By Dr. Debra Brown – President and Chief Executive Officer of Governance Solutions
Is your board frustrated with its approach to board evaluation? Are you tired of filling out survey after survey and not seeing any meaningful benefits for your efforts? Do you ever wonder why you are asked to answer so many seemingly pointless questions?
With the proliferation of governance consultants, do-it-yourself directors and cut-and-paste evaluation questionnaires has come a hot mess of evaluation tools that only serve to add confusion rather than value to the governance system. It is no wonder that some boards question why they even bother.
Don’t throw the baby out with the bathwater
The primary purpose of board evaluation is to improve board performance and so to add value to the organisation and its governance. Evaluation does this by identifying areas of strength and weakness in the governance system and the role the board plays in it. Evaluation, therefore, remains a needful exercise for any board.
The solution to problematic evaluation processes and tools is to use a tool that aligns with the purpose and process of governance and the fundamental roles and tools of the board itself. The benefit of this approach is that evaluation surveys are laser-focussed on adding value to the governance system and the organisation overall.
This article provides a clear governance framework for board evaluation that is designed to test board effectiveness in governance and organisational oversight – the job of the board. Nothing more, nothing less. It examines the definition of governance and the duties of the board, describing these in five levels of governance and it provides an example of some evaluation questions aligned with this framework along with a sample ‘board evaluation scorecard’.
If we grasp the definition and purpose of governance and the role of the board, then we can understand the competencies and functions the board must excel at. It stands to reason then, that those are the areas the board should focus on and test in its evaluation. This will allow the board to determine where it is strong and performing well and where it is weaker and not performing as well as it might.
The definition of corporate governance is ‘the system by which organisations are directed and controlled’ and this definition provides an excellent framework for board evaluation. Boards fulfil their governance duties by concentrating their time, energy and focus on strategic direction and control:
- Direction Setting of direction and strategy, planning, risk governance, delegation, policy setting and resourcing
- Control Oversight and monitoring, evaluation and measurement of the plan, risk, people, policy and disclosure
The board, as the governing body, sets the direction and uses its controls to ensure the organisation is on course. For an organisation to be strategically ‘in control’ means the board has confidence, or reasonable assurance, that the organisation is moving in the direction it has approved. While the board focusses on strategic direction and control, the CEO performs the actual day-to-day work of the organisation, developing and delivering products and services.
The work of the board and CEO is integrative. They are partners collaborating in achieving the organisation’s mission, vision, goals and objectives. Each does what they are uniquely equipped to do and each respects the other’s potential to succeed and to excel.
Boards seek and need to fulfil their governance duties in each of these five areas, corresponding to their main roles in direction and control:
1. Strategy setting and accomplishment The directional side of strategy answers the question: Where are we headed? The primary role of the board is setting (approving) the strategic direction of the organisation, including playing a role in strategic planning. Everything else in governance and operations flows from strategy – strategy is the master, governance is the servant. This calls for a wide range of strategic information, from environmental scans, SWOT, situational and sensitivity analyses, to financial projections. On the control side, the board must monitor the strategy to ensure the organisation continues to head in the direction that was set and ensure effective reporting to principals on the results. This answers the question: where are we compared to where we say we would be?
2. Performance and risk oversight and monitoring The directional side of performance and risk oversight answers the question: what obstacles and opportunities might we face along the way (to where we are headed)? This includes setting risk appetites and tolerances, key performance measures and targets. On the control side, the board must gain reasonable assurance that the organisation is going – and can be expected to continue to go – substantially in the direction that the board approved. This role calls for the largest amount of strategic information, often for committees of the board, including enterprise risk management assessments and mapping, financial statements and variance analysis, performance dashboards or scorecards and non-financial and policy monitoring reports. This answers the question: how do we measure up and how well have we mitigated risks and acted on opportunities?
3. Care and oversight of people The directional side of the care and oversight of people answers the question: who will do what? In addition to ensuring the CEO is providing effective oversight and care of the organisation’s human resources, this involves directly managing the employment relationship with the CEO. On the control side, this is the most hands-on role of the board and consequently calls for more detailed strategic information on the CEO’s performance, leadership and relationship expectations and results, as well as robust compensation information. This answers the question: how well did we perform?
4. Policy creation and oversight The directional side of policy creation and oversight answers the question: what are the boundaries and guidelines? The board must set policy for management to follow, as well as the board itself and the organisation. These are the high-level guiding policies – the non-negotiables – that guide the work of management, the board and the organisation. This means establishing policies and the control framework within which management operates (the ‘why’ and the ‘what’). But it does not mean dictating procedures (the ‘how’). On the control side, the board oversees the fulfilment of policy for management, the board and the organisation. This answers the question: how effective are our policies and what must be adapted or updated?
5. Allocation and distribution of resources The directional side of the role of the board in resources answers the question: how will we resource our efforts? While the control side answers the question: how are we doing compared to budget? Fulfilling the role of the board in resource allocation and distribution is not as simple as approving and monitoring a budget. It means providing oversight of the business plan (including human resources, facilities and technology plans), as well as external and public disclosures of strategic information by the organisation. The board has a role in signing off on corporate disclosures, encompassing the whole gamut of periodic and continuous reporting, beginning with budget approval, playing its role in internal and external audit and culminating in the annual report, audited financial statements and annual filings. An evaluation tool that assesses the board’s effectiveness in these five levels of this systematic framework will provide powerful insights into board performance and practical value-added diagnostics on where to invest efforts to enhance that performance.
Figure 1 (above) gives examples of some of the questions the board should ask itself in each of the five levels of governance. By asking questions directly targeted on each role of the board using this framework, the output of survey data collected becomes more meaningful and nuanced. The board can pinpoint exactly which area, or areas, of the governance system needs the most attention and improvement, and it can help to prioritise efforts.
Consider the tabulated results found in this board evaluation scorecard (see Figure 2) created using the five levels of governance framework. It is easy to see that this board needs to do a better job in its role in strategy – specifically, in the directional side of strategy. The board is doing a reasonably good job in the direction and control of resources. It could do better in the direction and control of risk, people and policy.
It is reasonable to observe that without a clear strategy, it is difficult to effectively oversee risk, people and policy – this pattern is clearly recognisable. If this board were to focus its efforts on improving its capacity and time spent in strategy direction, it would have the added benefit of raising its level of effectiveness in each of the other areas within its scope of responsibility. This in turn will strengthen the strategic focus of the entire organisation and have positive implications for the other levels of governance.
By asking questions directly, driven by the five levels of governance, and organising survey results according to those levels, evaluations are focussed, directive, meaningful and add value to the organisation and its governance.
About the Author:
Debra Brown is the founder, President and CEO of Governance Solutions Inc. Since founding GSI in 1991, Debra has developed it into a full-service firm providing governance consulting, research, training and tools. Additionally, Debra is the founder and a lead faculty member of The Professional Director Certification Program™, a world class, online director education and certification program.
Currently, Debra serves on major international boards, and has worked in corporate governance in North America and as far afield as Malaysia, Bahrain and Guatemala. She is an acknowledged and sought-after thought leader in corporate governance, authoring over two dozen major research articles published in Canada and internationally. Prior to forming Governance Solutions, Debra spent several years in the Canadian financial sector, working most recently as CEO.