In the world of PLC boards, these issues have been tackled by the Financial Reporting Council (FRC) mandating all FTSE 350 listed companies to go through an externally managed process of evaluation against the requirements of the UK Corporate Governance Code at least every three years and then to report the resulting action plan to shareholders.
The aim of the FRC was to encourage all listed companies to do what the more enlightened ones were doing already to seek out objective feedback on performance and to be transparent about the outcomes. This process has been generally welcomed by shareholders as it gives a degree of assurance about how a board works and therefore the risks it is managing. It also provides a point of comparison on how seriously a board takes its own evaluation and performance improvement and by extension how this effects the culture of the organisation it is governing.
But if mandatory external board evaluation is such a good thing in larger PLCs, might not the same be true for all boards There are plenty of unregulated boards in significant but perhaps smaller businesses, and thats not to mention charities, mutual and public sector businesses.
Are boards really so different from each other
To explore the differences and similarities between sectors when it comes to board improvement we recently conducted a survey of over 100 board members. We wanted to see if there were as many differences within a sector as between sectors. The headlines were pretty clear, while boards may have a different missions when it comes to their own operation: the setting of priorities, the way they make decisions, getting access to the right skills, and critically how they view their own performance improvement, there were far more similarities than differences.
The first and most obvious difference is one of size and composition. In our survey 72 per cent of respondents from charity and Mutual Boards reported that they had eight or more NEDs/trustees, whereas our private sector respondents reported an average Board size of five NEDs and a similar number of Executive members.
Read more about the boardroom:
- Board games and misbehaviour: A tug of war between directors and shareholders
- What makes a balanced board of directors
- The role of the FD and its power to influence the board
These boards are different in other ways to, for example our survey showed that public sector boards are much less focused on risk management and making investment decisions compared with private sector boards. Charity boards put making key Executive appointments as a higher priority than other sectors.
The survey we conducted shows that a high proportion of boards across all sectors are conducting some form of evaluation, but outside PLCs where an external evaluation is mandated, the majority of these are internal exercises. However the good practice encouraged by adherence to the FRC Code is spreading and a number of other boards are looking for evaluation frameworks to help guide their assessment and development plans. New codes of practice for these boards are being developed in the charity and public sector.
In many cases these new codes are being created in response to a fear that the FRC Code is “not applicable for our business”. But these new codes, which are designed to meet the perceived needs of a specific situation, may miss the point of a generally applicable code. By developing a framework to suit a particular sector or type of organisation there is a risk of common blind spots in a sector being emphasised, focusing too much on the content of the decisions expected of the board and too little on how the Board makes the best decisions possible to meet its accountabilities.
In addition these new codes may not have the on-going commitment and resourcing (currently provided by the FRC) that will ensure that they are kept up to date with rapidly changing stakeholder expectations.
Lets use what we know works
Our experience evaluating boards across many sectors suggests that one approach to performance evaluation can work for all boards. In fact we are increasingly seeing boards from many sectors now requesting the use the FRC Code as the touchstone of best practice. Experienced NEDs who sit on boards of different sized organisations in different sectors are already familiar with the requirements of the Code and can see its value.
One framework used across all sectors could encourage learning across sectors through the movement of NEDs. It could also encourage greater understanding or what makes all boards effective and, most important, greater transparency of board performance. And this might help tackle the real problem encouraging greater scrutiny of boards that dont embark on any evaluation of their performance at all.
Alex Cameron is director of Socia.