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PKF Australia

Accountants and Business Advisers

The importance of Board Appraisals

The importance of Board Appraisals

Posted 08 Apr 13 by Allan Farrar

While shareholders may complain that their Boards of Directors are not accountable and do not serve the best interests of all shareholders, the improvements we are continuing to see in Corporate Australia are gradually bringing about better governance of companies, more appropriate appointments and more accountability.

Appraisals of Board performance as part of a sound governance regime are also becoming more accepted and are resulting in people with the appropriate skills, knowledge and experience being appointed to company Boards.

Many directors will feel discomfort in submitting to the scrutiny of such a process, but evaluation of Board performance within a structured review regime is becoming the accepted norm in Australian public companies. It can be clearly demonstrated that the process is giving rise to far more effective teamwork among Boards which are more inclined to act with a unity of purpose.

A sound appraisal process will identify weaknesses in the performance of the Board as a whole, individual directors, the Chair and the Chief Executive Officer and it will address those weaknesses with a view to providing solutions.

Such an evaluation should involve each officer undertaking a self-evaluation, evaluating his peers and evaluating the overall Board in a frank and candid assessment of performance. It is essential that the process is conducted in the strictest confidence and by an experienced, independent consultant who will report without fear or favour.

Acceptance of the evaluation process is often difficult for Boards and directors where this level of accountability has not been the standard in the past. Often, a Chair will gradually introduce the process to the Board before bringing the independent consultant into the process.

The Australian Securities Exchange (ASX) Corporate Governance Council's Principals of Good Corporate Governance and Best Practice Recommendations strongly encourage the implementation of a Board Appraisal process and the disclosure of that process to shareholders. Given shareholder expectations it is clear that an independent process is by far the preferred method of implementing such an evaluation.

While it has been the practice of certain Chairs of public companies to require non-executive directors to sign an undated letter of resignation which could be effected by the Chair at his/her discretion, such a practice is far from satisfactory and is open to completely unacceptable abuse. A director, acting in the best interests of shareholders, with an opposing view to the Chair, and potentially to majority, faces removal without any justifiable grounds whatsoever.

If a director acts in a manner which is clearly disruptive, in their own or someone else's interests rather than the company's interests, fails to comply with best practice behaviour or is demonstrably unable to add value to the company, there needs to be a mechanism for their removal. But such an outcome needs to be as a result of an independent and impartial review of the facts.

A quality Board Appraisal process involving face to face interviews and written questionnaires should produce a more cohesive Board which in turn improves company strategy and performance.

Ensuring that a Board is performing to its maximum capacity is essential in such difficult economic times and a Board Appraisal is an integral part of that process.


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