Board evaluation offers an opportunity to reflect on directors’ overall effectiveness and address any gaps or concerns. In-House Perspective assesses why that’s important and how in-house counsel add value.

Boards of directors must place monumental recent events – from the Covid-19 pandemic to the war in Ukraine – in the context of longer-term systemic risks such as the climate crisis and inequality. In short, they’re increasingly expected to understand a broad range of risks and opportunities. Board evaluation offers an opportunity to reflect on directors’ overall effectiveness and address any gaps that may arise.

The specific requirements for board evaluation vary across jurisdictions. In some regions it’s a legal requirement – for example in Spain or for US companies listed on the New York Stock Exchange. In other jurisdictions, evaluation is recommended by their corporate governance codes or guidelines.

The exact requirements or recommendations differ between regions, with some needing evaluation annually or every three years, and some simply requiring a ‘regular’ evaluation. Different jurisdictions ask for different aspects of board performance to be assessed. The UK and France require an external evaluator to carry out the process every three years. Some jurisdictions, such as Brazil, Canada, Japan and Spain, recommend that individual directors are assessed. Germany doesn’t specifically recommend board evaluation is carried out at all.

Despite these different expectations across jurisdictions, there are commonalities in best practice. These may have arisen because international institutional investors expect the same standards to be applied across all of the markets they operate in. James Beasley, Senior Director and Head of Board Advisory EMEA at the Nasdaq Center for Board Excellence, says the techniques used by external evaluators are often similar across jurisdictions despite the differing formal requirements. He also highlights how cultural differences can influence the approach taken. For example, in Europe it’s normal to assess board dynamics by being present in board meetings to observe them, but there’s a reluctance in the US to do the same because the culture is more litigious.

The purpose of board evaluation

Board evaluation prompts senior directors to step back from what’s an increasingly demanding day-to-day agenda and perform a sense check of how well they’re doing. This can cover how they perform as a group, as well as the progress of each individual director. The process allows directors to think about the issues to address, where they feel they could do better and how to improve. It should also bring to the surface any issues impeding board effectiveness. Abhijit Mukhopadhyay, Committee Liaison Officer for the IBA Corporate Counsel Forum and President (Legal) and General Counsel at Hinduja Group, based in London, says that ‘board evaluation is extremely critical because businesses have become very complex; the geopolitical risks have become severe’.

Anthony Goodman, Senior Client Partner, ESG and Head of Board Effectiveness Practice at global organisational consulting company Korn Ferry, based in Boston, US, says that often board evaluations are backward looking. He argues it would be more beneficial for an evaluation to look forwards and be linked to the organisation’s strategy. For him, ‘a really effective board evaluation would be thinking about how [to] future proof the board’. Taking this approach would also avoid the evaluation becoming purely a compliance exercise.

Beasley says spending too much time looking backwards can be limiting because it can result in the evaluation being viewed as a standalone process that’s put on a pedestal. This makes it a distraction, with a significant amount of time spent on the final report. Equally, when boards look ahead to the next evaluation with this mindset, it can be distracting because they lose focus on current pressing matters requiring immediate attention. For Beasley, evaluation should instead fit in with the board’s priorities. It should be undertaken as part of a wider process of continuous improvement rather than becoming an attempt to solve all of the board’s problems at once.

For Sharon Constançon, CEO of corporate governance company Genius Boards, the evaluation has two main aims. The first is to examine governance and process, asking whether the board ticks the necessary boxes covering independence, confirmation, structure or skillset. These are all tangible areas of board performance and when problems arise, their solutions are relatively easy to identify.

The second area of focus is boardroom dynamics, which Constançon breaks down into looking at leadership and how the board functions as a team. She says assessing dynamics involves ‘working out those little things around being mindful, listening, [emotional quotient] EQ, showing respect, challenging effectively, being supportive, working out how you can create a team dynamic’.

Susan Stenson is CEO of Independent Audit, where she runs its team of board effectiveness professionals. She says that ‘board directors and management are more prepared to put [dynamics] on the table as an issue or something that they want to look at compared to three years ago’. This could be because the Covid-19 pandemic forced many boards to pay more attention to the wellbeing and mental health of their employees and this focus has remained.

