Board Evaluations: Contemporary Thinking and Practice

Board Evaluations:

Contemporary Thinking and

Practice

Gavin Nicholson, Geoffrey Kiel

and Jennifer Ann Tunny

INTRODUCTION

As the top tier of the corporate decision-

making hierarchy, boards of directors can

have a substantial impact on corporate per-

formance (IoD, 2010). While there are ongo-

ing debates surrounding what the board of

directors should do (e.g., different perspec-

tives on the importance of the monitoring

role and independent directors), there is near

universal recognition that boards benefit

from feedback.

Practitioners and policymakers prescribe

board evaluation as fundamental to effective

corporate governance (e.g., Walker, 2009;

ASX Corporate Governance Council, 2010).

As summarised below, most corporate gov-

ernance codes require boards to outline

whether they are carrying out an evaluation

on an annual basis, and regulators are taking

an increasingly aggressive stance to require

evaluations (e.g., APRA, 2009). Coupled

with advice from practitioners (e.g., Garratt,

1996; 2010; Kiel, Nicholson & Barclay,

2005; Charan, 2009), it is clear that board

evaluations are now a feature of governance

practice.

Academically, there has also been a rise

in interest in board evaluations. Research

from the behavioural sciences, applied to

boards of directors, highlights that groups

need feedback to learn and develop (e.g.,

Sonnenfeld, 2002). There is also emerging

evidence that reflective boards outperform

those that do not take time to review how

and why they operate in the way they do

(Brown, 2007; Dulewicz & Herbert, 2008).

Moreover, in the field of behavioural gov-

ernance, the last decade has seen the emer-

gence of new models that move beyond the

highly simplified agency theory (e.g., Hillman

& Dalziel, 2003; Nicholson & Kiel, 2004;

Huse, 2007, 2009) against which boards can

be compared.

In this chapter, we provide a summary

of the trends, challenges and approaches

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taken around board evaluations. While we

draw on academic insights wherever possi-

ble, we also provide commentary on con-

temporary normative advice and practice.

First, we provide a brief overview of the

major trends surrounding board evaluations.

Next, we address the major challenges for

the topic, focusing on how the theory and

practice of board evaluations can be informed

by the elements common to most models of

effective corporate governance. With the

background to and foundations of board

evaluations covered, we spend the remainder

of the chapter providing practical options

for boards based on both normative advice

and insights from research into boards and

groups generally.

TRENDS IN BOARD EVALUATION

A major trend in corporate governance has

been the shift from boards being seen as

“ornaments on the corporate Christmas tree”

(Mace, 1971: 90) to boards being seen to

have responsibility for strategy and adding

value to the organisations they govern

(Pound, 1995; Hendry & Kiel, 2004; Huse,

2007; Hendry, Kiel & Nicholson, 2010).

As a result, directors and boards are under

increasing pressure to do more than simply

fulfil their fiduciary duties (van der Walt &

Ingley, 2001). At the same time, academics

have increasingly concluded that the most

used or investigated potential correlates of

governance effectiveness (e.g., board struc-

ture, independence of directors, use of com-

mittees) appear to have little explanatory

power in predicting board effectiveness

(Tricker, 2009). Thus, there are now calls to

understand and manage how boards work,

rather than to simply adopt preferred board

structures and policies.

One outcome of this shift in thinking about

boards is the increased use of board evalua-

tions as a method of performance improve-

ment. Previously, performance improvement

took place in an informal way, but there is

now pressure to make it formalised (Tricker,

2009), standardised (e.g., National Standards

Authority of Ireland, 2010) and more rigor-

ous (Clarke & Klettner, 2010). While there

have been many changes over the past 10−15

years, there are at least three key themes to

emerge: (1) increasing regulatory prescrip-

tion and recommendation; (2) increasing use

of board self-evaluations; and (3) the rise of

external reviews.

Increasing regulatory prescription

and recommendation

Perhaps the most significant change over the

past decade is the increase in regulatory

requirements and advice surrounding board

evaluations. Nearly every major report and

governance-related body has issued advice

on conducting evaluations. We have com-

piled a list of many of these in Table 13.1.

