They are the lifeblood of the boardroom, providing an independent view to guide the management process.
It’s effectively a stewardship role. These outside experts are valued for their broader business experience, challenging the executive team and helping companies to take a long-term view and plan accordingly.
They also contribute to ensuring a company’s corporate governance is fit for purpose and that its structure and behaviours are designed to deliver long-term shareholder value, whilst having regard to other stakeholders in and around the business.
As we’ve seen with failures such as Carillion, Toys R Us and Maplin, the consequences of corporate failure can have a ripple – even a tsunami effect on people’s lives.
Government and Parliamentary Select Committees often review these larger failures and everyone wants answers as to why they happened.
The spotlight is on the directors, quite rightly.
Judgements are made on whether directors have the right experience, skills and diversity to be managing a business.
And who, at the end of the day, makes that judgement? It’s the outside world.
Yet in the day-to-day life of a business we expect boards to be self-critical and evaluate their own performance, preferably with some external help.
In a recent QCA survey, small and mid-cap companies told us that most companies (56 per cent) evaluate their board every year, with a further 14 per cent doing this every two years.
But some companies leave it over five years before they critically examine boardroom performance (6 per cent).
Our survey covered companies typically on the AIM Market.
On the Main Market of the London Stock Exchange the Financial Reporting Council requires companies to carry out an externally facilitated board evaluation every three years and to describe what measures are being taken to ensure that gaps in experience, knowledge and understanding are being taken.
I’m not aware this process has ever been examined by a Parliamentary Select Committee or any other forum that looks at corporate failure and success.
Where companies are listed on the Main Market and experience difficulties or even failure, it would be very helpful to understand what form of evaluation took place and how each director was assessed for skills and experience.
This would encourage both individual directors and boards collectively to consider how to ensure they’re up-to-date and aware of the risks a company takes and faces when applying its business model.
If board evaluation is to be effective then the internal examination of a board should be able to stand up to public scrutiny.
It is clear that institutional investors ask companies about their board evaluation procedures in the normal course and they take comfort from what they hear but I am not aware of any follow up after a seismic event.
There is a body called the Investors’ Forum that facilitates collective engagement between investors and individual companies and perhaps this is a role that such a body could take on.
It is important that we learn from these events and improve good practice.
Investors working as a collective in these cases may be a good route to follow.
Preparatory qualifications for directors go some way to ensuring individuals have a good grounding in what is required, but continuing education is more difficult to quantify and describe.
So the ways in which companies navigate difficulties should be examined closely – we should learn from good practice as well as bad.
Board evaluation is vital.
The quality of that assessment should be put under the microscope to ensure it’s not a wasted opportunity to determine a company’s health.
It must be explicit so that everyone can learn how the best directors stay on top of their subject, using new blood (at appropriate intervals) to refresh the board’s skills and experience.
And as in healthcare, transfusions are best administered before a patient is too ill to benefit!
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