London, 20 January 2021 – ICSA: The Chartered Governance Institute has today released the findings of its review into the effectiveness of independent board evaluation in the UK listed sector. The review, which was carried out at the request of the Department of Business, Energy and Industrial Strategy (BEIS), assessed the quality of evaluations and has identified a number of ways in which board evaluation might be improved.
Commenting on the findings, Sara Drake, Chief Executive of the Institute said:
“While there is no evidence to suggest that there is widespread market failure that needs to be corrected, we believe that there is scope for broader adoption of good practice and greater transparency on the part of both board reviewers and the companies using their services. It is for BEIS to decide what action to take as a result of our report, but we believe that those objectives should be pursued through voluntary initiatives, with appropriate encouragement from BEIS and the Financial Reporting Council.”
Alongside the report, the Institute has also published today:
- A voluntary code of practice for providers of external board performance reviews to FTSE 350 companies based around four broad topics: competence and capacity; independence and integrity; client engagements and client disclosure. Reviewers are asked to commit publicly to the standards in the code by becoming signatories
- Voluntary good practice principles for listed companies. Companies are encouraged to apply these principles when engaging an external board reviewer. The Institute considers that the principles reflect existing good practice
- Guidance for listed companies when reporting on their annual board performance review. The guidance is designed to assist companies with their reporting obligations under the UK Corporate Governance Code.
Minister for Corporate Responsibility Lord Callanan said:
“Robust, consistent evaluation of company boards will be crucial as we strive to make the UK the best place in the world to do business.
“This Government is committed to learning lessons from previous collapses, which is why my department commissioned the Chartered Governance Institute to work on a Code of Practice for boardroom evaluators.
“We welcome the Institute’s review. We will consider their recommendations carefully, and set out more details on next steps at a later date.”
Maureen Beresford, Head of Corporate Governance at the Financial Reporting Council commented:
“Board Evaluations are an important tool to support corporate governance in UK companies. The UK Corporate Governance Code recommends UK companies undertake an external board evaluation every three years. The FRC’s recent review of corporate governance reporting identified that many companies could improve their disclosures and highlighted areas for improvement. This is a welcome review and its recommendations should be considered carefully.”
Peter Swabey, Policy and Research Director at the Institute concludes:
“The primary purpose of regular board performance reviews is to help the board continuously to improve both its own performance and the performance of the company. Engaging an independent reviewer can bring greater objectivity and fresh insights to the process. It can also provide some reassurance to the company’s stakeholders that the company takes its responsibility for continuous improvement seriously.
“Having a voluntary code of practice and good practice principles will help listed companies to reap the most benefit from their board evaluations. The code will encourage greater transparency about how external board reviewers conduct reviews and what their qualifications for doing so are, rather than prescribe or standardise how reviews are expected to be carried out. Similarly, the principles will help to prevent conflict of interest and drive good practice.
“While it is possible to identify some elements of what would be widely recognised as good practice in the way independent reviews are conducted, it is not appropriate to be overly prescriptive. The support that is needed by one board may be very different from that needed by another. Excess prescription could deter innovation and competition. That said, it is legitimate for shareholders and others to expect greater accountability from both companies and reviewers as to how board reviews are conducted, and evidence that they are being undertaken robustly. Evaluating the board’s effectiveness may not be an exact science, but nor should it be a black box.”
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For further information, please contact Maria Brookes, Media Relations Manager:
mbrookes@icsa.org.uk
+44 (0)20 7612 7072
+44 (0)7890 649 143
Notes to Editors:
- The Chartered Governance Institute is the qualifying and membership body for governance with over 125 years’ experience of educating and supporting governance professionals. With a Royal Charter purpose of leading ‘effective and efficient governance and administration of commerce, industry and public affairs’, we provide professional development, guidance and thought leadership, and work with regulators and policy makers to champion high standards.
The Institute has divisions in Australia, Canada, Hong Kong/China, Malaysia, New Zealand, Singapore, Southern Africa, the United Kingdom and Zimbabwe. The division headquartered in London (known as ICSA: The Chartered Governance Institute) represents and supports members in the UK, Republic of Ireland, Crown Dependencies and associated territories, which include the Caribbean, sub-Saharan Africa, the Middle East, Mauritius and Sri Lanka. Website: www.icsa.org.uk - Background
In August 2018 the Department of Business, Energy and Industrial Strategy asked the Institute to review the quality of independent board evaluation in the UK listed sector and identify ways in which it might be improved. The Institute was assisted in this review by a Steering Group consisting of company and investor representatives. Following a public consultation exercise in 2019, the final report and recommendations was published in January 2021.
In conducting the review, the Institute considered not only the available evidence on the current state of the market for independent board evaluations in the listed sector, but also the potential impact of the actions taken by the Financial Reporting Council (FRC) in 2018 to strengthen the UK Corporate Governance Code’s provisions on conducting and reporting on board reviews. - The report, code of practice, principles and guidance can be downloaded for free at www.icsa.org.uk/boardevaluationreview