1. Evaluating Your Board (and why it matters) Simon Osborne FCIS, Solicitor Chief Executive www.icsa.org.uk

2. UK Corporate Governance Code Main Principle B.6 “ The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors” N.B. “Evaluation of the board should be externally facilitated at least every three years. Where consultants are used a statement should be made available of whether they have any other connection with the company.” – Code Provision B.6.2

3. Why Should Boards Be Evaluated? (1) Self-evident – they control major resources Shareholders seek reassurance – “The prime risk that shareholders take is that the management of a company will mismanage it” – Jonathan Sumption QC, Defendants’ Counsel in Weir & Others v. Secretary of State for Transport & Another, 2005 (the Railtrack Shareholders Case)

4. Why Should Boards Be Evaluated? (2) “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” - Warren Buffett

5. Why Should Boards Be Evaluated? (3) “The Code’s emphasis on evaluation of Board, Committee, and individual performance attracted universal support. Views differed on the frequency, scope and method of evaluation... What was clear.... is that formal evaluation is seen as a valuable tool for improvement.” - FRC on FTSE 100 Chairmen’s views (2006)

6. Why Should Boards Be Evaluated? (4) “The thing about boards is that you only know how good they are in a crisis. Otherwise, it’s a case of ‘Everything’s all right while it’s going all right’. It’s when there’s a BP situation or a scandal that you find out when a board works or not.” Sir Nigel Rudd, chairman of Invensys plc, quoted in the Financial Times, 27 th March 2011

7. What Should A Board Be Doing? Develop strategy and make timely strategic decisions Ensure operations are in line with strategy & monitor management’s performance against agreed goals Provide help and advice as a sounding board for management Ensure integrity of financial information & robustness of financial and other controls Oversee management of risk and review effectiveness of risk management processes Ensure that right people are in place and coming through

8. Before starting an evaluation Chairman must give support – doing it “because the Code says so” may be damaging Board must know/understand the process at least in outline Chairman must have thought through what needs to be achieved –radical overhaul; health check; addressing a problem; guarding against complacency/inertia?

9. What Are The Alternative Approaches? In-house – currently the favoured approach for >70% of UK listed companies In-house facilitated by external person External provider

10. When May External Involvement Be Useful? For new chairmen For “old” boards When tenure of certain directors is being challenged Every so often if in-house evaluation is generally preferred When there is a known problem requiring tactful, impartial handling

11. What should an external provider be offering? Independence and confidentiality No conflicts e.g. cross-selling The process must cover the ground Tact and diplomacy throughout the process Provide board with agenda for improvement

12. Initial meeting with chairman and company secretary Detailed briefing from company secretary One on one structured interview with each director Circulate interview notes confidentially to each director for sign off The approach of ICSA Board Evaluation

13. Prepare draft report based on interview notes quoting anonymously comments made in interview Moderator makes detailed review of draft report Draft report sent privately to company secretary Near final draft report sent to chairman for meeting with chairman and company secretary Feedback to board of directors. The approach of ICSA Board Evaluation

14. Why we eschew questionnaires The structured interview permits a director to seek an explanation if he or she is unsure about the question being asked by the evaluator. An interview encourages him or her to be totally frank and open without committing views to paper (a good psychological point!). The evaluator is able to ask follow-up questions when a director expresses dissatisfaction with an issue, or to probe if the evaluator feels that a response merits deeper discussion.

15. Why we eschew questionnaires The whole evaluation process is personalised and tends to elicit better information. Questionnaires are generally devised in-house and have a tendency to miss some of the key issues. Sometimes they get stale which can create a boredom factor. We are not convinced the use of a questionnaire alone will satisfy the requirements of Main Principle B.6 of the 2012 UK Corporate Governance Code regarding rigour.

16. Benefits (1) Well conducted evaluations have potential to achieve various benefits: Confirmation that board has good balance of skills Focus attention on attributes required in a new director Focus on any inadequacies Identify strategic priorities and gaps between strategy and delivery

17. Benefits (2) Assurance that key relationships really work Focus on risk tolerance and effectiveness of risk management processes Assurance of subsidiary governance and internal control regime Review practices/procedures to improve governance/be more efficient Timeliness of board meetings/agenda items

18. Benefits (3) Relevance and objectivity of information Sufficiency of succession planning Develop skills, knowledge in individual directors Identifies any “dead wood” Justify recommending re-election of each director Make board evaluation report available for prospective directors’ due diligence

19. Principal Findings (1) People factors are of greater importance than process factors Strategy day: poorly planned; too much information More attention should be paid by the board to risk identification and management; and to business continuity Quality of board discussion about risk Complacency that board is performing well

20. Principal Findings (2) Interaction between EDs/NEDs and between NEDs/ “marzipan layer” The obstructive NED Succession planning: NomCo not always fully engaged NomCo’s thinking at odds with other directors’ views Insufficient discussion of social media policies Directors not really keeping up to date

21. Getting right level of information to the board Factions: may produce mushrooms! Getting optimum number of meetings Boards taking insufficient interest in work of committees Audit committees being overworked More attention should be paid to subsidiary governance Principal Findings (3)

22. Reporting to Shareholders (1) The board should state in the annual report how performance evaluation of the board, its committees and its individual directors has been conducted. UK Corporate Governance Code 2012 Provision B.6.1

23. Reporting to Shareholders (2) What has been reviewed (board, committees, directors) with an explanation if, say, only the board was being reviewed Who conducted the evaluation and an explanation of how any conflicts were managed or disregarded An outline of the nature of the process An outline of key findings, lessons learned Follow up actions agreed by the board

24. Conclusion Purpose of evaluation is to help company boards, main committees and directors to perform to maximum capability Evaluation must be honest and rigorous to be effective