the whole board to put in place an evaluation process.

Searching for the appropriate means to conduct the evaluation becomes the next step in the right direction. Is it worth doing? No, if it is just to tick a box and say that we have done so. Yes, if it is to obtain genuine feedback to make continuous improvement.

As the saying goes: “Feedback is the breakfast of a champion.”

Contact

Na Boon Chong is a Managing Director, Executive Compensation & Performance at Aon Hewitt, and can be reached at boon.chong.na@aonhewitt.com. Dr. Grace Wu can be reached at grace.wu@aonhewitt.com.

This article was featured in Singapore's Business Times in January 2011.