Peter Crow
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On board reviews: providing some bite

12/9/2013

2 Comments

 
The much maligned board review process needs to be overhauled because the complex, socially dynamic, endogenous nature of boards—and the idiosyncrasies of human nature—render it somewhat toothless in many cases:
  • People don't like to "score" themselves or their colleagues harshly
  • People tend to have an artificially positive or negative view of performance
  • Differentiating between the performance of individual directors and the performance of the board (as a whole) is difficult
  • Even if a high-quality review is completed by an independent party, the results may still be ignored or suppressed by the board, for fear of reputational damage

Notwithstanding these challenges, the board is responsible for optimising business performance, on behalf of the owners. But how does one hold the board accountable, to ensure it performs well?

One approach to provide some bite could be to apply the "one-up" principle. It works well within organisations: the CEO is reviewed by the board, general managers are reviewed by the CEO, and so forth. However, the one-up principle is more notional for boards, so a variation is required. The audit process provides helpful guidance. In most companies, the owners appoint an Auditor (normally at the AGM), who is then responsible for providing a report to demonstrate that the accounts are a true and accurate record of performance. This is, in effect, a one-up process.

A similar process could be applied to board reviews, whereby a resolution is brought to the AGM to approve a Reviewer, who is charged with conducting a formal board review and reporting back to the next AGM. Such an approach would expose the review findings to the owners; give the owner's some teeth; and, enable the owners to hold directors accountable via the election process. It could be very threatening to some incumbent directors though...
2 Comments
Ben Pieters link
13/9/2013 14:24:46

I agree that an outsider should perform a board effectiveness review, but suggest that the net is cast wider than shareholders only. This is a critical task from a shareholder's point of view and requires experience, ability, insight and preferably a track record of previous reviews successfully undertaken. Unfortunately this does not come free ....

Reply
Peter Crow
13/9/2013 14:59:37

Hi Ben
Your comment has exposed a rather embarrassing assumption on my part. I assumed (but did not state) that the Reviewer would be selected via a proper process, just as an Auditor is. So yes, proposals, credentials and so forth would be required. I suspect the Reviewer's fee would be cheap compared to the reputational and direct financial implication of having an underperforming board in place.

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