By Vindel Kerr, Contributor
IT is ironic that at a time when Government, the business sector, civic society and even the church are calling for higher levels of performance, more transparent business dealings, and greater trust by stakeholders, those who call the shots among these groups are left generally unmonitored with little accountability.
A very important group that comes into question is the 'board of directors'. Performance evaluation is almost non-existent among board of directors in Jamaica. This is rather interesting when one considers that the said board of directors should be fulfilling one of its key roles that of monitoring management and the performance of the CEO, based on objective criteria.
This author is therefore suggesting that the time has come for the Jamaican corporate boardroom to take a closer look at itself in the context of ensuring a formal and structured programme of director evaluation. The evaluation of the board of directors has been gaining momentum as a very important element in good corporate governance among top European and American firms. It is a practice now being rapidly adopted in countries in Africa and Asia. In Jamaica, at least one publicly listed company has so far introduced a system of self-evaluation. Albeit speculative, it has to be seen as a step in the right direction. Board evaluation is non-existent among Jamaican state-owned companies and there is unquestionably the need for such governance practice, given the grim performance of many state-owned companies in Jamaica.
A CASE FOR BOARD EVALUATION
Performance measurement enhances the effectiveness of directors and thus further reduces the risk to the organisation. The obligation to embark on an annual formal evaluation ensures that the board takes time to reflect on its own performance. The primary purpose is not just to improve performance, effectiveness and the contribution of each director, but also to improve the effectiveness of the board as a whole in fulfilling its role.
Formal evaluation once per year should not replace informal feedback on performance on an ongoing basis, although establishing a formal evaluation methodology provides an objective framework for analytical feedback to the board and members of the nomination, appointment or succession planning processes.
Any board evaluation framework should provide for ensuring that the chairman is accountable when giving advice about board members to the board (and chief executive), and ultimately responsible for the effective performance of the board. Some chairmen often operate like army generals. They ought to realise that board processes and behaviour must be driven on a basis of trust, consensus decision-making, and a deep sense of commitment. Many directors would undoubtedly be sensitive to board evaluation. Many believe there is an element of voluntary devoted service; they also believe their contribution should be gratefully received and not questioned.
Well, I have news for those who dare to embrace such feelings. Board directorship is not a badge of prestige it is hard work. If a director does not have the time, energy and skill, he should not accept the appointment. It is an onerous task that is now accompanied with significant legal obligations (albeit protection for directors by said statutes). Hence, they should therefore be assessed for performance standards in the same way executive management are evaluated and are being rewarded on their levels of output and value-added to the corporation.
While some directors will reject the evaluation process, others are grateful for an objective framework in which to compare their performance with others, or to improve their contribution in the boardroom. Within this context, experienced directors can offer practical support to first-time directors. To avoid putting first time directors in an awkward position, the purpose and intent of the evaluation exercise should be clearly communicated when practised.
Chief executives are now, more than ever, under increased scrutiny and pressure to perform at high standards, to return maximum value to firms, and with their pay packages being dependent on their performance. Peer review is becoming more prevalent as an integral part of professionals monitoring their own performance. It is equally relevant that directors also have a performance evaluation. Through this process, members and stakeholders can ensure that the board is adding value to the organisation and fulfilling its legal obligations.
Director evaluation needs to be seen as an important way forward in the corporate sector, with introduction of codes of best governance practice in Jamaica.
WHO SHOULD EVALUATE THE BOARD?
While self-evaluation, that is, peer evaluation among board members, has been playing a critical role in providing important feedback, it is not necessarily accepted as a valid process among external stakeholders. External stakeholders require a more objective and independent assessment, and as such, the board should be evaluated by an independent element. In most jurisdictions where corporate governance is now highly developed, it is a common thing that 'board services' firms are contracted to conduct independent evaluation of the board. This is happening for both private and public sector companies in countries like New Zealand, Australia, Korea, Germany, Denmark and Belgium, and many others.
BENEFITS OF BOARD EVALUATION
Some potential key benefits of board evaluation are:
- It puts directors under pressure to perform and by so doing, they usually
add value much greater than in situations where this kind of monitoring is
not the norm.
- It encourages feedback and hence provides a basis for self-examination.
- It can reveal or clarify information provided by whistle blowers of the
board.
- A reliable framework of board evaluation will safeguard the integrity of
the board in the eyes of each other and the firm's external stakeholders.
- Board evaluation can assist in identifying high performers and hence serve
to guide future selection criteria of a nomination or appointment committee.
- Maybe the most potentially beneficial contribution of a well-crafted evaluation
tool could be its use as a reliable measure by the minister (state-owned boards)
or chairmen and/or shareholders (private or publicly listed boards), to determine
which director(s) to re-appoint or not to re-appoint to the board.
POSSIBLE EVALUATION CONSIDERATIONS
The following are some issues that may form part of a framework agenda of a
board appraisal or evaluation exercise. The issues identified are not limited
to any specific company or monitoring approach:
SHAREHOLDERS
- What is the board's relationship with monitoring agencies?
- What is the health of the relationship with the shareholders?
- To what extent do company objectives reflect stakeholder expectations?
STAKEHOLDERS
- Who are the key stakeholders?
- Is there a stakeholder communications policy?
- Is there full and accurate reporting by the company?
THE CORPORATION
- What is the status of the level of strategic planning? Is its quality and
content appropriate and sufficient?
- How accurately is the strategic plan indicative of an operational level
in the business plan?
- Does the board review the company's performance against the business plan?
COMPANY DIRECTION
- Is the board's monitoring of the company satisfactory?
- Are critical success factors being identified?
- How well are these critical success factors being identified and discussed?
THE CEO
- Is the CEO performance moni-tored and appraised satisfactorily?
- Is he/she satisfactorily supported and given the needed resources?
- How well is the CEO's job defined? Is the board getting involved or intruding
in the CEO's and management's responsibilities?
BOARD MEETINGS
- Is the board ensuring information received is adequate, timely and accurate?
- Is board attendance and members' participation going well?
- Are accurate and timely minutes made and maintained?
- Is there satisfactory follow up on actions taken by the board?
INDIVIDUAL BOARD MEMBERS CONTRIBUTIONS
- How is the chairman executing his role?
- Is there recognition and use of individual board members' skill and expertise?
- Are members utilising their 'boundary spanning' role to the benefit of the
firm?
CONCLUSION
In the final analysis, an effective board employs objective criteria to determine
future direction. An effective board is accountable, seeks to determine value-added
and reward performance to ensure continuity and ensures continual improvement.
Of all things, an effective board strives on performance of the highest standards.
Good corporate governance is about maximising a firm's value, ensures continuity,
adopts and practices the concept of meritocracy, and reinforces high ethical
and socially accepted business practices. A system of holding the board accountable
in the same way management is held accountable is a demonstration of leadership
by example it is nothing more and nothing less.
Vindel Kerr is the Founding President of the Centre for Corporate Governance,
Strategy and Competitiveness a management, taught leadership and agribusiness
consulting firm. He lectures and is involved in corporate governance research
for doctoral studies. Contact: vkerrl@anngel.com.jm
