Board evaluation in the post-pandemic world – technology to the rescue?

At the recent Governance beyond the pandemic virtual summit, we discussed the pandemic and its impact upon the governance landscape. A key area we looked at was how can technology be used in board evaluations.

In our session on Board evaluation in the post-pandemic world, Stephen Page, Head of EMEA Board Engagement at Nasdaq Governance Solutions, James Harley, Director of Strategy at Nasdaq Governance Solutions and Peter Swabey, Policy & Research Director at The Chartered Governance Institute UK & Ireland, explored:

• the purpose of board evaluations
• whether technology should be playing a bigger role in board evaluations
• why more boards (globally) are conducting self-assurance and peer reviews
• what board evaluation trends we see in the UK and the top 5 areas of disclosure
• what this means for governance professionals
• The value of harnessing diversity of thought

What is the purpose of board evaluation reporting?

This question requires two contrasting schools of thought to be considered, namely:

1. The purpose of board evaluation is to inform a continual process of self-improvement so that the board can provide some reassurance to shareholders and others that it takes its responsibilities seriously and is endeavouring to carry them out to the best of its ability; or
2. The purpose of board evaluation is to assess whether the board is effective, and thereby provide assurance on the future performance of the board and company.

This question was considered in last year by The Chartered Governance Institute as part of its ‘Review on the effectiveness of independent board evaluation in the UK listed sector’. The view expressed then was that the first of these positions was much more and that the principal purpose of a board evaluation is, therefore ‘to inform a continual process of self-improvement’. It would be surprising if many commentators dissented from this view.

On this reading, then, good governance for board evaluations is grounded in the board’s commitment to continuous improvement. It follows from this that the watermark for board evaluation reporting should be set at a level allowing stakeholders to make this judgement.

Should technology play a bigger role in board evaluations?

The answer here must surely be ‘yes’. Despite digital tools playing an ever-increasing role in board governance, the board evaluation process, both in-house and externally-facilitated, has been largely impervious to technology. This is strange given the pivotal role of boards and the clamour from all sides for greater board effectiveness and performance. Whilst not literally (although in some cases literally is the right word), the vast majority of board evaluations are still ‘paper-based’ with all the inefficiencies this brings  – including lack of security and confidentiality.

This state of affairs is particularly striking for peer evaluations. These require directors to rate the performance of their fellow board members and are naturally sensitive. To be effective, peer evaluations must be fully confidential; otherwise, there’s a serious risk that directors will not give candid assessments, devaluing the evaluation processes. Technology can play a big role here in the form of third-party operated cloud-based digital platforms. Using digital platforms, individual and consolidated peer reports are produced automatically for each director, together with reports for board, CEO and chair evaluations as necessary. To be meaningful, peer reports clearly need to include comments and ratings on different dimensions of performance from fellow directors. The benefit of a digital platform is that comments and scoring are randomised and cannot be attributed to any one director. Anonymity is assured.

Technology can help board evaluations in other ways. For example,  it can be used to generate sophisticated graphics and other visual aids (e.g. heat maps) for inclusion in reports, which when combined with directors’ scoring and responses to open-ended questions produces quantitative and qualitative information on a granular level. This information can be used for comparison purposes, not only within companies but potentially across organisations in similar industries, locally and internationally. Technology means that benchmarking board evaluations - and board performance - is now a real possibility.

Why are boards conducting self-assessments and peer reviews?

The reasons can be varied, but will usually be the result of one or more of the following:

• Exchange listing rules
• Corporate governance codes
• Regulators
• Investors and other stakeholders’ expectations for a rigorous board evaluation process
• Optimise benefit of an evaluation

What board evaluation trends are we seeing in the UK?

The new board evaluations disclosure requirements for FTSE 350 companies were effective from 1 January 2019. This meant that the accounts published earlier this year by most of these companies included the additional board evaluation disclosures. We pulled a random sample of 10% of these accounts to inspect companies’ reported evaluation outcomes, and this is what we found.

Top 5 areas for improvement

1. Better management of board meeting materials

The majority of companies in our sample cited board meeting agendas and board materials as areas where improvements could be made. This included comments ranging from rebalancing board agendas to allocating more time for strategy, risk and operations, to designing board packs better.

2. Increased stakeholder engagement

The need for greater stakeholder engagement by the board was a consistent feature. This was doubtless driven by recent legislative and other requirements requiring better engagement.

3. Continued evaluation of board composition and skillsets

Board composition and succession planning featured prominently, some highlighting the requirement for boards to understand better the talent pipeline at the executive and mid-management levels.

4. Improved understanding and oversight of risk

Many corporations are navigating a risk environment evolving in scope and complexity. We weren’t surprised, therefore, to see disclosures expressing concern about the board’s understanding and management of emergent risks.

5. Increased focus on strategic guidance

The need for boards to better oversee and monitor the execution of the strategy was a constant theme.

What this means for governance professionals

Greater transparency and accountability clearly underpin the new UK model for board evaluation reporting. It will be fascinating to see whether other jurisdictions follow suit, or if the greater disclosure will be outweighed by concerns that board collegiality and board relationships will suffer from heightened public reporting. Historically, the evolution of corporate governance in the UK has impacted boardrooms around the world. Time will tell if this extends to the greater disclosure of board evaluation outcomes, and governance professionals will doubtless be watching with interest. This is especially so if overseas group subsidiaries perform board evaluations.

The value of harnessing diversity of thought

Although ‘demographic diversity’, which looks at individuals in terms of the groups they form, e.g. ethnic, gender, age, or any other grouping, goes some way to introducing diverse thinking into a group situation, it does not, of itself, introduce ‘cognitive diversity’, which is concerned with differences and perspectives, insights, experiences and different thinking styles. Although there is often an overlap between the two types of diversity, they are two distinct concepts. That's because people from different backgrounds, with different experiences, often think about problems in different ways; in short, belonging to a different group does not necessarily mean bringing a different perspective.

We looked at how technology could be used to assess the different thought preferences within a Board. Not to be used as a gap analysis, but how different thought preferences could work together to add different dimensions to fixing a problem and ultimately decision making.

Download our board effectiveness report and guide here:

https://nq.nasdaq.com/BL_Top_5_Ways_Board_Effectiveness_Report

https://nq.nasdaq.com/BL_Top_5_Ways_Board_Effectiveness_Guide

Nasdaq Governance Solutions

Nasdaq Governance Solutions trusted board portal technology, board engagement services, and expert insights can help drive excellence and advance corporate governance practices. Nasdaq Boardvantage is designed with intuitive interface and security features to meet the critical meeting and collaboration needs of boards, committees, and leadership teams. Consultative board assessments, digital board evaluations, directors and officers questionnaires and surveys are also available as alternatives to paper-based processes. In addition, the Nasdaq Center for Board Excellence provides in-depth research and insights for board members to exchange ideas and discover valuable resources.

To find more about our Board Evaluations services click here:

https://www.nasdaq.com/solutions/board-evaluations