Grading the Board: Board Evaluations, Based around Recognised Best-Practice Models, Are Widely Seen as an Important Method for Developing Better Corporate Governance
McCormick, Iain, New Zealand Management
CORPORATE governance is defined by the OECD as the "structure through which the objectives of the company are set and the means of attaining those objectives and monitoring performance are determined".
The importance of good corporate governance has grown rapidly as a result of the scandal associated with American companies including Enron and WorldCom and in New Zealand with the failure of Feltex and a range of finance companies. This has stimulated the creation of legislation like the Sarbanes-Oxley Act in the United States, while agencies such as the New York Stock Exchange and the New Zealand Exchange have defined best practices in the hope of improving corporate governance.
Board evaluations, based around recognised best-practice models, are widely seen as an important method for developing better corporate governance. The New Zealand Exchange Corporate Governance Best Practice Code endorses regular board and director evaluation, an approach also adopted by others such as the Toronto, London and New York stock exchanges.
Higher investor expectations of corporate governance, together with globalisation and the need for international competitiveness, will continue to drive the importance of board effectiveness and the use of director evaluation.
Director evaluation involves board members undertaking a constructive but critical review of their own performance, identifying strengths and weaknesses, then writing and implementing plans for further professional development. The provision of feedback on board performance and governance processes is the most crucial element of the director evaluation method for stimulating board development.
There are many benefits to be gained from director evaluation. The process identifies weaknesses for skill development and strengths that can be further built upon. Evaluation enhances relationship building by encouraging open communication amongst board members and management. It increases performance by clarifying roles, expectations and responsibilities, and by fostering collaborative goal setting. Board evaluation leads to specific improvements in board focus, strategic planning, efficiency and time management.
Increased performance leads to increased board productivity. This has been confirmed in a survey involving 3000 of the largest US companies by recruitment consultancy Heidrick & Struggles together with business improvement organisation The Corporate Board. They found that nine out of 10 companies which undertook director evaluation said the evaluation made their boards more productive. Further evidence was reported in the Harvard Business Review in 2004, based on a survey of 200 large corporations, where director evaluation was found to be among the top activities to improve board performance.
The benefits of evaluation extend to the board as a whole and to individual directors. The benefits for individual directors include building greater levels of professional leadership, greater role clarity, teamwork, accountability, decision making, communication and more effective board operations.
Institutional investors clearly believe enhanced director performance is worth paying for. Consultancy firm McKinsey & Co surveyed more than 200 institutional investors in 31 countries in 2002 and found about three-quarters of investors were willing to pay more for shares of companies with good governance. They suggested price premiums averaged between 12 and 14 percent in North America and Western Europe, 20 to 25 percent in Asia and Latin America, and more than 30 percent in Eastern Europe and Africa.
The contents of director evaluation questionnaires are typically based on established governance frameworks principles and codes such as those from the OECD, the World Bank or the London Stock Exchange. The London Stock Exchange's Practical Guide to Corporate Governance is a particularly well written, clear and helpful guide. …