Good governance practice asserts that a board should work to continuously improve the way it fulfils its responsibilities. To enable this, it is essential that Boards undertake independent evaluations which help them to identify gaps in their governance framework and opportunities to enhance their Board performance and inform succession planning. The aim of the review is to evaluate the effectiveness of the board including its clarity of purpose, its committee structures, individual directors, risk oversight, culture, Board composition, the Chair, or a combination of these and more elements.
Importantly it should evaluate the extent to which the Board is future focused and applies its time to strategies critical to the business rather than spending the bulk of its time looking through the rear vision mirror.
¹It is common and in fact ²recommended for boards to undertake an internally-managed board review on an annual basis and an independent externally facilitated review every 2 – 3 years.
Use of independent third-party governance experts, such as VUCA, to design and facilitate the evaluation process is increasing. The Commonwealth Government, in relation to ³government business enterprises, prescribes that an independent review is undertaken every 2 years and the Charity Governance Code with regard to NFP entities recommends an independent review every 2-3 years.
The benefit of a third party, independent of the company and the board, means that unbiased participation in the evaluation process can meaningfully enhance the objectivity and rigor of the process and results. Trust in the process and its confidentiality are critical for success of the evaluation exercise, for trust is the best incentive to encourage candid input and feedback from the Board members.
Third-party experts can identify blind spots and provide new and different perspectives gained from their experience and work with other companies. These insights and considerations are designed to lead to improved governance practices, stronger board compositions more reflective of the strategic intent of the organisation and actionable outcomes which will enhance the overall performance and effectiveness of the Board.
The use of independent third-party governance experts may be especially helpful when:
- The board believes an independent third party can objectively bring new perspectives and issues to the board to help raise the bar in its performance and inform succession planning
- There is a significant strategy which impacts on the risk appetite and risk profile of the organisation
- The board has not seen significant change in composition over a period of time and new perspective is required on board composition and performance
- The organisation and its board are facing and addressing a major challenge/change
- The board wants to demonstrate best practice and provide members with assurance that the Board is performing in accordance with 1AICD governance principles
- To provide validation to each Director that he or she is adding value to the Board’s composition
- Board wishes to demonstrate its accountability through genuine and open assessment of its effectiveness and performance
- Building trust and confidence in the organisation’s governance structures with shareholders, donors, or funding bodies.
Board evaluations can also help boards reset expectations for directors and management and strengthen the board’s relationship with management. They can also identify opportunities to adapt and advance board leadership, structure, dynamics, decision-making processes, operations, information practices, committee terms of reference and education opportunities.
Disclosures about the board’s evaluation process and high-level outcomes can enhance understanding and trust in the objective rigor of a board’s oversight by offering a valuable window into the robustness of the board’s self-assessment and its commitment to continuous improvement.
Most importantly, the role of the independent third-party board evaluation becomes not only to review the current performance of the board but also to provide a development roadmap and recommendations to enhance the performance and the effectiveness of the board to govern into the future.
The structure of an effective independent third-party board evaluation is a combination of quantitative (survey data) which is one dimensional and qualitative (one-on-one discussions) which provides richer, more nuanced, and contextualized responses. Remember it is easier for a third party to tell the Emperor they are not wearing any clothes!
Contact VUCA Trusted Advisors to discuss your Board Review enquiries@vuca.com.au
References
¹ https://aicd.companydirectors.com.au/resources/not-for-profit-resources/not-for-profit-governance-principles
² https://www.charitygovernancecode.org/en/5-board-effectiveness
³ https://www.finance.gov.au/sites/default/files/2019-10/commonwealth-gbe-governance-and-oversight-guidelines-rmg126.pdf