Board effectiveness reviews

Board effectiveness reviews

Introduction

An effective board is key to the success of an organisation, and cultivating the performance and dynamics of a Board to deliver clear strategic leadership and insightful and constructive challenge are at the heart of effectiveness. 

Periodically evaluating effectiveness gives a board the opportunity to reflect with external partners on its strengths and areas for improvement which can lead to enhanced performance; both of individual directors and of the board collectively.

Consequently, Board Effectiveness Reviews can be a powerful tool in enhancing board functioning and effectiveness; setting the board, and ultimately the organisation, up for success.

What is a Board Effectiveness Review?

A Board Effectiveness Review is, in essence, an assessment of whether the board is appropriately constituted (i.e., whether it is made up of an appropriate number and balance of individuals who are skilled and experienced in relevant areas), whether it has the right dynamics, and is performing its role and duties in setting strategic direction and challenging organisational performance. 

What is needed from a board and its directors may also change over time depending on the context of an organisation. An effective board for a start-up, for example, may need to change as an organisation expands or reaches steady state. As such, conducting periodic Board Effectiveness Reviews serves to ensure that firms’ board arrangements keep pace with, and remain appropriate for, the firms they oversee.

Ultimately, directors have legal responsibilities to make sure that the organisations they oversee do what they were set up to do. As such, directors must have the appropriate skills and experience, be effective, and be focused on the right things. Organisational success can depend on it, particularly during times of stress and challenge, and when things go wrong, boards need to be able to demonstrate that they took reasonable steps in overseeing the organisation responsibly. This includes regularly challenging themselves, their approach and thinking.

Why might you need to conduct a Board Effectiveness Review?

There are a number of important reasons why an organisation may benefit from conducting a Board Effectiveness Review. These reasons include (but are not limited to):

  • To enhance strategic business success;
  • To enhance stakeholder confidence;
  • To promote continuous improvement;
  • Following a merger or acquisition;
  • For board renewal and succession planning;
  • To promote board education and development; and
  • Regulatory pressures or scrutiny.


When might you need to conduct a Board Effectiveness Review?

The revised 2018 UK Corporate Governance Code (which is due to be further updated in line with the FRC's Position Paper - Restoring Trust in Audit and Corporate Governance – issued in July 2022; and further Consultation document – issued in May 2023) is centred upon the principle of ‘effectiveness’. Boards are required to demonstrate the ways in which they are effective and identify areas of improvement for the benefit of stakeholders, but also to provide assurance around the competency of the board and its leadership and stewardship of the organisation.

All firms subject to the UK Corporate Governance Code should conduct "a formal and rigorous annual evaluation of the performance of the board, its committees, the chair and individual directors". The Chair should also consider commissioning regular externally facilitated board evaluations, and for FTSE 350 companies this should take place at least every three years.

Though the emphasis of the Code is on FTSE listed companies, the principles have applicability for all organisations, and we consider the parameters above for conducting Board Effectiveness Reviews to be good practice more broadly. This has been underlined in the Wates Principles for Large Private Companies issued in 2018 and is being highlighted for financial services firms by the responsibility held by the Chairman (SMF 9) ‘for chairing and overseeing the performance of the governing body of a firm’.

How does a Board Effectiveness Review add value?

Board Effectiveness Reviews can provide invaluable insights. They can:

  • Help the Board be clear on purpose;
  • Identify skills and experience gaps, including both technical and softer skills;
  • Evaluate the level of diversity on the Board;
  • Evaluate if the right level of issues, challenge and discussion is taking place at the Board;
  • Evaluate whether the board is suitably independent;
  • Help the organisation in establishing effective succession planning arrangements;
  • Provide guidance around suitable board training and development;
  • Evaluate the governance and Board processes depending on the context of an organisation; and
  • Promote efficiencies and effectiveness via insights around board management information, minutes, and board processes to ensure the most effective use of valuable board member time.

Board Effectiveness Reviews can also provide key insights around board functioning and dynamics, board culture, relationships (e.g., between shareholder non-executive directors, independent non-executive directors, and executive directors) and can also shed light and provide a path forward with regards to known issues.

However, Board Effectiveness Reviews need to be well designed and delivered to ensure that they provide the upmost value to the board. Common pitfalls of less successful board effectiveness reviews we have noted include:

  • Poorly designed scopes;
  • Inadequate planning and stakeholder engagement (e.g., not fully engaging the board and board members);
  • Lack of tailoring (e.g., "tick box" or fully questionnaire-based exercises);
  • Reliance on subjectivity;
  • Lack of specialist expertise; and
  • Reluctance to deliver challenging messages.


How can BDO assist?

At BDO we have a specialist Governance and Risk Advisory Team that designs and delivers our Board Effectiveness Reviews. BDO is on the FCA and PRA Skilled Person Panel and frequently conducts reviews on behalf of the UK regulators. As such, our team has a strong understanding of the regulators’ expectations when it comes to board effectiveness and wider governance arrangements.

We are also able to draw on our experience of working with a diverse selection of firms and can recognize the needs of varying-sized firms in order to make assessments and recommendations that are proportionate to the size and complexity of the business.

