Directors’ behaviours are often the root cause of corporate board failings

That’s why robust board evaluations need to go further than assessing corporate governance processes and structures to address the real behavioural aspects and interpersonal dynamics at work and how they help or hindering board effectiveness.

The UK Corporate Governance Code 2018 (‘the Code’), which applies to many publicly quoted companies in Ireland, recommends that FTSE 350 companies conduct externally facilitated board evaluations at least every three years. Chairs of private companies, or companies who seek to comply with the Code, are also encouraged to conduct external board evaluations periodically.

A good board evaluation will call out the opportunities and challenges, supporting the evolution of the board in tandem with the evolution of the business and the industry it occupies. The output from the process can provide a level of comfort to the board that it is on the right track and that its composition is setting it up for success.

The Institute of Directors (IoD) in Ireland has been conducting board evaluations since 2010 and has built up a significant competence. This year, it conducted research among boards who had recently been through an external board evaluation. Twelve boards participated in the research. One-to-one interviews were held with participants.

The findings were striking. An evaluation focused on board processes and structures was seen as sub-optimal; board members have limited patience for a one-size-fits-all approach based around a best practice governance blueprint. They also don’t want the board evaluation assessors to tell them how to run their business.

Directors put most stock in an assessment that looks at how board dynamics and behaviour impact effectiveness. A board evaluation is not an assurance exercise or a compliance exercise. A chair must work with the board assessor to get the best from the process, even if this means accepting scrutiny upon their own performance.

Company context is another key consideration to take into account. The board assessor must possess the experience, inquisitiveness, and analytical skills to understand the context of the board and company.

‘Context’ encapsulates the journey the company is on, whether it is a subsidiary or a parent board, the company size, board size, the industry the company operates in, whether it is regulated, stakeholders who influence board composition and company business, as well as other unique characteristics of the business such as ownership structures. The board assessor must understand these contextual characteristics, as well as the timing of the evaluation process.

The IoD research found board members regarded emotional intelligence, empathy, and interpersonal skills as key attributes of the assessor.

Board assessors must absorb a great deal of information and must have the ability to “take the individual directors’ input and present a report that lands with a collective audience while demonstrating to individuals that they were heard”, as one participant observed.

Another research participant reinforced this point, saying: “Sometimes, directors are sitting on an egg waiting to crack it. The board evaluation gives them an opportunity to crack the egg.”

Boards are willing to commit time to the process but want it to add value and be more than a box-ticking exercise. When done effectively, the process enables a board to take a step back and reflect on its operation and effectiveness, as well as that of its committees.

The IoD research has informed the Institute’s own external board evaluation offering but, more significantly, it provided encouraging insight into the long-term benefits to be derived by boards from a well-executed board evaluation.

Dr Margaret Cullen is a Board Evaluation Assessor with the Institute of Directors (IoD) in Ireland.