SOCRATES memorably declared well over two thousand years ago that "the unexamined life is not worth living".
Sir Derek Higgs, who led the post-Enron review of corporate governance in the UK, must share his views, since the revised version of the Combined Code on Corporate Governance, introduced in 2003 in the light of his study, went behind the boardro
om door for the first time and introduced the concept of board-level evaluations.
The board of every UK listed company is now called on to "undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors".
An effective evaluation is a powerful tool that will enable boards of listed companies – and indeed those of privately owned businesses and their equivalent in the public and charitable sectors – to unlock their full potential. A modest investment of time can yield very substantial returns even for well-performing boards.
Mazars' survey of FTSE 350 evaluations shows that most boards are generally making good progress in embedding evaluations into their boardroom practice. In their latest annual reports, for example, 96 per cent of FTSE 100 companies and 93 per cent of their FTSE 250 counterparts reported that they had undertaken an evaluation during their last financial year.
Almost a third of FTSE 100 companies are also now making voluntary disclosures related to findings arising from them.
Strategic issues featured prominently in the disclosures of leading Scottish companies, as they do for the FTSE100 generally. British Energy, for example, said it would focus in the coming year on strategy, nuclear performance, investor feedback, committee structures and governance and succession planning.
Standard Life also said it would spend more board time on group strategy issues as well as strengthening communications between the board and the group's principal subsidiaries while the HBOS board committed itself to devoting a full meeting to discussing long-term strategy.
For the best results, the board as a whole must have a sense of ownership of the evaluation process, under the chairman's leadership, and board members need to feel comfortable contributing their honest views on the board's effectiveness.
They must, in particular, be able to comment freely on possible areas for development (or weaknesses in non-HR speak). Evaluations should look at how the board works together as a team along with other aspects of its decision-making processes such as the areas on which the board spends most of its time, how it measures performance, the quality of papers presented and the way in which decisions are taken at board meetings as well as whether outcomes were as planned.
An effective evaluation will also include a follow-up plan covering agreed improvements, including implementation timescales. Meanwhile, good communication of its results internally, especially to managers, as well as to the market, will help foster a learning culture in the organisation – there is no better demonstration of a board's commitment to continual improvement and innovation than by promoting them in its own deliberations.
Using an external facilitator in their latest reported board evaluation represented a significant innovation for ten FTSE 100 companies, highlighting that practice in this area is still evolving. A further nine have had external involvement in each of their last three reported evaluations.
In total, 25 of them had external involvement in their last board evaluation – around double the proportion for FTSE 250 companies. By contrast, well over half of FTSE 100 companies have not reported external involvement in any of their last three evaluations and this majority group includes most leading Scottish companies apart from Scottish & Newcastle which had one of its evaluations externally facilitated.
The merits of an external evaluation are naturally linked to the personal qualities of the lead facilitator and the methodology adopted but they do have a number of potential strengths. As a result, more boards are likely to consider using them in the coming years, perhaps as part of a two or three-year cycle, with internally facilitated evaluations in the intervening years. They can provide a fresh and independent perspective and help ensure that evaluations do not become too routine in nature, with the concomitant risk of them being seen as a compliance exercise rather than business driven.
They can also on occasion bring to the surface important issues that board members are aware of but which it may be more difficult to raise in an internally-led review.
As boards get used to, and indeed value, the examined life, it is important for them, however, to remember they should look back principally to learn from past experience rather than to allocate blame where, with hindsight, matters might have been handled differently.
Evaluations should above all be forward- looking and focused on ensuring the board is in the best possible position to face current and future challenges successfully.
• Anthony Carey is a partner in Mazars LLP, which has offices in Edinburgh and Glasgow.
The full article contains 834 words and appears in The Scotsman newspaper.
