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Board Effectiveness & Performance

Professor Thomas Clarke


Alice Klettner

UTS Centre for Corporate Governance

Wednesday 27 October 2010, ASX Sydney


Boards of Directors

Out of the Darkness


Boards of Directors

Into the Light


Research Project

This research is primarily motivated by the call for further vigilance and
effort to strengthen corporate governance. While it is uncertain if the
worst of the global financial crisis has passed, the expectation remains
that boards should not just monitor management, they should also take
full responsibility for their own performance to ensure business
longevity at the optimal level that shareholders also seek.

The regulatory changes occurring overseas also suggest that interest


in board evaluation is likely to increase over the next few years. Taking
into account that corporate Australia is part of the international
financial landscape, it is prudent to understand how our directors
conduct board evaluations and if improvements could be made.

Ann Byrne, CEO ACSI


Board Effectiveness and Performance

 Aims and objectives of the research.

 Methodology and its limitations.

 Board evaluation in context.

 Key findings.

 Significance and impact.

 Where to next?
Aims of the Research

 To examine current practice in board


evaluation, both on paper and in practice,
here and overseas.

 To explore its value in terms of improving


board performance and effectiveness.

 To understand how best this value can be


communicated to investors.
Research Questions

 How should Australian Boards assess


performance at both individual and group
levels?
– What does effective board evaluation
comprise?

 How can shareholders recognise high


performing boards?
– How can information on board evaluation
and performance be communicated by
companies or extracted by investors?
Methodology

Stage One

 What are companies disclosing in their annual reports regarding their


board evaluation processes both here and overseas?

 We reviewed 70 annual reports


– Top 30 ASX
– Top 10 LSE
– Top 10 NYSE
– Top 10 Europe
– Top 10 TSE
Methodology

Stage Two

 What do directors and investors think about board evaluation?


– The process
– The outcomes
– Improving board performance and effectiveness
– Indicators of good board performance

 We interviewed 12 directors and 3 fund managers representing:


– 26 companies in the ASX 100; and
– 3 significant institutional investors
Limitations

 Stage One
– We chose the largest companies on the basis they are usually at
the forefront of corporate governance. Our findings may not apply
to smaller companies

 Stage Two
– Director interviews - our sample was not random which could
lead to bias. There are many reasons why directors might agree
to be interviewed which have to be balanced against the
difficulties of obtaining access
– Fund manager interviews – small sample was designed to
explore the issue of disclosure from both sides and was not
intended to comprise a stand-alone data source
Context

Internal External
Internal
Roles and responsibilities
External
Regulatory requirements
of directors Post-GFC reforms

Board

Board evaluation processes Investor engagement


Post-GFC Reforms
New Focus on Board Performance & Effectiveness

Revised UK Corporate Governance Code published June 2010:


 To encourage boards to be well balanced and avoid “group think”, there are
new principles on the composition and selection of the board, including the
need to appoint members on merit, against objective criteria, and with due
regard for the benefits of diversity, including gender diversity.

 To promote proper debate in the boardroom, there are new principles on the
leadership of the chairman, the responsibility of the non-executive directors
to provide constructive challenge, and the time commitment expected of all
directors.

 To help enhance the board’s performance and awareness of its strengths


and weaknesses, the chairman should hold regular development reviews
with each director and board evaluation reviews in FTSE 350 companies
should be externally facilitated at least every three years. (FRC, 2010)
Post-GFC Reforms
New focus on institutional investors

UK Stewardship Code for investors published July 2010:

 sets out good practice on engagement with investee companies.


 Investors are encouraged to publish on their websites ‘comply or
explain’ type statements against the Code’s seven principles.
 Principles deal with overall stewardship, conflicts of interest,
monitoring, intervention, collective action, voting policy and reporting.
Stage One Findings: Disclosure

 Regulatory regime strongly influences style and extent of disclosure.

 The USA’s prescriptive regime appears to lead to more perfunctory


standardised disclosure than the principles-based regulation
elsewhere.

