Who Evaluates the Board?

Written by on January 14, 2014 in Board Effectiveness, Board Role and Duties with 0 Comments

Black and white photo of a lighthouse on a sandy shoreWho evaluates the board’s performance?  How does a board, let alone anyone else, know if the board is doing a good job?

If you read the business press, it’s every journalist, commentator, stockbroker, proxy advisor and share tipster, at least for listed companies.  A board that tried to listen to all that feedback would never accomplish anything.  It would be stuck in a mesh of contradictory advice like a fly in a spider web.

[Guilty, your Honour.  I have indeed critiqued the behaviour of boards, without being privy to their discussions, or even knowing all the facts they had in front of them.  It’s an irresistible game.]

Well, is a board doing a good job if objective indicators, maybe return on shareholder funds, are looking good?  Let me refer you to an extensive literature about which indicators or ratios actually tell us something useful, or don’t, and how they should vary between industries, or shouldn’t, and how they should be adjusted for various circumstances, or shouldn’t.  There’s more scope here for snow jobs and special pleading than for evaluating board performance.

And I think we all know that the share price is not a board evaluation indicator.  Stock markets are driven here and there by all sorts of mostly short-term considerations, and a fair dose of nonsense.  Share price matters, but you can’t set your watch by it.

Well, the shareholders then?  The shareholders elect the directors, and can un-elect them if they see fit.  It is, after all, the shareholders’ company.  But it is not the job of the shareholders to manage or direct the board.  If they do that, the board is superfluous.  The directors are elected as fiduciaries for the shareholders as a body, and they have specific tasks (see my 5.5 Core Board Tasks).  The shareholders expect a return on the capital they entrust to the company, and they rightly expect both board and management to work to achieving that return.  Of course ROI matters.  But shareholders don’t have the job of monitoring and managing the performance of the board as a board.

Another point here: recent research shows that shareholders in listed companies very rarely vote to remove a director; any displeasure is reflected in  quite small changes to the Yes vote.  Directors should listen carefully to those signals, but this is light-years away from detailed feedback.

In smaller companies and family businesses, the feedback loops are tighter, of course, and a lot of the same people may have two or more roles: shareholder, director, executive.  Nevertheless, if a company is to share in the many benefits of an able and independent board, it is the board itself, not the founder, the family or the CEO, who must do the performance management.  Not that directors can do whatever they like: they have clear duties and constraints on their actions, and the owners can always call an EGM and say “This isn’t working.” But the board must make and communicate binding board decisions, or it isn’t a board.

In the end, it comes down to the board to stand back from its own work, decide if it is spending quality time on the right issues, and assess how well it is dealing with them.  Then improve — we can all improve.  This is a mighty difficult task, and many boards seek external assistance.  An outsider can name the elephant in the room,  facilitate non-threatening appraisals of skills and skill gaps, and help the board see more clearly where it is strong and where it is not.

In the end, the buck really does stop with the board.  Who evaluates the board?  The board does.


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