Review of the effectiveness of independent board evaluation in the UK listed sector - final report from ICSA The Chartered Governance Institute

In August 2018, the UK Department of Business, Energy and Industrial Strategy asked ICSA The Chartered Governance Institute (the Institute) to review the quality of independent board evaluation in the UK listed sector, and identify ways in which it might be improved. Following a public consultation exercise in 2019, the Institute published its final report and recommendations today, 20 January 2021.

The document can be found here

Board evaluation - or ‘board performance review’ as the report now recommends it should be called - is one of the most important governance innovations since Code was introduced in 1992.

To remind ourselves, the concept of regular board performance reviews was first introduced to the (UK Corporate Governance) Code in 2003, when it stated that “the board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors”, and asked companies to describe in their annual reports how that review had been conducted.

The first reference to externally-facilitated board performance reviews came in 2010, with the introduction of a ‘comply or explain’ provision stating that FTSE 350 companies should undertake such a review at least every three years. The 2010 Code also introduced a requirement for the company to disclose whether it had any other connection to the reviewer.

The concept has travelled successfully around the world, with many companies, and other organisations, embracing the concept of performance review. It is fair to say that the practice has also been viewed with suspicion, and resisted, by many boards which are not comfortable with the idea of director accountability. I am firmly of the view that board performance reviews have made the world a better place, and should be considered good practice, and required, in all jurisdictions (although the nature of the local Code will determine the degree of prescription).

The industry is still in its infancy, and there have been periodic reports of low-quality work, high costs and therefore poor value for money, and conflicts of interest from some practitioners. Companies have occasionally been accused of finessing, if not distorting, the outcomes of a performance review when discussing the exercise with stakeholders, particularly investors.

I first became involved in this area when Sir Christopher Hogg, Chair of the UK Financial Reporting Council (FRC), asked the Institute to provide supplementary guidance to the UK Corporate Governance Code after the 2007/2008 global financial crisis. As Policy Director at the Institute, I wrote the Guidance on Board Effectiveness, advised by a steering group under the leadership of Sir John Egan. The Guidance, published in 2011, became - and remains - one of the FRC's most requested publications.

One of my first tasks, after leaving the Institiute in 2013, was to work with my new colleagues to write a 'Code of Best Practice' for board performance reviews. The Institute has graciously told me that that publication was referenced extensively to guide it in preparing the initial consultation document which has led to the publication of today's report, several years later. Thought leadership is not always fast-moving!

What are the key takeaways?

1. Board performance reviews should be viewed as more important in providing reassurance to stakeholders, than assurance to the board, that everything is going well
2. The impact of any board performance review depends as much – if not more – on the attitude of the board, as it does on the ability of the reviewer
3. Any actions expected of board reviewers and boards, as a result of the Institute's report, should be voluntary, at least initially. 
4. A voluntary code of practice for providers of external board performance reviews should be adopted to guide reviewers towards good practice, accompanied by principles to guide companies 
5. Any set of actions to improve the conduct and accountability of external board performance reviews must be addressed to companies, as well as reviewers, and must enhance the ability of shareholders (stakeholders) to hold both to account

My conclusion? The Institute's report is an important contribution to the development of standards in what is not only one of the most sensitive interactions between a board and its advisers, but an interaction which can - when both the reviewer and the board are high-quality - lead to significant value being created in terms of board and director performance.

If you would like to know more about the work I do in the area of board performance reviews - Listed, commercial, not-for-profit, sport National Governing Bodies - please get in touch.