Boards should note, however, that these

requirements are the baseline for societal

expectations. In Australia, the Corporations

and Markets Advisory Committee (CAMAC)

stated that it is the directors, not regulators,

who carry the responsibility for ensuring

boards have an appropriate evaluation

process in place (CAMAC, 2010).

The prevalence of evaluations

While there have long been arguments that

boards need to focus on professionalisation

(and the consequent demands for evaluation

of directors; e.g., Tricker, 1999), globali-

sation and the pressures associated with

international competitiveness have driven

measures such as board evaluations aimed

at improving board accountability (Ingley

& van der Walt, 2002). Thus, the last two

decades have seen a shift in the use of

board evaluations from a relatively rare

event (e.g., Steinberg, 2000 reports 20% of

boards undertaking a review) to a far more

regular occurrence (e.g., Clarke and Klettner,

2010 report 70% of boards undertake an

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Table 13.1 Governance codes and board evaluations

Country Code/guideline Date Recommended /

mandated

Frequency

Australia Corporate Governance Principles and

Recommendations

2010 §2.5 Regularly

Belgium The 2009 Belgian Code on Corporate

Governance

2009 §4.11 Regularly (e.g., at least

every 2−3 years)

Canada Corporate Governance Guidelines 2005 §3.18 Regularly

France Corporate Governance Code of Listed

Corporations

2008 §9 Annually, with a

formal evaluation

at least once every

3 years

India Corporate Governance Voluntary Guidelines

2009

2009 §II.D Annually

Italy Corporate Governance Code 2009 §1.C.1(g) Annually

Netherlands Dutch Corporate Governance Code:

Principles of Good Corporate Governance

and Best Practice Provisions

2009 § III.1.7 Annually

New Zealand Corporate Governance in New Zealand:

Principles and Guidelines

2004 §2.10 Annually

Norway The Norwegian Code of Practice for

Corporate Governance

2010 §9 Annually

South Africa King Code of Governance for South Africa

(King III)

2009 §2.22 Annually

Sweden The Swedish Corporate Governance Code 2010 §8.1 Annually

Thailand The Principles of Good Corporate

Governance for Listed Companies

2006 §5 Regularly

UK The UK Corporate Governance Code 2010 §B.6 Annually – externally

facilitated at least

every 3 years

USA NYSE Corporate Governance Standards 2009 Rule 303A.09 Annually

annual evaluation). This is particularly so in

listed companies where they are often man-

dated or strongly encouraged through gov-

ernance codes (see the preceding section).

The preceding comments and figures relate

to “board-as-a-whole” reviews, where the

overall performance of the board is reviewed.

A second and complementary approach to

reviews is individual director evaluation.

While recent attitudes to individual director

evaluations have changed, and few would

now argue against them (Tricker, 2009), they

are clearly employed less often then whole-

of-board reviews. For example, a 2004 survey

by Korn/Ferry international reported that

21% of boards conducted self-evaluations

(Stybel & Peabody, 2005), while Nadler

(2004) reported 24% of respondents carrying

out individual assessments.

External reviews – a new

phenomena

In addition to a rise in internal evaluations,

there has also been a rise in the number of

external reviews conducted by ratings agen-

cies, pressure groups, investors, and so on

(Collier, 2004; Van den Berghe & Levrau,

2004). External evaluations are largely con-

ducted through analysing statements by

the board in external reports. These are then

compared with some benchmark such as

the Combined Code (now the UK Cor-

porate Governance Code) (Collier, 2004)

in the UK (Financial Reporting Council,

2010) or the ASX Principles in Australia

(ASX Corporate Governance Council, 2010).

There are a number of organisations pro-

ducing such reviews. Standard and Poor’s,

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the FTSE Group in collaboration with

International Shareholder Services (ISS),

GovernanceMetrics International (GMI),

Deminor Corporate Governance Ratings,

and Thai Rating and Information Services

(TRIS) are examples of groups providing rat-

ings assessments (Tricker, 2009).

