Carraghyn - Chartered Directors

Board Appraisal - Why Bother?

If you've never been through a board appraisal you probably don't see the point, the benefits are not always obvious. If you have been through a board appraisal it may have been a good experience or a bad one. If it was good you already understand why a board appraisal is such a useful tool, and if it was bad you probably think it's a useless piece of bureaucracy demanded by regulators or consultants. This article is for those who have never been through the process, and those who have had a bad experience.

  

What is a Board Appraisal?

It's all in the name. It is supposed to be an appraisal of the effectiveness of a board of directors or trustees, typically performed annually, to help the board identify potential for improvement, and year on year to help it measure that improvement. Most of us will have annual appraisals of staff in our organisations, appraisals are recognised as good practice and if done properly can be highly beneficial, they same applies to board appraisals. Sadly staff appraisals are often not done well, by managers who have not been trained to do them, the experience is traumatic for employee and manager alike, and the same applies to board appraisals. Doing appraisals properly is essential to reaping the benefits they offer.

In the case of a board appraisal it may be performed in one of two ways - by questionnaire or by observation. Occasionally both methods are used in combination. It may also be done internally, for instance by the chair of the board, or externally using professional consultants like Carraghyn.

Board Questionnaire. In the questionnaire method each board member is required to complete a questionnaire attributing numeric scores to a range of questions addressing the varied responsibilities of the board. The scores are aggregated to produce a quantitative measure of the board's performance in areas such as Risk Management, Stakeholder Engagement, Development of Strategy etc. Some questionnaires also invite comments, which are vital if a qualitative appraisal is required, but these are usually optional and often neglected. We are of the opinion that a quantitative measure without a qualitative appraisal is almost useless, a box ticking exercise, because it may inform that a board feels some of its responsibilities have been poorly executed but it will not capture how or why.

Board Observation: An external consultant is hired to observe one or more (preferably more) board meetings and produce a subjective report on his observations. That can be the full extent of the appraisal, but better consultants will separately interview each board member to gain his opinions. Board observation can be a useful technique in identifying why a board is dysfunctional, and director interviews can flush out board member's concerns and issues which are not immediately apparent from observation. The nature of observation and interview is such that it cannot consistently cover all the responsibilities of a board, so whilst it is useful in identifying the root causes of board dysfunction it is a weak tool for determining whether the board is satisfactorily addressing all its responsibilities.

Clearly, given that both methods have strengths and weaknesses, using them in combination is the ideal, but most expensive and time-consuming, scenario.

Internal Board Appraisal vs External Board Appraisal

Internal is nominally cheaper, although if it were billed by the hour the Chairman's time would probably be as expensive as an external consultant, and it enables the board to be comfortable about secrecy in respect of their deliberations of confidential commercial matters and the weaknesses they find in their self-examination. Even with a questionnaire however, it is almost impossible for an appraisal to both produce valuable insight and remain anonymous. The appraiser, normally the Chair, will recognise the concerns and styles of the colleagues he works with so closely, and this can seriously inhibit members from being as honest, frank and open as they should be for the process to have value.

External usually means hiring a consultant, implying both expense and disclosure of confidential and possibly embarrassing matters to an outsider. In respect of the confidentiality any fears are usually unfounded, the consultant could be sued if he disclosed any confidential information and would probably never work in board appraisal again, so most consultants are very tight-lipped, some not even disclosing the identities of their clients unless the appraisal is to be published to meet regulatory demands. The external consultant typically brings  three advantageous qualities; expertise in board responsibilities, objectivity, and anonymity for board members. The filter provided by the consultant ensures that the qualitative views of board members are balanced and anonymised, enabling them to give a much truer assessment of the board's strengths and weaknesses.

If a board appraisal is to be a meaningful exercise which delivers value to the organisation and avoids being a tick-box compliance exercise for compliance' sake it should be carried out by a trusted independent external consultant.

So What Do You Get?

Enough what and how about board appraisals, the real question has to be why? Why bother, what are the merits? These are my top three benefits observed from performing board appraisals:

Identification and Prioritisation of Boardroom Risks

These are not operational risks, I'm talking about the risks an organisation faces if the board fails to live up to its duties. A good board appraisal will identify which of the key responsibilities of a board, such as Developing Strategy, Performance Measurement of the organisation, Stakeholder Relationships, Risk Management, Audit and Integrity, and Control of the Executive, are being executed well and which are being performed inadequately - and why. It will provide both quantitative measure and qualitative appraisal of the weaknesses which the board needs to address in order to improve, and assist it in prioritising the various measures in its self-improvement programme.

This benefit is obvious, it is the object of performing an appraisal, and until the perfect board is created with no weaknesses it is worth its weight in gold, or any other precious commodity of your choice. If the board is under-perfoming in its leadership of the organisation then it is reasonable to assume that the whole organisation is disadvantaged and under-performing.

Disclosure of Common Perceptions

It is common that a board member, concerned about a particular issue, does not raise it at board meetings or with other board members for fear of being "out of step". The board is a collaborative, collegiate entity and many board members are reluctant to raise matters about which they believe that only they are concerned. A good board appraisal will not only expose these individual concerns, but will very often reveal that they are concerns shared by several members of the board, each of whom has been biting their lip. With the common recognition of issues the board then has the common will to move forward and address them.

Unity of Purpose

With both the boardroom risks, and board members concerns, out in the open and shared the board can identify, prioritise and agree its actions in unity. The board becomes more cohesisive, shares common purpose, focus and determination, is less distracted by minor non-strategic or operational matters, and spends more time focusing on what it should really be doing and how to improve its performance in these areas. In short the board starts to behave like a team, with each member playing their role for the benefit and improvement of the team's performance.

So there you have it. There are many other side benefits of a good board appraisal, and much emphasis on good; going through a poor appraisal process is a universally disappointing experience. 

In addition to Board Appraisal, which is about the effectiveness of the board as a unified entity, it is sometimes appropriate to consider group and individual director appraisals which will be the subject of another article.

For more information on Carraghyn's Board Appraisal System see here

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