Creating a dynamic and resilient board through board evaluation

With the Covid-19 pandemic, company boards aren't focusing on governance alone. The attention is now firmly on the environmental and social in their environmental, social and governance (ESG) imperatives.

In the new normal, there is increased pressure on boards and management to deliver returns in a complex and disruptive environment. The challenge around governance is to create a dynamic and adaptive model, venturing beyond its traditional fiduciary responsibilities.

While shareholders elect directors, a board is self-governing as long as it operates within the established rules and regulations. Over the years, many boards have adopted internal board evaluations while some have engaged external advisers for a more objective assessment.

The Financial Times recently reported on how Wirecard and Carilion failed despite their annual board evaluation exercise. While board evaluation is not foolproof against company failure, it does provide early detection, which can lead to the right changes. It is somewhat akin to a health screening where the diagnosis and recommendations are based on medical science.

In board evaluation, it is based on human judgement and best practices. Thus, it is the governing body − the board itself − which needs to agree on the issues, prioritise, and decide what to do. There lies the risk of board evaluation becoming merely a compliance exercise with little else achieved.

In Aon's recent analysis of more than 25 boards in South-east Asia, we found that most of the boards scored themselves three or more points on a five-point rating scale across categories during self-evaluation. Keeping in mind the business disruption that has been in motion even before the pandemic, the lower-rated areas were managing human capital, mitigating disruption with forward-looking and objective views on emerging opportunities and risks, and keeping up with the pace of changes in the business environment when it came to directors' continuous education.

For many mature companies, improvement in these areas will help to govern their corporate restructuring to unlock or create new value. While most boards scored high on ESG, with the intensifying scrutiny and demand of investment managers, we expect heightened focus on the measurement and reporting of material ESG factors to the business.

The desirability of a dynamic board might seem to be common sense, but it is not easy to become one. Deciding what to focus on demands serious self-scrutiny, and many boards may be reluctant to do so because it takes time and can yield pointed criticisms.

A dynamic board must continually reassess its own internal functioning and achievements along with the long-term opportunities and risks, its engagement with management, oversight practices and priorities, and stakeholder communication. A dynamic board is only as good as the capabilities it has onboard. Beyond that, it requires collaborative work, and a learning and responsive culture.

While there are several direct board evaluation methods, one less deployed set of tools is for the behavioral aspects of board culture and team profiling. Despite the stellar performance of individual directors, the board could be sub-optimal. This is where board culture comes into play to address the gap between the current and the desired. We measure board culture along dichotomous variables such as internally versus externally focused; conventional versus innovative; reactive versus proactive.

At an individual level − if one director thinks in terms of the big picture when another is more focused on details, or one is more practical and consistent while another is more abstract and flexible - a thorough profiling of each director's attributes may help to improve the team dynamics.

To make the best use of the diversity of individuals, the starting point is self-awareness. This begins with candid feedback and a genuine intention to improve rather than to check boxes of a list.

Getting the basics right makes it easier for a board to undertake the hard work of providing true oversight and to adjust the priorities of both the directors and the company.

Our research and insights with clients across the region have led us to distil the best suggestions for making the board evaluation process as effective as possible. Generally, the key isn't to do more but to focus more.

When everything is positively evaluated, focus on what is less so. Relative comparison of the questions and categories being evaluated is important in providing insight on what is not working as well as the others. Interviews and/or focus groups are invaluable for collecting qualitative data to corroborate or add to the quantitative data.

Few boards encourage their management to provide feedback on their effectiveness in addition to their self-evaluations. Done properly, this may not only improve the relationship between the board and management but also lead to a fruitful partnership. Board evaluation could also take away from the trends in continuous employee performance management by making it real-time and event-based, such as post-session feedback after a significant board interaction.

Going beyond self-evaluation, we have found that one of the best ways to inject external stakeholder views is in the form of adviser, shareholder, investment and business community feedback on the board's performance. There are proven tools and methodologies to make the board evaluation process generate explicit and tacit knowledge gained through insightful data analytics. Current culture should never be an excuse for not challenging oneself.