There is ample evidence that failures in corporate governance are often related to behavior and dynamism among directors. Bild einer Bildagentur
Numerous failures in corporate governance at home and abroad show that it is typically the behavior and dynamics of directors that impair the effectiveness of company boards, and not their formal processes and structures.For this reason, sound board reviews need to go beyond assessing corporate governance processes and structures to take into account the real behavioral and interpersonal dynamics at work and how they support or hinder the effectiveness of the board.
The UK Corporate Governance Code 2018 (the “Code”), which applies to many listed companies in Ireland, recommends that FTSE 350 companies conduct externally assisted board reviews at least every three years. Chairmen of private companies or companies that wish to adhere to the Code are also encouraged to conduct regular external assessments by the board of directors.
A good board of directors assessment will highlight the opportunities and challenges and the development of the board along with the development of the business and the industry it occupies. The results of the process can provide some comfort to the board that it is on the right track and that its composition prepares it for success.
The Institute of Directors (IoD) in Ireland has been conducting board evaluations since 2010 and has built up significant expertise. This year, it conducted an investigation among boards that had recently undergone an external board evaluation. Twelve panels took part in the investigation. One-on-one interviews were held with the participants.
The results were striking. An evaluation focused on committee processes and structures was viewed as suboptimal; Board members have limited patience for a unified approach based on best practice governance. They also don’t want the panel’s reviewers telling them how to run their business.
Most directors value a review that examines how the dynamics and behavior of the board of directors affect effectiveness. A board assessment is not an exam or compliance exercise. A chair must work with the panel’s assessor to get the most out of the process, even if that means reviewing their own performance.
The business context is another important aspect to consider. The panel assessor must have the experience, curiosity and analytical skills to understand the context of the panel and the company.
“Context” encompasses the company’s journey, whether it is a subsidiary or a parent board, company size, board size, the industry in which the company operates, whether it is regulated, stakeholders who make it up of the board of directors and the company’s operations, as well as other unique characteristics of the company such as ownership structures. The panel’s reviewer must understand these contextual features as well as the timing of the assessment process.
IoD research found that board members viewed emotional intelligence, empathy, and interpersonal skills as key attributes of the assessor.
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The panel’s assessors need to absorb a lot of information and be able to “take in the submissions of each director and produce a report that will resonate with a collective audience while showing individuals that they have been heard”, such as a Participant noticed.
Another research participant reiterated this point, saying, “Sometimes directors sit on an egg waiting to crack it. The board rating gives them an opportunity to crack the egg. ”
Board members are willing to invest time in the process, but want it to add value and be more than a tick box exercise. When this process is carried out effectively, it enables a board of directors to step back and reflect on how it works and how effective its committees are She provided encouraging insights into the long-term benefits that boards can get from a well-conducted board assessment.
Dr. Margaret Cullen is a Board Evaluation Assessor at the Institute of Directors (IoD) in Ireland.
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