Board evaluations mostly for show

Scandals in business and industry, like Enron have led to the development of both national and international guidelines and recommendations for running companies.

These guidelines are designed to foster more trust between companies and their stakeholders.

One of the things they recommend is for the board to evaluate their competence and work annually.

Study of Board Room Practise

Associate Professor Janicke L. Rasmussen from BI Norwegian Business School has completed a doctorate study at Cass Business School within the area of corporate governance.

One of the things she has investigated is how board evaluations are carried out in nine major Norwegian listed public limited companies.

Board evaluation can be used as a tool for quality control of board work and contribute to clarifying the responsibilities of the board and its members. Board evaluations may also contribute to increasing the efficiency of the board, the board researcher states.

The companies investigated follow the recommendations, and conduct annual board evaluations. Unfortunately it doesn’t look like they use the evaluations as a tool to improve the quality of their own work.

”Board evaluations contribute little to increased efficiency of their work the way they are conducted today,” she concludes.

According to Rasmussen, the boards of the companies investigated conduct evaluations because they are expected to. Then they can cross off having followed up the recommendation. Accordingly, it results in little improvement in practice.

Without direction

The companies investigated want the board evaluation to be over with as quickly and easily as possible.

Not much in the way of goals for and expectations of the board’s and board members’ work is drawn up. This means it’s not possible to compare actual work with identified goals.

“This means it’s not possible to evaluate whether the board and board members are carrying out their work as efficiently as possible either,” Rasmussen states.

She thinks one of the reasons things are so bad in Norwegian boardrooms is that we don’t know enough about board evaluations. The concept itself is relatively new, and there is little knowledge of how board evaluations should be conducted in practice.

Six practical points of advice

In answer to this, the board researcher has developed a model for how board evaluations can be conducted. The model gives specific advice and recommendations of what’s necessary to make evaluations more than a just a compulsory exercise. Here are six of Rasmussen’s recommendations:

1. Goals for the board evaluation must be related to the organisation’s general goals and results.
2. Board evaluation should be linked to the board’s strategy work and contain specific goals regarding what is required of the board and board members.
3. The goals for board evaluation must take into account all elements of board work; composition of the board, responsibilities, work processes and structure.
4. Individual descriptions of roles should be prepared for each board member in order to increase understanding of what is expected of each individual. This will also provide a framework for assessing individual board members’ contributions.
5. If there is a gap between established goals and actual performance, a follow-up plan to amend this must be prepared.
6. New and current board members must receive training which ensures the expertise necessary to tackle responsibilities of the board. This applies to both knowledge of the enterprise, but also knowledge of a more general nature relevant to the board work.

Reference:

Rasmussen, Janicke L (2010): Corporate Governance in Norway; the development of a board evaluation model with special emphasis on large listed companies. Doctoral thesis. Rasmussen presented her doctoral thesis 28 July 2010 at the Cass Business School, London.

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Read this article in Norwegian at forskning.no