Beasley says that often when a director is asked what it’s like to be part of a board, or how it’s run, their response will be an observation of dynamics. ‘Whatever it might be that they say, they’re naturally thinking about dynamics,’ he explains. For Beasley, directors acknowledge dynamics are important because fundamentally the board is a group of people, not just an entity that exists on paper.

It can be hard for directors themselves to voice their concerns about boardroom dynamics because successful boards are often built on trusting relationships and collegiality. External evaluation can be valuable, therefore, in giving directors an opportunity to speak about any issues to an independent third party. It can also encourage the board to invest the necessary time in improving dynamics.  

Helping boards focus on strategy

During the Covid-19 pandemic, many boards were forced to become more involved in the operational side of the business. In some cases, this was because they had more experience of handling a crisis than management did. Now that the worst of the pandemic has passed in many countries, these boards are finding it hard to let go and return to their oversight role. Board evaluation is playing an important part in helping directors to identify how to be strategic and to know when they’re overstepping their remit and crossing into management’s responsibilities. Goodman says working on this issue highlights why it’s beneficial to evaluate each board member as well as the group as a whole. He also says the technique of holding up a metaphorical mirror to the board can be useful in this context because it helps directors see what they’re doing and what needs to change.

According to Beasley, ‘there’s quite a lot of reflecting going on amongst boards around oversight of change and how close they can get to things that are pretty transformational for the organisation’. The volume of transformation that’s currently taking place as organisations respond to the big issues of the day ­– from cybercrime and the climate emergency to the war in Ukraine and the cost of living crisis – has really brought this issue to the fore.

There’s more demand from boards for expertise in governance to help them define where the board’s role begins and ends. ‘How do they get close enough to be comfortable and understand,’ asks Beasley, ‘but far enough away that they’re not being presented with every single working paper?’

General counsel and company secretaries can help the board return to being strategic by looking at the agenda for an upcoming meeting and considering whether the board is focusing on the right issues, helping directors to find the correct balance between strategic and operational matters. 

A board that’s fit for the future

The issues that boards are required to respond to now extend beyond the lived experience of many incumbent directors. Boards need to hire directors from under-represented backgrounds who can bring their varied experience and cognitive difference to the boardroom table. Having a diverse board will empower the organisation to respond to the issues of the day.

According to Goodman, ‘boards are much more interested in their composition than they were a few years ago’. In part this is because of a greater awareness of social issues following events such as the Black Lives Matter protests, especially those of 2020, as well as the way in which the Covid-19 pandemic focused attention on wellbeing and mental health. The board also needs to have access to specific expertise to address certain challenges, such as digital transformation or the climate crisis. This has raised questions about whether boards currently have the right skills around the table.

Stenson says increased diversity in the boardroom is ‘changing the topics of conversation and the kinds of conversation, the way that conversations are conducted in boardrooms’. She sees this as the ‘living impact of diversity in boardrooms,’ where individuals from different backgrounds approach an issue from a variety of perspectives, which in turn ‘surfaces a different kind of conversation’.

As boards hire more directors from under-represented backgrounds, an inclusive culture is required to ensure they get the most value from each new recruit. Inclusion will be the next challenge for boards. Directors will need to move away from thinking about whether a new board member will be a good fit for the group and instead further consider how the board can be reshaped to accommodate different types of directors. Constançon believes there should be mindset training for board directors and ‘policies that support equitable treatment […] so that we can foster an environment in which diversity will deliver value’.

For Stenson, inclusion is about seeking out the contribution of all directors. She says this isn’t happening enough and believes ‘it is incumbent not just on the chair, who has a special role, but on all directors to seek out the contribution of their colleagues, especially those who tend to be quieter’. This is particularly important in the context of groups such as boards of directors who have been working together for some time. It can be hard for a new member of the group to penetrate that culture and make an impact.

Stenson argues that to date board agendas haven’t changed as dramatically as the world around them and that to an extent boards are stuck in the same pattern. Board evaluation can offer an external perspective to help directors understand how they need to change to be fit to respond to the issues of the day.