A major criticism of external reviews is

that they rely on the published statements

of companies as to their practices. These

statements may not fully reflect what the

company does or does not do. In addition,

these public statements are contrasted against

criteria that not all directors and commenta-

tors would agree represent best practice.

Finally, they are not informed by the behav-

iours and decision making that actually goes

on in the boardroom. Nevertheless, they are

an important trend.

DEFINING AND MEASURING BOARD

EFFECTIVENESS

Clearly, boards are being pressured to under-

take more rigorous evaluations, more often.

Yet, this trend to an increasing use of board

evaluations has highlighted some of the chal-

lenges facing boards. One of the greatest

challenges for both academics and practition-

ers lies in how to define an “effective” board.

The different contexts in which different

boards operate (e.g., different legal structures,

for-profit vs not-for-profit, family owned vs

listed, stable vs turbulent industry) and the

various constraints they face (e.g., constitu-

tionally imposed constraints, operating envi-

ronment shocks, institutional forces) results

in “value creating boards” (Huse, 2007: 4)

undertaking different tasks and having differ-

ent attributes. In short, board effectiveness is

both contingent and equifinal – it is contin-

gent on the broad environment in which the

organisation finds itself, and there are alter-

native paths to effectiveness. The existence

of these alternative paths to board effective-

ness can be seen in the differing models of

how boards work (e.g., Donaldson & Davis,

1994; Hillman & Dalziel, 2003; Nicholson

& Kiel, 2004, 2007; Huse, 2007).

The problematic nature of measuring

board performance springs, we believe, from

three major sources. First, the focus of a

board evaluation is often ill-defined and

mixed; in academic language, the unit of

analysis is poorly defined. Second, there are

few sources of data and the key sources (the

board itself and key employees) are subject

to bias. Third, current thinking on the rela-

tionship between boards and performance

emphasises the contingent nature of the

board’s work, meaning there may be no sin-

gular way to measure board effectiveness. In

fact, we know that different stakeholders

judge board and organisational performance

differently (Herman, Renz & Heimovics,

1997; Callen, Klein & Tinkelman, 2003;

Balduck, Van Rossem & Buelens, 2010).

And while there is some limited, coherent,

case or survey-based understanding of what

makes a very effective director (e.g., Tricker

& Lee, 1997), there are quite disparate

views on the attributes of an average or poor

performer (Balduck et al., 2010).

Thus, the definition and measurement of

board effectiveness is a key problem for

board evaluations. To some degree, the topic

is like the definition of hard-core porno-

graphy offered by Justice Potter Stewart:

we cannot define it, but we “know it when

we see it” (Jacobellis v. Ohio 378 U.S. 184

(1964)). In the following sections, we outline

these key challenges and summarise the

implications for board evaluations and cur-

rent thinking about how to solve these

problems.

Evaluation focus – unit of analysis

problems

One of the major challenges facing a board

evaluation is choosing the appropriate level

of analysis for the process. A key error is

substituting organisational performance for

board performance (Nicholson & Kiel, 2004).

Quite simply, just because a company is

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performing well does not mean the board is

effective. There may be an exceptional man-

agement team in place, the current organi-

sational performance may reflect previous

(not current) board performance, or it may be

a matter of luck (e.g., Mauboussin, 2009) – a

point to which we return in our discussion

on contingency. Thus, the first step in

defining effectiveness lies in differentiating

board performance from organisational

performance.

Despite these significant difficulties, we

would propose that it is possible to assess

board effectiveness accurately. To do so

requires us to understand the complex nature

of the issue. Boards, like most groups (see

Hackman, 2002), require three different types

of effectiveness if they are to maximise their

potential. These types of effectiveness oper-

ate at three different levels – the organisa-

tional level, the group level and the individual

level. The idea of different levels of perform-

ance is put in different language in the gov-

ernance literature. Some authors concentrate

on the work of the board. They look at board

roles (Zahra & Pearce, 1989) or board tasks

(Huse, 2007), and how they add value to the

corporate value chain (Huse, Gabrielsson &

Minichilli, 2009a, 2009b), while others con-

centrate on the group (Forbes & Milliken,

1999) and individual requirements (Tricker

& Lee, 1997).

