The UK Corporate Governance Code (the “Code”) requires companies with a premium listing on the London Stock Exchange to apply the Code on a comply or explain basis.
Many companies that are not required to follow the Code (PDF) also choose to do so as a matter of good Governance practice.
Principle 23 of the Code provides that a Company’s annual report should describe how their board evaluation has been conducted¹. In recent years there have been some notable governance failures, namely by British-born firms Sports Direct and Carillion plc, both prime examples of large corporations with ineffective governance protocols in place.
Following the demise of Carillion the Financial Reporting Council (FRC) updated the Code in 2018 to promote higher standards and transparency in corporate reporting. The FRC also published supplemental guidance on board effectiveness (PDF) with a key objective of promoting transparency and integrity in business.
The Code recommends that FTSE 350 companies have externally facilitated board evaluations at least every three years. Chairs of smaller companies are also encouraged to consider doing this periodically. External facilitation can add value by introducing a fresh perspective and new ways of thinking, and a critical eye to board composition, dynamics and effectiveness. It may also be useful in certain circumstances, such as when there is a new chair, if there is a known problem requiring tactful handling or there is an external perception that the board is, or has been, ineffective².
The board of directors are at the helm of a company and are instrumental in ensuring and insisting on implementing good governance processes and practices, under advice from the Company Secretary and/or Head of Governance. The primary purpose of the guidance on board effectiveness is to stimulate boards’ thinking on how they can carry out their role and encourage them to focus on continually improving their effectiveness.
Why is a Board Evaluation required and what are the key benefits?
- It can serve as an annual ‘health MOT’ for your board by assessing what, as a board you are doing well and identify any shortcomings and any areas for improvement.
- It enables a system of checks and balances between the non-executive directors and the executive and/or management team.
- Conducting and disclosing the results of your board evaluation can provide confidence to shareholders and stakeholders and attract future investment.
- It can enable the board and management team identify potential opportunities and areas for organisational improvement.
- It keeps board members informed and reminded of their role as director and fiduciary responsibilities.
- It provides directors with the opportunity to confidentially raise any concerns or provide constructive feedback.
- It can serve as an annual tool for the chair to address any performance shortfalls in the board or any of its committees.
It encourages a review of directors’ skill set and contributions and can highlight any requirement for further diversity on the board or its committees.
What are the methods of an Effectiveness Evaluation?
- Anonymous questionnaires or surveys, which can capture both quantitative and qualitative feedback and responses from directors on board performance, the performance of the chair and/or CEO and the senior independent director and other members on the board.
- Individual director interviews, which can be useful in obtaining tactful feedback on sensitive issues and encourage open and honest discussions.
- Board roundtables can also facilitate open discussions, and resolve conflicts.
As the Code is not mandatory, some companies may choose not to conduct an evaluation, however, board and committee assessments are a critical part of driving continuous improvement in board performance.
Good board dynamics and having the right mix of directors on your board is necessary for efficient and effective decision making. Directors have a legal and fiduciary duty to act in the best interests of the company and its stakeholders.
Here at Kin Company Secretarial, we can assist your company by conducting an independent board effectiveness evaluation by using the most appropriate method of evaluation for your company.
This can range from assisting with an annual internal evaluation or a fully facilitated external evaluation. Our experienced team will help you set objectives for your evaluation, facilitate the process, collate feedback and provide a confidential, anonymised report to your board, complete with useful action points, and identify key themes and areas that require further board consideration.
Find out more about effectiveness evaluation
For further information on the process and on how we can assist, please contact us by emailing companysecretary@kincosec.com or complete our online enquiry form.
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