Board evaluation can help boards understand what terms like environment, social and governance (ESG) mean in the context of their business and how they can translate them into practical strategy. Stenson says there’s often a mapping exercise to be done to show boards that a lot of the work they’ve already done on areas such as diversity and inclusion falls under the ESG umbrella, and they don’t need to consider ESG as a standalone topic.

Investors are putting pressure on boards of listed companies in particular to respond to the modern agenda, asking if the board is fit for the future. This is pushing board evaluations to focus more on areas like board composition and less on process. Stenson is surprised investors don’t make more use of the board evaluation process to understand how well the board is stewarding their investment. ‘That nexus between the shareholder side and the board [needs] to be strengthened and will be strengthened,’ she says, ‘and the evaluation process is a really good way of doing that.’

How legal can add value

General counsel can play an important role in maximising the value of the board evaluation process. Sometimes the general counsel will own or run the evaluation process, either conducting it internally and reporting on the findings or acting as the main point of contact for the external evaluator. Goodman says ‘they are often the people making sure that the process we’re going to go through is effective’.

Stenson believes that ‘when it comes to the evaluation, the perspective of the general counsel is essential’. She argues that the general counsel is the protector of the director in terms of their fiduciary duties. As such they need to be comfortable that the board is covering the right issues in the right way, bearing in mind the heightened risk of legal action being taken against boards for breach of fiduciary duty on areas such as the environment.

In some jurisdictions, general counsel who also hold the company secretary position are the most likely to be involved in the board evaluation process. Mukhopadhyay says the company secretary often works with the chair of the board and the chairs of the remuneration and nominations committees to develop an evaluation process. ‘If I am asked who are the two people you will contact if a board evaluation process has to be developed, I will always say general counsel and company secretary,’ explains Mukhopadhyay.

There’s scope for general counsel to brief an external facilitator on the kinds of compliance knowledge board directors need, as well as the kinds of geopolitical risk they should understand. They could also brief the facilitator on any areas of concern they may have about how the board functions, for example if there are dysfunctional relationships between directors. General counsel who attend board meetings are particularly well placed to gain insight into these areas and alert the evaluator to them.

Stenson says general counsel’s insights are valuable to external facilitators because they help them get to the truth and facts of the matter. ‘The most important thing when we’re working with boards is absolute transparency and honesty,’ she says. ‘As a lawyer you’re trained to present information clearly and objectively […] so it’s very helpful for us to be presented with information in that way.’

Beasley says board evaluation works best when there’s a good working relationship between the chair and the company secretary or joint general counsel and company secretary. He says the evaluation process offers a good opportunity to foster that relationship more. General counsel who also hold the company secretary position can gain more insight into the chair’s thought process from going through evaluation, for example, finding out what the chair considers to be a priority or area of focus.

General counsel may have ownership of any action plan that comes out of an evaluation, enabling them to influence which findings are prioritised. They may also have a role in putting action points into practice. Constançon says the most important thing general counsel can do is stand behind the findings of the evaluation, because they have kudos and integrity, and directors trust their perspective. They can coach the chair and encourage them to accept any recommendations coming out of the evaluation, citing their own professional perspective of the issues they raise. She argues that ‘there is a massive role of mentoring that a general counsel can carry out around the board evaluation outcomes’.

General counsel could request a one-on-one meeting with the external evaluator to be briefed on their most important findings, some of which may not be included in the final report if they are sensitive. This would be particularly beneficial if the general counsel isn’t on the board or doesn’t attend board meetings.

Beasley says some boards consider effectiveness as an obligation and feel that reflecting on it is an important responsibility. He argues that boards don’t have to wait a year to do this. He says general counsel can play an important part in initiating mini-reflections after decisions have been made, getting feedback from the board on how they think it went and possible improvements.

Goodman argues that general counsel are uniquely placed to add value to the board evaluation process. ‘Higher board functioning is something that makes a huge difference to them in their job,’ he says. ‘They don’t have any vested interest in a particular individual or a particular business decision, their interest is […] that the board should be as effective as it can be.’