Self or other: directors’ attitudes towards policy initiatives for external board evaluation

Abstract

Recurrent crises in corporate governance have created policy pressure for greater attention to the effectiveness of boards. Since the 1990s there have been calls for boards to undertake regular self-evaluation. Since 2010, the UK Corporate Governance Code has urged large corporations to engage outside parties to conduct such appraisals at least every three years, a move other jurisdictions have copied. Despite its importance, little research has been conducted into processes or outcomes of board evaluation. This study explores the attitudes of directors on board evaluation, whether self-administered or facilitated by others. We interviewed 17 directors with some 50 listed-company board appointments between them. Even though their companies fall below the threshold specified in policy, all undertake board self-evaluations and evaluations using professional facilitators. We find broad acceptance of the principle and recognition of the value of board evaluation. We also find some acceptance amongst those directors who have implemented external evaluation of the benefits of using outside facilitators. Their evaluation of the evaluation process points towards a need to professionalise the practice of outside facilitation, and to conduct research into the skills and knowledge needed and the processes used.

Determinants of the quality of external board evaluation in the UK

“…Moreover, these prior studies investigate neither the quality of externally facilitated board evaluation nor its determinants. Our paper, developing a measure of the quality of external board evaluation and demonstrating some effects of the timing of adoption and types and degree of independence of external facilitators on it, augments the limited empirical research in this space (Booth and Nordberg, 2020). Independent 121 0.22 0.09 0.00 0.47 0.19 0.10 0.00 0.42 0.08 0.10 0.00 0.40 Non-independent 30 0.15 0.08 0.00 0.32 0.19 0.13 0.00 0.47 0.07 0.08 0.00 0.30 Relationship is not disclosed 44 0.16 0.09 0.00 0.34 0.15 0.10 0.00 0.44 0.05 0.10 0.00 0.23…”

“…It has the benefits of being less costly and offers confidentiality from outsiders (Kiel and Nicholson, 2005). However, individual directors may not raise concerns and may provide the highest possible scores to themselves in self-evaluation (Booth and Nordberg, 2020;Kiel and Nicholson, 2005). Research also shows that self-evaluation fails to result in any action for the improvement of board working arrangements and processes (Booth and Nordberg, 2020;Rasmussen, 2015).…”

“…More so, the few studies in this area frequently rely on survey or interview responses from a limited number of respondents, due to the difficulty in accessing high profile board members. However, scholarly interest in external board performance evaluation has been renewed recently because of the recent policy initiative to improve board accountability in the UK (Booth and Nordberg, 2020;Rasmussen, 2015;Dulewicz and Herbert, 2008). Dulewicz and Herbert (2008) surveyed 29 FTSE350 company secretaries and find that board performance evaluation results in significant changes in board membership.…”

“…Few other studies have examined the usefulness of the balanced scorecard in evaluating board performance and offered mixed evidence (Aly and Mansour, 2017;Northcott and Smith, 2011;Ling et al, 2009). In addition, very scant empirical studies in this space have used a limited number of survey or interview responses to understand the types of board evaluation conducted by companies and their possible consequences (Booth and Nordberg, 2020;Rasmussen, 2015;Dulewicz and Herbert, 2008). However, there is a paucity of empirical research that examines the quality of externally facilitated board performance evaluation and its possible determinants.…”

“…Therefore, this study responds to the call of Cuomo et al (2016), who invited scholars to explore practice variation in CG mechanisms across firms over time following institutional theory. Secondly, we contribute to the limited empirical literature on board evaluation (Booth and Nordberg, 2020) by showing some association between the types and independence of the external facilitators, and the quality of board evaluation. While many scholars (Minichilli et al, 2007;Long, 2006;Kiel and Nicholson, 2005) and policy initiatives (FRC, 2010) maintained that the characteristics and independence of external facilitators are critical, no prior study investigates the effect of types and independence of external facilitators on the quality of board evaluation.…”