We believe that the key to a successful Board Effectiveness Review, and one which adds value, is to work collaboratively with our clients. We subsequently make sure that we are:

  • Meeting your needs - from planning through to delivery
  • Working to an agreed timeline - taking account of any internal governance timeframes
  • Being actively involved - engaging all relevant stakeholders from scoping and designing the review through to delivering our report and verbal feedback
  • Providing solutions - that are relevant, pragmatic, and proportionate, so that you can comfortably take these forward.

Our service offering

We offer a range of modular board effectiveness reviews and tools to meet your differing needs. We can also further tailor our approach as required. A key feature of our approach is that it remains flexible throughout to accommodate your specific needs as your own resourcing or technical capabilities grow or change.

Light:

We offer a Light Board Effectiveness Review, which includes:

  • Documentation Review;
  • Observation of the board and (1-2) board committee meetings;
  • Confidential interviews with (2-3) board members; and
  • Verbal feedback and a clear and concise report; setting out our observations and tailored recommendations.

We recommend that firms conduct a Light or Standard Board Effectiveness Evaluation annually or bi-annually.

Standard:

We offer a Standard Board Effectiveness Review, which includes:

  • Documentation Review;
  • Observation of the board and (1-2) board committee meetings;
  • A board members Skills & Capabilities Assessment;
  • Confidential interviews with (2-3) board members;
  • A BDO Governance Maturity Matrix Assessment; and
  • Verbal feedback and a clear and concise report; setting out our observations and tailored recommendations.

We recommend that firms conduct a Light or Standard Board Effectiveness Evaluation annually or bi-annually.

Comprehensive:

We offer a Comprehensive Board Effectiveness Review, which includes:

  • Documentation Review;
  • Observation of a board and (all) Board Committee meetings;
  • An anonymous board member survey;
  • A board member skills and capabilities assessment;
  • Peer group benchmarking;
  • Confidential interviews with (all) board members;
  • Diversity and Inclusion & Cultural Analysis;
  • A BDO Governance Maturity Matrix Assessment;
  • Dedicated time with the board to discuss feedback and recommendations; and
  • A clear and concise report; setting out our observations and tailored recommendations.

We recommend that firms conduct a ‘Comprehensive’ Board Effectiveness Evaluation every 3 years.

Board Training:

We offer tailored Board training on a diverse range of topics including regulatory “hot topics” and topics tailored to your firm, sector, and board. These can pe provided in a variety of formats, including workshops or training sessions, to best fit your preferred style.

Board Effectiveness Toolkit:

We offer a Board Effectiveness Toolkit where we share our best practice methodology and toolkit framework with you, to support you in undertaking Board self-evaluations. This will include us providing you with a suggested project plan, self-evaluations, and accompanying toolkit.

What does a Board Effectiveness Review typically cover?

There are a number of components that comprise a typical broad effectives review. These include (but are not limited to):

There are several factors that we would consider when assessing the composition of a board. The size of the board is one of the critical factors that needs to be considered. As the board needs to be an effective decision-making body, the size of the board should be appropriate and proportionate. The Higgs Report 2003, for example, raised concerns about the effective functioning of boards that are excessively large or small.

Other factors that would also be taken into consideration include the composition of the board in terms of types of members, for example, the proportion of independent versus non-independent and executives. We would also consider the diversity of the board.

Another area we would assess is whether the board has an appropriate balance of skills and experience to discharge its duties effectively, taking into the account of the firm’s business model, strategy, risk profile and key risk areas.  Technical and sector knowledge is important as the directors should understand the business model and its associated risks. However, softer skills are also important as board members are required to think flexibly and work effectively with other members of the board. 

Another area we would assess is board role and responsibilities. For example, how appropriate the board’s Terms of Reference (ToR) are, and how well the board’s collective responsibilities are documented. We would also consider other roles and responsibilities, such as in respect of the board Chair. For example, how clearly their responsibilities are documented, and whether these responsibilities are effectively enacted in practice. 

The board processes underpin the board and can lead to its successes or even failures. Board processes cover things such as the board calendar and scheduling of meetings (e.g., frequency, duration). When evaluating board process, some of the questions we consider are: How frequently does the Board meet? How are meetings scheduled? How much consideration is given to the timings of meetings, both within and between meetings? When are packs circulated and by whom? Is sufficient time given for the board to review materials in advance of meetings? How are actions tracked outside of meetings? Do MI packs include focused executive summaries? Is the quality and coverage of MI appropriate? Is the MI tailored for board level consumption? 

We also assess board relations and dynamics including whether/how the board operates as a collective. This might include, for example, consideration of board culture. Is there a constructive and inclusive culture on the board whereby all members feel able and willing to contribute? Are all members listened to and their perspectives valued? Is there an individual or group of individuals who are dominant? Are working dynamics constructive? 

Can the scope and approach be tailored depending on the organisation?

Yes, the scope and approach could and should be tailored to the individual firm. As part of our approach, we spend time thinking with you upfront about the key questions your board would like answered during the course of the review. Thinking about these questions, and any particular drivers for the review, helps us to – in collaboration with you – define a scope that is meaningful and will add the most value.

More information

For more information, you can download our Board Effectiveness Review brochure.

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