First a question; will we ever get real about Board’s performance evaluations? To find an answer to it we need to make a current state assessment around it through the criteria given below.
Mandatory guidelines on Board’s performance evaluation under the current rules and regulations governing Corporate Governance
- Guidelines being substantive.
- Enforcement of the guidelines
- Assessment of compliance and reconciliation with financial and other public information
So, if you’re not able to come across tangible guidance on the matter through this criterion, rest assured, there isn’t much!
The governance in the area is in the form of broad principles, self-assessment or an independent assessment, quantitative versus effectiveness evaluation, etc. Principles to me are more personal than Corporate and thus we usually see that “corporate wisdom” holds sway in such decisions. So, for instance collectively:
- The Board will usually go for a self-assessment,
- The Board will tick in the box with quantitative data on meetings, attendance, appointments, remuneration, etc.
- The Board will have a minimalist criterion for its evaluation.
Let’s now add another important flavor to this debate; the Board that consists entirely of members representing Bodies/Entities holding stakes in the company, but not comprising of the owner/entrepreneur directly. Can such Boards and the Bodies/Entities they represent, also afford to be content with a minimalist (read tick in the box) performance evaluation?
I agree, the single most pivotal KPI is the shareholder’s return and if that’s in accordance with the expectations, there’s nothing to worry; right? But then, how do we know if the reported profit or a chunk is a creation not fully satisfying the financial statement assertions, or if the profit has been made at the cost of other financial and operational KPIs and significant downside risks like even reputation?
If the Audit Committee of the Board’s performance is not objectively evaluated at the time it was required (before D-Day) all that would be left would be external auditors for…. yes, that’s right……. scapegoating!
Ok, I get it, you would like to understand why the Board’s evaluation is a big deal after all. Let’s get to it right away now. When a Boards performance is not objectively evaluated, following could be the outcomes, of course, inconclusively:
- Board being unaware of its fiduciary responsibilities,
- Board not providing oversight, strategy and direction,
- Board rubber stamping management’s decisions instead of questioning them,
- Terms of Reference (ToRs) of the committees of the Board not aligned with their statutory and regulatory mandate,
- Committees of the Board not performing in accordance with the established ToRs,
- Committees of the Board lacking the skill set and resources required in fulfillment of their objectives,
- Board not aligning the minutes of meetings of its committees with the outcomes of related affairs,
- Board not establishing reporting requirements for its committee,
- Board not making inquiries of its committees on important findings and wrongdoings reported to these committee.
So that brings us to our core concern; if Board evaluation is that big a deal, why is it not being done substantively and objectively and especially for Boards not comprising of owners? Simply because everyone is in it for his Cut! A couple of established KPIs chiefly on financial and technical performance, not ensuring any wrongdoing is prevented or is adequately resolved to prevent recurrence but instead, ensuring a wrongdoing is not reported! And then having the KPIs self-evaluated.
Such a KPI system coupled with its self-evaluation serves the interests of employed-management and represented-board members, because they’re truly and wholly concerned about their Cut only. Long term corporate objectives like; sustenance, growth, diversification, reputation do not matter to these groups because they’re focused on their returns in the current term and because these things matter to the owners not as much to the employees; be it management or directors.
Solution you ask? Simply put; Board’s KPIs and criteria established by the owner in accordance with corporate governance framework; independent evaluation and reconciliation with all relevant information by external assessors and finally reported to the Owners and the Regulator.
Till then? Enjoy the rubber stamp Boards who look exceptionally good in……. meeting minutes!