Posted: 9th November 2018
Setting the Scene
The 2017 PWC Annual Corporate Directors Survey reported that “46% of Board members think at least one existing director needs to be replaced and 21% say two directors need to be replaced.” This result comes despite the significant efforts undertaken in director selection, annual self-assessments and third-party evaluations (the latter two ‘as required’ or optional).
Recent articles have called out a commonly held view that Board Chairs prefer to let directors ‘serve out their term’, irrespective of poor performance rather than face a difficult discussion with a director. Whilst initiating a tough conversation with a Board member about poor performance may be uncomfortable, the Chair must do so with urgency, or risk damaging the board’s overall performance. Not only that, they also risk losing the commitment and engagement of other directors. These discussions are made much easier if you have the right information.
Clarify the Board’s culture, values and behaviours
The Financial Reporting Council (FCR) Corporate Governance Code (the ‘Code’), and Boards in general, focus attention on the ‘culture of the organisation’ but rarely on the ‘culture of the boardroom’, and that really matters to a Board’s effectiveness. It is typically the culture – those shared values and established behaviours – that most negatively impact a Board’s impact and directors’ morale.
During Board evaluations, directors often tell me about that one Director that ‘doesn’t pull his or her weight’, ‘doesn’t spend enough time with executives’, ‘comments on what is in the board papers but nothing further’, or ‘criticises ideas put forward without offering suggestions’.
These behaviours which, can seriously damage the morale within the boardroom if left unaddressed, need to be brought into discussion. This is easily done by holding a session in which the directors openly discuss what is expected of each other, how ‘we are going to work as a board and individuals.’ Some boards find it helpful to brainstorm specifics of what ‘good’ and ‘not good’ behaviours are, thus bringing the values to life. A discussion about how you will collectively manage behaviours that fall outside those expectations is highly recommended.
Reflect your culture, values and behaviours in the director recruitment process
The Code states that “It is important to build a proper assessment of values and expected behaviours into the recruitment process”. It is quite easy to miss this important point, which is rather buried in the Code.
The only way to get the right values and behaviours into the Boardroom is to define them and then recruit specifically for them. I have reviewed many Board director job specifications and attended countless interviews, but the behavioural specifications rarely go beyond comments such as “demonstrated ability to work as part of a team”, “respectful challenger”, etc. These are fine for early-stage discussions but, in later, stages it is important to specifically discuss these expectations with candidates.
I recommend you cover these behavioural expectations with every candidate, even those who are highly experienced. Sometimes they are the ones who are most challenging to manage, operating under assumptions brought from previous board experiences. Remember, also, to explain these expectations to executive directors who are joining the Board.
The Board’s annual self-assessment – Room for improvement
The Code specifies that an annual evaluation should be performed to consider, among other things, how effectively members of the board work together. Individual evaluations should demonstrate whether each director is continuing to contribute effectively.
In my experience, the individual evaluation and feedback process has consisted, primarily, of feedback provided by directors to the Chair, who then shares it with individuals. From time to time the senior director also collects information about the Chair. Third-party reviews gather performance information via interviews, but not systematically or quantitatively.
Reviews that include a specific focus on director behaviours can generate startling, actionable insights into the Board and individual members. Collecting and using actual data arms the Chair with a quantitative measure of how a director performs, vis-à-vis his or her peers, improving the quality of the feedback discussion. The proposed actions below are likely to result in increased director turnover – actually a positive thing, per the PWC report.
There are three actions your Board can take to make its self-assessments more useful, providing tangible information for the use of all Board members, and the Chair in particular:
- Develop and utilise a ‘director behavioural scorecard’ – This should be a list of expected behaviours, e.g. integrity, independent mindset / judgement, willingness to act, capacity to challenge, influencing skills, etc. Confidentially, facilitated by the Company Secretary (or third party), each director will rate his or her own, and his or her colleagues’ performance, in some cases twice, as a member and as Committee Chair. A scale of one to ten is recommended to ensure a useful spread of results.
- Share the overall results with the full Board and hold a high quality, candid discussion about those collective results. The Chair should hold one-to-one meetings with each Director – Armed with the quantitative results, each director will be able to see his or her performance relative to the collective results, relative to her or his self-assessment and to the full group’s range in ratings. The Chair will receive feedback from the senior director. This process and its outcomes should hold a stark light on the Board’s and directors’ performance.
- Take action based on the results – The root cause of the results mentioned in the PWC report is the discomfort and resultant unwillingness Chairs have in addressing performance issues. In the case of poorly performing Chairs, it is often the hesitancy of the senior director at the root. The data gathered through this self-assessment process will make these discussions easier. Discussions with weak directors are just as difficult as executive performance discussions, but even more necessary. Your high performing directors will thank you for it.
Whilst this is not common practice yet, I have spoken to numerous boards who have adopted some form of the above, keeping things simple to start. Some have tasked the Nominations Committee with responsibility for driving a firm-specific approach forward. I believe this practice will become more common in the coming years.
A simple, every-meeting self-assessment
If the self/peer behavioural assessment is currently out of reach for your board, try this idea. At the end of each meeting, allocate the last ten to 15 minutes to a self-assessment discussion. I suggest you begin with these five guiding questions (dependent on what is right for you):
- How would you rate our collective performance?
- How well did we focus our attention on the right issues?
- How did our behaviours match our expectations?
- What is the most important decision we made?
- What can we do better next time?
This type of reflective discussion will establish a foundation for the more robust ideas explained above.
I encourage you to try these techniques out. You will likely see the impact and satisfaction of the collective and individual directors improve dramatically!
Jeannette Lichner is a member of Huntswood's Regulatory Conduct Advisory Panel and leads Huntswood's Behavioural Evaluation solution.