Instead of being the exclusive domain of

one level of analysis, board effectiveness is

likely to be highly complex (Ingley & van

der Walt, 2002), requiring a sophisticated

approach (Dilenschneider, 1996). Board

evaluations should include both group and

individual levels of evaluation (Epstein &

Roy, 2004b), where the attributes of a direc-

tor affect their ability to contribute to a board

in complex ways – for example, minority

directors have more influence on strategic

decision making if they have experience as

directors (Westphal & Milton, 2000). To

understand this dynamic better, we provide

current thinking on the three key levels of

analysis – board purpose, group development

and individual contributions.

Fit for purpose

First, a board needs to be fit for purpose or

able to carry out the tasks the organisation

requires of it. In the organisational psychol-

ogy literature, this would be considered the

team product (e.g., McGrath, 1984) and

follows the major academic research tradi-

tions that focus on understanding the tasks

required of the board (e.g., Johnson, Daily &

Ellstrand, 1996; Hung, 1998) and normative

prescriptions for the board to clarify what it

sees as its role. An effective board is one that

knows and can execute the tasks required of

it, irrespective of how those specific tasks

vary with each board. Ultimately, relevant

board task execution determines whether a

board adds value, not the execution of a

standard role set.

Different researchers provide different ter-

minology to the area, with the team product

being called board roles (e.g., Zahra &

Pearce, 1989), board tasks (e.g., Huse, 2007)

and board functions (e.g., Cornforth, 2001).

Similarly, there are different terms and cate-

gorisations used by different researchers.

These range from Hillman and Dalziel’s

(2003) two role models of control and access

through various three-role typologies of serv-

ice (including advice giving and strategy),

networking and control (Zahra & Pearce,

1989) through to six role models (e.g., Hung,

1998) and more.

Similarly, there is no agreed role set among

the normative literature (e.g., Garratt, 1996;

Charan, 1998; Carter & Lorsch, 2004).

However, there is emerging evidence that

practitioners focus more on a normative list

of their tasks than on a generic set of limited

roles as described in the academic literature

(Nicholson & Newton, 2010). What is criti-

cal is that the board’s product – its “core

responsibilities and activities” – need to be

translated into expectations of the board

(Conger & Lawler, 2009).

Group

In order to deliver its core responsibilities

and activities, a board requires its directors to

work together effectively. Recent analysis of

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board contributions to the global financial

crisis highlight how board “effectiveness has

been undermined by a failure to observe

appropriate boardroom behaviours” (ICSA,

2009: 3) such as the willingness and ability

to challenge management (Walker, 2009).

Furthermore, if we combine (1) the definition

of a team as a group with a common goal

(Hackman, 2002) and (2) the legal concept

that a corporation is a separate legal entity

founded for a common purpose and which is

directed by the board (Micklethwait &

Wooldridge, 2003), then clearly the board is

an autonomous team.

Recognising an effective board as a high

performing group leads to the conclusion

that boards, like other work groups, would

benefit from active construction (or “board

building”) and management (Nadler, 2004:

104). Effective boards will share the attributes

of an effective team – cohesion, cognitive

conflict, shared commitment and values,

and so on (Huse, 2005). These team-based

attributes are no substitute for individual

competence or task execution, but rather

allow the board to make the most of the

people that they have serving on the board to

execute the required task set. Thus, in-depth

interviews with 60 Belgium directors high-

lighted how both team attributes (e.g., board

meeting quality, board composition, decision

making) and fit-for-purpose outcomes (i.e.,

role of the board, management−board−

shareholder relationships, etc.) are seen as

elements of an effective board (Van den

Berghe & Levrau, 2004). Similarly, the kinds

of information that the board possesses

(diversity of information) and the way board

meetings take place (open discussion and

active search for information) affect the CEO

ratings of board strategic tasks immediately

and into the future (Zhang, 2010).

