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Best Corporate Governance Practices: Why Boards Should Evaluate Themselves

Best Corporate Governance Practices: Why Boards Should Evaluate Themselves

By Dorcas Karuana, 

Mounting stakeholders’ expectations, challenges faced by companies to operate under fluctuating economic conditions, pressures of globalization and increased regulatory requirements have brought the quality of performance of the Boards of Directors under greater scrutiny.

In Kenya, the Code of Corporate Governance 2016 requires a formal annual assessment of the effectiveness of the Board, its committees and that of the contribution of each individual directors, the Chairperson, Chief Executive Officer and company secretary to that effectiveness (Capital Markets Authority). In addition, a write-up of the evaluation process should be provided in the annual report.

Why have Board Evaluations

Simply having competent people of goodwill around a boardroom table does not necessarily result in an effective functioning board. Issues of structure, processes, and behaviour can detract from or add to the effectiveness of a board. According to a study by Delliote, 2014 on Performance and Evaluation for Boards and Directors a properly conducted board evaluation will help to flush out these by assessing matters such as:

  • Does your board meetings allow enough time for governance review, or if governance tends to be squeezed out of the discussion by ongoing business issues?
  • Are discussions open, frank and constructive, with all views considered, or are they dominated by key players?
  • Is the information provided to the board by your management is timely, appropriate, and sufficient and in a format that will foster a healthy review?
  • Do the board committees work efficiently?
  • Is the composition of the board optimal in terms of members’ skills, knowledge and diversity of experience, and outlook?
  • Would training help to remedy any identified weaknesses?

The Board Evaluation Process

In the conduct of their board assessments, the majority of companies in Kenya use internally prepared questionnaires or open boardroom discussions, and the chairman’s or nominating committee’s evaluations of board effectiveness. These methods do not offer confidentiality in Director’s responses hence lack transparency. More so, the whole process is labour intensive, time-consuming for board administrators costing the companies hundreds of thousands of dollars annually in resourcing; printing, distribution and labour.

Using an External Facilitators

A survey by the Institute of Directors (IOD) Kenya, 2015, shows that most boards continue to rely on internal assessments. Only 28 per cent of responding companies engage an external facilitator or consultant to help coordinate the process. An even smaller percentage use external support for assessment of board committees.

While external consultants can be seen as independent, using one consultant over a period raises objectivity questions due to possible internal interferences. Considering that these companies spend two months from the time they engage a consultant to draft questionnaires, administering them through to submitting a final report, this process costs companies between of $10,000 to $25,000.

Targeting Areas of Assessing Your Board Effectiveness

The Board performs three major roles in a company – it provides direction (i.e. sets the strategic direction of the company), it controls (i.e. monitors the management) and provides support and advice (advisory role). Board evaluation typically examines these roles of the Board and the entailing responsibilities and assesses how effectively these are fulfilled by the Board. The effectiveness of the Board depends on a variety of factors, some of which are:

  • Board Structure: its composition, constitution and diversity and that of its Committees, competencies of the members, Board and Committee charters, frequency of meetings, procedures;
  • Dynamics and Functioning of the Board: annual Board calendar, information availability, interactions and communication with CEO and senior executives, Board agenda, cohesiveness and the quality of participation in Board meetings;
  • Business Strategy Governance: Board’s role in company strategy;
  • Financial Reporting Process, Internal Audit and Internal Controls: The integrity and the robustness of the financial and other controls regarding abusive related party transactions, vigil mechanism and risk management;
  • Monitoring Role: Monitoring of policies, strategy implementation and systems;
  • The Chairperson’s Role; and
  • Supporting and Advisory Role

The evaluation of the performance of the Boards is essentially an assessment of how the Board has performed on all these parameters.

eHorizon eBoard Evaluation Assess Your Board’s Effectiveness

Examining so many areas of competence can be labour intensive and time-consuming experience, but it doesn’t have to be. Board management software solutions create a process for board evaluations that is far less time-consuming than manual processes. Board assessment tools like eHorizon eBoard Evaluation allow boards to save questions from year to year to evaluate and compare effectiveness progress over time. The whole board evaluation process is standardized making it easy to compare and contrast results.

eHorizon eBoard simplifies board evaluations process by allowing board administrators to use pre-designed templates that can be customized to various formats for the questions.  It’s easy to use features allow the board administrator to pull up readymade questions, review them for relevancy and once ready simply click on the names of board directors and shares with them all at once

The evaluation tool is intuitive and mobile-friendly. Board directors have the option of starting the evaluation at their own time, saving it and completing it later from anywhere then submit their responses at a click of a button. What’s more, the increased confidentiality of eBoard brings transparency to the director’s responses.

Administrators can easily track who has opened their questionnaires and get notifications when evaluations are completed and submitted.

Insightful Board Evaluation Results 

Once all the results are in, board administrators can pull all the information together in a few clicks. The program automatically creates charts, graphs and other visuals so the information is easier to digest and analyze. Board administrators can even download the results in various formats to use during presentations. eBoard Evaluation tool has been used by over 3,500 trusting board directors and executives across Africa and the Middle East since 2012.

The writer is the Marketing Communication Manager at Software Technologies Ltd.

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