Board evaluation

On 21 January, the Institute published 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.

In addition to the review, we have also published:

• 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.

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.

All these documents can be downloaded at: https://www.icsa.org.uk/knowledge/board-evaluation-report