An effective and well-functioning board is the key driver of a company’s value. Boards play a significant role in strategizing, defining a company’s objectives and goals, and executing plans. They are held accountable for responsible corporate governance, so they cannot afford to be inactive or ineffective.
The Board appoints and guides the members of the management to ensure the long-term interests of investors and shareholders. The most effective Boards have strong, forward-looking agendas that focus on the company’s goals and deploy specific tools to monitor the company's performance. The expectations from the Board have evolved, and they are now expected to play a more active role in the company’s growth and value drivers. Boards are required to strategically use their limited time to develop the company’s capabilities, define key value drivers and critical processes, and make an agenda that focuses on monitoring and improving those capabilities.
Due to changing demands and expectations from the Board, a Board performance evaluation has become a necessity for the smooth functioning of the Board. A company can evaluate the performance of its Board members by delegating the task to an internal committee led by the Chairperson of the Board. Sometimes, the job can be delegated to a non-executive member, lead director, or a specific Board committee. An external party with experience in a performance evaluation of corporate governance can also perform a Board evaluation for the company. Some companies use a self-evaluation method where Board evaluates its own members’ performance. However, this method can produce biased results. Thus, it is recommended for companies to take the help of an external advisor who has the technical expertise and independence to conduct a fair and impartial Board evaluation.
Nagel and Kaplan (2003) developed a multi-dimensional balanced scorecard to measure and monitor the company's performance. The Balanced Scorecard includes the Executive Balanced Scorecard, the Enterprise Balanced Scorecard, and the Board Balanced Scorecard to help different bodies of management and board members to meet their roles and responsibilities more effectively. The Balanced Scorecard consists of four elements evaluating the Board’s performance:
This dimension focuses on the Board’s responsibility of ensuring the company's short-term and long-term financial success and stability. Measuring short-term success is fairly straightforward by looking at the earnings, cash flow, and return on equity. On the other hand, long-term financial success can be measured by evaluating the return on investments/assets and earnings growth trends. Other key metrics like performance against competing companies and sales growth can measure long-term financial success.
The Board has a responsibility to all the shareholders and stakeholders in the company. The Board needs to protect the interests of those shareholders/stakeholders and the minority parties. To do so, the Board must maintain ethical behavior at all times and hold its members accountable for good corporate governance. The Board should establish open communication channels between board members and shareholders/stakeholders and always adhere to a code of behavioral conduct. Additionally, the Board can take other measures to improve its relationships with shareholders, including voluntary disclosures, compliance with standard governance protocols, preventing any ethical violations, and focusing on the interests of the company’s employees and community.
The Board's responsibilities in the company’s internal processes include recognizing and managing any internal crises and risks, effectively evaluating the performance of those processes, reviewing the corporate strategy plans, and enhancing the effectiveness of the Board. To achieve these objectives, measures like performance-based compensation, meetings with the CEO, Board meetings attendance, and the formation of specific committees have proven helpful. Some boards take additional steps to ensure their company’s internal processes are efficient. For instance, they conduct risk audits, link non-financial performance and compensation, ensure directors' visits to the company sites, and link stock ownership and compensation. Another way to comprehensively measure the Board’s performance in maintaining internal processes is by assessing the approval and review process of annual budgets and other operational plans - the kind of information provided to board members, time taken for strategy planning, board’s role in developing meeting agenda, etc.
This dimension focuses on the board's knowledge, skills, and competencies, constructive Board meetings, communication between the executive team and Board members, and information about enterprise strategy and its impact on the organization. To measure the learning and growth of Board members, the Chairperson/or any other member can conduct surveys after each Board meeting to assess the board processes, the meeting quality, and the information provided during the meeting. Boards must evaluate the performance of their directors, ensure diversity in the boardroom and establish training and induction programs for new Board members.
As the discussion illustrates, an effective
Board goes a long way in driving the success of the company. A company Board
should have an innovative, forward-thinking, and competitive approach. And for
this, a balanced performance evaluation is an absolute necessity. The
above-defined four dimensions are not restrictive by any means; they can be
molded and transformed depending on the needs and goals of a particular
company.
