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COMMUNITY UPDATE

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For the next three weeks, Criticaleye will be exploring different elements of board structure. In our High Performing Board Series, we will be looking at three key areas: board diversity; aligning board composition to a changing strategy and board appraisals.

Boards are the anchor of the business strategically and ethically. Getting the right board can be difficult yet it is the key to drive business forward. This week we are exploring board appraisals – their importance and who should be tasked with appraising them.

Board failures have been littering the cover of the newspapers throughout the recession.  John Allkins, Non-executive Director, Intec, says:  "Board performance, and by implication appraisals, are in the news because of the catastrophic failure of some boards to understand the risks their businesses were taking which resulted in huge destruction of shareholder value. Whilst most boards haven't seen anything like the financial services meltdowns, they are more conscious of the need to appraise performance.”

The process of evaluating the performance of a board is as unique as the company itself. But Members of the Criticaleye Community agree that appraisals are of the utmost importance.

“NEDs often suffer from a lack of feedback due to the low degree of day-to-day contact,” says Duncan Hine,  Executive Director - Integrity & Security, Identity & Passport Service.  “It is as important for them to have proper evaluations and a chance for peer group feedback even for full-time directors, though they often have to provide advice, oversight and constructive criticism for the same group.”

Board appraisals carry more significance than just a bow to compliance processes. It serves as a good way to see who is still engaged and is adding value. A polarising NED may stimulate discussion, but if someone continually slows down discussions and causes rifts getting rid of them may be an option. This can be sorted out in the appraisal process.

“It is easy to presume that everything is 'hunky dory' but boards are living entities with a changing dynamic, reflecting shifting corporate priorities and occasional changes in composition,” says Angus Fraser, Non-executive Director, IdaTech plc and Associate, Criticaleye.  “Self-appraisal is effective if it is given the necessary lead, weight and urgency by the chairman and the results can be surprisingly positive and sometimes even transformational in their effect.”
  
Kevin Appleton, Chief Executive, Lavendon Group plc, says: "Although board appraisals can have the hallmarks of a bureaucratic compliance process, it doesn't have to be this way. With a commitment to honesty, and with an absence of excessive ego, good quality feedback amongst board peers can transform effectiveness."

Boards have to be able to make daring decisions in an effort to be more effective. Paul Clarke, Non-executive Director of Brookwell and Associate, Criticaleye, says: “Appraisals are essential but it must be recognised they are only an aid in getting boards to be more effective. Sometimes it is blindingly obvious that one personality dominates or one person is totally ineffective and the board has to address that issue upfront and not hide behind an appraisal system. Boards need to be bold - that is what they are paid for.”

There is much debate about who should be undertaking appraisals. Some feel that having the board evaluate themselves is fine while others felt that the only effective evaluations can be done by external appraisers.

“The days of cosy internal board appraisals are coming to an end. Shareholders are likely to demand external board evaluations on a much more regular basis in future and possibly demand to know which company has performed this work,” says Paul Manduca, SID, Development Securities plc.

“Independent facilitators may be preferable under certain circumstances,” asserts Angus. “Particularly where the board has specific, quite fundamental or sensitive issues to address which are affecting its performance and effectiveness.”

Sir John Egan, Chairman, Severn Trent plc and Associate, Criticaleye only uses an outside facilitator. He says: “The boards who do it for themselves never seem to take it seriously. I always ask directors to appraise each others' performance and if found wanting by most directors, I will take action including dismissal if necessary.”

Appraisals are all about assessing the effectiveness of the board. It is likely that at times, a NED or chairman will have to be let go. This can be a particularly tricky situation made worse by the recession.

“Often appraisals are an annual event which take place just in time for the annual report and are a routine occurrence. But with some impacts of the recession being forecast to last to 2015, boards should take the opportunity to assess whether they have the right team to take the company forward in a new and sometimes more difficult environment. This should include individual appraisals of the contributions of each board member and if necessary discussion with the chairman on how contributions could be improved. If the chairman's contribution could improve, or style needs to change to maximise board efficiency, it normally falls to the SID to have that, sometimes difficult, discussion with the chairman," John Allkins.

External facilitators are not always needed. David Baynes, CEO, Fusion IP, explains why a good relationship is important when it comes time to appraise performance. "Board appraisals are done by the chairman once a year. At our organisation, the chairman runs the board and the CEO runs the company, which is the way it is meant to be. Certainly, as the CEO, I am not going to get involved with appraising NEDs. The one downside to this is that we actually don’t appraise the chairman, although this is not an issue at the moment as the chairman is excellent. When it comes to the time for NEDs to be let go, I liaise with the chairman and senior executive director, we discuss it and make a decision.”

Finally,Bob Garratt, Visiting Professor, Cass Business School and Associate, Criticaleye, gives his top tips for board appraisals:

  1. Don't let the chief executive run it.  It is the duty of the chairman of the board to run the appraisal process
  2. Don't let the chairman think that some cosy one-to-ones are sufficient
  3. Do agree a structured process with the whole board before you start
  4. Do use a "gap analysis" approach on every question
  5. Do treat it as a developmental process (board and personal) rather than a test
  6. Do bring all participants together for the final feedback and the planning of the ways forward.

If you would like further information on today’s topic please look at the Insights page of the website. For example, in Board appraisals: From Compliance to Success, London Business School’s Sir Andrew Likierman examines how a successful board appraisal can add value to an organisation.    

Please get in touch if you have any comments about the issues in today's update.

I hope to see you soon,

Matthew