 Leading companies in the UK, Europe and Australia are voluntarily


disclosing more, including information on the outcomes of board
evaluation.
Stage One Findings: International Comparison

UK company GlaxoSmithKline stated:

“The Board agreed the following actions to generate more inclusive


engagement with the executive management team and further
improve its collective decision making process:
– Identify how to utilise the time spent in Board and Committee
meetings more effectively and facilitate further contribution by
Non-Executive Directors on a broader range of issues
– Seek to enhance further the Non-Executive Directors’ continuing
education process beyond their initial induction
– Provide greater visibility to the Board of GSK’s executive talent
and the management succession planning process.”
Stage Two Findings: State of Play in Australia

 Large companies have been conducting formal board evaluations for


at least 10 years.

 Over this time processes have been refined but, more importantly,
the exercise has become accepted as valuable practice.

 Details of the process (questionnaires, consultants etc) less important


than its content and purpose.

 Board improvements should occur continuously, not just as a result of


formal evaluation.
Process

Purpose

Board maturity
Industry changes

Cycle Subject

Implement actions Individuals


Review processes Whole board

Process Content

Include management Retrospective


Informal mechanisms prospective
Lead by

External
Chair
Both
Individual v Team

 Directors were divided on the value of individual director evaluations

Advantages Disadvantages
Everyone likes to get constructive Implies an ‘ideal’ director rather than
feedback embracing differences

Discussion around individual A good board is a good team, It


strengths and weaknesses can doesn’t matter if all the individuals
improve team function are excellent if they can’t work as a
team
Links to director re-election and Rating colleagues can interfere with
training requirements the collegiality necessary for a good
board
Positive Outcomes

 Prioritising board roles e.g. less time on compliance and more on


strategy

 Increasing efficiency – meeting protocol, papers, delegation to


committees

 Improving information flow – bolstering communication lines, more


site visits

 Refining composition/skill set – clear link to director education and


succession planning

 Team-building exercise in itself


Skills Matrix

 Complex with room for improvement in succession planning

– “Different companies have different [requirements]. At one


company [the matrix] includes the work experience of all the
directors, overlaid with knowledge. It’s really tricky as you want to
throw other things in that make people valuable.”

– “There can be some skills that you don’t foresee that can be
extraordinarily useful.”
The Dysfunctional Board

CULTURE COMPOSITION
An adversarial atmosphere in the boardroom Skill deficits or lack of genuine independence
or an unmotivated board with a tendency to on the board
group-think

Chair
CEO

CHARACTERISTICS PROCESS
Conflicts of interest or factional interests on Poor chairmanship – a chair who is too weak,
the board, perhaps due to a dominant too autocratic or too close to the CEO
shareholder Poor processes leading to inefficient use of
time
The Effective Board

CULTURE
COMPOSITION
Honest, Respectful
Diversity
Transparent
Experience
Constructive challenge

Chair
CEO
PROCESS
CHARACTERISTICS
Secretarial support
Engaged Information
Non-adversarial Committees
Independent
Disclosure

 ASX Principles recommend disclosure of whether board evaluation


done and the process

 Leads to rather dry and meaningless information – a statement on


objectives and whether they achieved might be more valuable

 Direct, informal communication valued much more highly by investors


Indicators of Board Performance

 Director history/profile

 Director personal characteristics assessed face-to-face

 CEO appointments

 Company performance within industry

 Board performance during a crisis

 Proactive communication with shareholders


Evaluation Cycle

New board?
Concept Entrenched board?
Industry changes?
Purpose
Subjects

Implementation Retrospective
Outcomes Disclosure Content Prospective
Links Aims
Action plan Criteria

External
Whole board
Internal
Feedback Individuals Method Alternate
To whom Who conducts
How What process

Timeframe
Other processes
Evaluate
How often
Key Findings

 International variance

 Flexible processes

 Continuous improvement

 Individual performance

 Senior management
Key Findings

 Informal discussion

 External facilitation

 Outcomes of board evaluation

 Implementation

 Links to other processes


Significance and Impact

 Access – insights from highly experienced directors of some of


Australia’s largest companies – rich empirical evidence to add to the
policy debate

 Timely – post-GFC there has been renewed focus on board


performance and effectiveness and the role of regulation in
encouraging board evaluation and improvement.
Where from here?

 Voluntary disclosure on objectives and outcomes of board evaluation


and how it links to other processes, particularly succession planning

 Measures to reduce ‘boilerplate’ – chairman statements

 More externally led performance evaluations

 Potential for Australian Stewardship code for investors depending on


how the UK fares
Board Effectiveness & Performance

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