Loretto Leavy and Ruth Sealy from the University of Exeter Business School have been conducting research to better understand behavioural dynamics on boards and how behavioural dynamics can drive positive change. In the first phase of their research, they analysed practice by looking at detailed reporting of FTSE 350 companies to develop guidance. The next phase will involve facilitated consultations on behavioural dynamics using their draft guidance. In this blog, the fourth in a series of six, Loretto and Ruth outline their findings in relation to ‘evaluate and act’.
Evaluation of the directors, committees and boards with resultant action is key to the ongoing health of boards. Although there are greater regulatory requirements for evaluation than for most of the other behavioural dynamics processes, there remains significant variance in approach. We have analysed the actions of 50 FTSE companies and categorised these actions into three levels of maturity which highlight the key variances and reveal a reluctance to report transparently on resultant actions in less mature boards. We highlight that evaluation should continue to be led by the chair, supported by the company secretary, as a key method for board improvement. However, we recommend that evaluation processes and actions are overseen by the nomination committee (NomCom) to ensure that they are connected closely with the appointment and re-appointment purpose of the committee.
‘Evaluate and Act’ Maturity Map
Board evaluation is an important tool for continual improvement. This includes reviews of past performance by diagnosing areas of good practice and identifying future areas of development including those which need to be addressed before reaching a crisis point. Action reporting can be used as a powerful tool for board change which progresses the maturity of a board and informs your stakeholders of this maturity. This tool for change is particularly distinct when boards are under stress or have new leadership. Although evaluation is important, acting on the results is paramount to achieve continual progression; hence, we reflect this importance by calling this process ‘evaluate and act’.
Our research focused on FTSE boards as they have had an increased level of reporting since 2019. FTSE boards are required to report on how the board, committee, chair and director performance reviews were conducted including any external reviewers, the outcomes and actions taken and whether it has or would influence board composition. However, in our research of 50 FTSE companies we have seen varying levels of disclosure. We have used the variation to highlight three emerging patterns which reflect different proportional responses.
At the most reactive level, we have approaches which acknowledge that evaluations are taking place predominantly via questionnaire and focusing on the board, with sparse detail on committee reviews, and no detail on director reviews. In the case of director reviews, this lack of detail is concerning as the reviews are relied upon for re-election and re-appointment proposals. In these board reports there are minimal references to actions and no supporting explanations for this non-compliance with the UK Corporate Governance Code. The board questionnaire approach may be proportional to boards in a steady state, those new to UK listing, or founder companies. However, the lack of transparency on director reviews and the actions taken, restricts the view for stakeholders of how the board is continuing to develop.
The more pre-emptive approach grasps the full spectrum of the reviews of boards, committees and directors. This normally happens via questionnaires and interviews but with the focus on actions to be taken within the year. It is important to note that the director reviews undertaken are those of the non-executive directors and this includes a review of the chair undertaken by the senior independent director (SID). This approach was undertaken by the majority in the sample, and we suggest that it may therefore be a sufficient delineation of baseline practice for large and highly regulated boards.
Finally, the more proactive approach, builds on the prior levels but with a more focused approach on actions. The actions are reported for the prior year and for the current year along with the outcomes of those actions, these often include named owners and sometimes have deadlines for action. In some cases, the actions are used as objectives for the board, committees and directors. Actions relate to composition and design, succession, engagement, behaviours and training and development. Boards carrying out the more proactive approach are doing so due to increased market or regulatory requirements, or to address specific board issues, or due to their overall higher maturity level. These boards demonstrate transparent reporting of actions which challenge cited deterrents such as action confidentiality and sensitivity. The proactive approach also gives the report reader a continuum of 18 months of board development to assess which is useful for board understanding by interested stakeholders and gives a fuller demonstration of the UK Corporate Governance Code action reporting requirement.
For external triennial reviews all boards reported external reviews which included questionnaires followed by individual director interviews. For proactive approaches, external reviews also include the observation of the board and committees in action. However, board and committee observation appear to be a UK centric practice. Pre-emptive and proactive boards use the three year annual review as the key anchor to structure three year programmes. The review timeline for triennial reviews was altered when there are significant pressures affecting the board such as a new chair, changed composition, changes reacting to a strategy or market change. Actions highlighted from board evaluation appear as a distinct method to progress maturity of responses with stepped changes seen in composition and NED succession approaches, particularly so via externally facilitated reviews. The use of an external evaluator allows additional independence in the review, although with any review there is a level of discretion given to the lead as to the key areas to review and the issues which will be highlighted as part of the report.
Workshop feedback
The sessions emphasised the key drivers for evaluation processes as: regulation; the perception of the chair and board regarding the usefulness of evaluations; a significant amount of facilitation supplied by the company secretary; and the issues being presented to the board at the time. Within these contextual influences, we discussed that the most appropriate approaches were being adopted by boards on a case-by-case basis. For example, a board may run a basic questionnaire-based programme until a significant issue arises which changes the approach to a more detailed evaluation process. Additionally, it was noted that some boards had structured multi-year programmes which included interim reviews to assess the board’s role in key issues they have faced.
In those boards which perceived the evaluation to be a tick-box exercise, little value was received. However, the perception was that evaluations were now more accepted (possibly due to regulation), and that boards which fully engage with the process get useful development points and interlinking with re-appointments and other behavioural dynamics processes. The interlinking of evaluation with other processes under the NomCom was agreed to be useful in gaining a more strategic view of the future resources of the board, although we were cognisant of potential gaps between reporting and actions due to the transparency approach adopted by each board. The sessions confirmed the usefulness of the detailed Maps for company secretaries, their teams and for application to their boards.
Recommendation for NomCom oversight
Most of the sample discuss evaluations in the corporate governance section of the report rather than the NomCom report, with relatively few reporting in the NomCom section or including this within their NomCom terms of reference. In the UK, the UK Corporate Governance Code infers that evaluation should be under the review of the NomCom as it is included with the NomCom report requirements. However, it does not explicitly state this and supporting FRC UK Corporate Code Guidance highlights that discussions of outcomes of triennial reviews should be discussed with the board. Recent CGI guidance on board evaluation for listed boards, implies that NomCom has a role in board evaluation.
We reiterate that the chair is responsible for evaluation delivery as supported by the company secretary, with the SID playing a role occasionally within the sample. Additionally, we endorse that the board should discuss the outcomes of the review. However, within these responsibilities, we recommend NomCom has oversight of the process and delivery of the actions of the board, committee and director evaluations, as seen in a small number of boards in our sample. Our recommendation is influenced by: the heavy agenda burden on most boards of large, regulated organisations so that detailed oversight might not be possible; the need for the board to maintain focus on strategy and running of the business; to take advantage of the established position of relying on committees to focus on detailed supporting processes; and to ensure that evaluation reviews are not artificially decoupled from related appointment and re-appointment decisions and their link with composition, design, induction, training and development. Additionally, the NomCom review allows for additional oversight of the process for evaluation and action delivery by providing a structured method for addressing the discretion given to those leading reviews in choosing question areas and actions.
Board Behavioural Dynamics Research
‘Evaluate and Act’ is part of a bundle of actions deployed for board behavioural dynamics. This mapping is part of our work on defining the ecosystem for board behavioural dynamics. It is sector and jurisdiction agnostic although size is a factor, with the mapping aligned to boards of large, highly regulated companies and organisations. Our research is part of a board behavioural dynamics research programme. As part of the wider research programme, we will be exploring the board design and maturity as part of chair and SID interviews.
Please register for further workshops and Guidance updates here.
Loretto Leavy FCG and Professor Ruth Sealy, University of Exeter Business School
