10 Best Practices for Board Evaluations

The global financial crisis caused a serious rethinking of the place of the board of directors in the company’s management system. In this article, we will analyze the best practices for board evaluations.

The concept of the board performance evaluation processes

The strengths and weaknesses of corporate governance are determined not by formal and externally visible structures, but often rather by the qualitative and essential characteristics that distinguish a strong and active board of directors from a weak one. Some of these qualities are determined by who exactly serves on the board of directors and what contribution these individuals make to the common cause. Others relate to the processes and technologies boards use to plan succession, evaluate performance, and orient new directors. Others echo such a sensitive and difficult-to-measure topic as the relationship between the CEO and the chairman of the board of directors.

Board performance appraisal is becoming more and more common around the world and has Anglo-American roots. For many boards of directors, evaluation, whether conducted by an external organization or by structures within the company, is an important tool for ensuring high performance. Assessment is often used to identify weaknesses in the skills system of board members. This valuable information can be used by the HR committee when considering the appointment of a new director, or it can serve as an indicator of the need to change the composition of the committee, change the chairman, or adjust the way the board of directors and its committees interact. Ultimately, board evaluation practice is one of the few formal mechanisms that the board uses to critically reflect on performance.

Top 10 practices to evaluate the board of directors

Boards of directors are very complex social structures exercising a huge amount of diverse powers. And today it is becoming more and more difficult to be an effective member of the board.

The most active supporters of the introduction of the procedure for evaluating the effectiveness of the board of directors are institutional portfolio investors, whose activity and weight in leading Western companies are constantly increasing. This group of investors is looking for mechanisms that are designed to increase the effectiveness of control by members of the boards over the activities of top managers, to prevent abuses on their part

When evaluating the effectiveness of the board as a whole, the following 10 best practices should be considered:

  1. Achievement of the goals set for the company.
  2. Availability and quality of required internal documents
  3. Influence of the board on improving the image of the company.
  4. Influence of the board on the personnel policy of the company at the level of top management
  5. Effectiveness of protecting the interests of shareholders and other participants in corporate relations.
  6. Effectiveness of the internal control system.
  7. Evaluation of the quality of the work of the board by top management, the constructiveness of relations with management.
  8. Availability of a risk management system.
  9. Compliance with the company’s corporate governance code and other corporate governance standards.
  10. Degree of implementation of board decisions.

The choice of indicators depends on the objectives of the assessment, the company’s capabilities (technical, financial, etc.), the composition of the board, and other factors. Ideally, the metrics should be determined before the elections: the members need to know how their performance will be measured. Following the best standards of corporate governance, the company should develop evaluation indicators both for the board as a whole and for each member, including the chairman.

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