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:
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...
- 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...