There is growing evidence of the impor-

tance of group-based performance to board

effectiveness. For example, a survey of 495

small Norwegian firms found that group

attributes (e.g., board working style and

board quality attributes such as motivation)

were more predictive of the board’s strategic

task/role involvement than individual direc-

tor attributes (such as traditional composition

measures) per se (Pugliese & Wenstøp, 2007).

Similarly, the individual attribute of motiva-

tion is an important factor, with clear evi-

dence that individual motivation is related to

both peer-perceived and self-rated engage-

ment and execution of board work (Stephens,

Dawley & Stephens, 2004).

Thus, the relationship between team devel-

opment and task or role execution is com-

plex, and is an important component of the

current research agenda (Zona & Zattoni,

2007). Board effectiveness is intertwined

with the intra-board relationships and rela-

tionships with management (Castro et al.,

2009) whereby group-based issues such as

inter-group dynamics are likely to affect

roles like advice and service (Kor, 2006). In

short, the ability of directors to work together

is critical to the board’s roles/tasks – and this

itself relies on the competency of directors.

Individual

An effective board is also one where direc-

tors have the required competencies (Tricker

& Lee, 1997), are contributing appropriately

(Dulewicz & Herbert, 2008), and enjoy their

work (Preston & Brown, 2004). As a starting

point, a director’s human capital (knowledge,

skills, abilities and social networks) is thought

to be important to board performance

(Hillman & Dalziel, 2003). Directors need to

be competent (Roberts, McNulty & Stiles,

2005) and have firm-specific knowledge and

skills such as company and industry knowl-

edge (Charan, 1998).

There is, however, no clear competency

list to guide any assessment process. In

regulatory frameworks there is there is little

consideration given to a director’s com-

petencies beyond independence (Zattoni &

Cuomo, 2010). Thus, most advice on director

competence focuses on the fiduciary duties

of directors, and is insufficiently tailored

to the myriad of company contexts (Tricker

& Lee, 1997). Instead, director compe-

tencies vary from company to company and

board to board (Coulson-Thomas, 2009) with

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the various “fit-for-purpose” requirements

(e.g., monitoring, advising, strategy, access

to resources) differing between boards.

By implication, so will required competen-

cies (Tricker & Lee, 1997) and what often

results in a complex list of highly desired

competencies that are almost impossible to

satisfy (e.g., Balduck et al., 2010 identified

some 41 different competencies in their study

of volunteer board members of community

sports organisations).

The focus on individual competencies

needs to be broader than knowledge and

cognitive competencies, however. The omi-

ssion of emotional and social competencies

neglects important components of an effective

director’s competency set (Balduck et al.,

2010). Engaged individuals work harder, use

their knowledge and contacts more and

generally feel more satisfied with their

role and contribution (Kahn, 1990; Meyer,

Becker & Vandenberghe, 2004; Cropanzano

& Mitchell, 2005). While it is important to

consider if the individual directors are

contributing effectively, this does not mean

that an effective board requires the same kind

and level of performance from each director,

but rather that each is contributing from

their capabilities appropriately and gaining

sufficient satisfaction from the role. Finally,

boards and those involved in evaluations

need to realise that, in many contexts, director

competencies may need to be built over time

(van der Walt & Ingley, 2001).

In addition to this general guidance, there

is emerging evidence that individual direc-

tors do make a difference. Thus, director

commitment is related to self-reported and

peer-perceived involvement in non-profit

board work (Preston & Brown, 2004). More

directly, above-average directors (measured

as those hired following losing a position

following a takeover) were associated with

subsequent above-average firm financial per-

formance in the firms into which they were

hired (Fairchild & Li, 2005).

The interaction between individual and

group-based attributes is also reflected in the

growing importance placed by academics on

information gathering and processes (e.g.,

Forbes & Miliken, 1999; Nicholson & Kiel,

2004; van Ees, Gabrielsson & Huse, 2009).

Normative advice, such as requirements to

have board papers prepared well in advance

of meetings (Kiel & Nicholson, 2003; Epstein

& Roy, 2004a), is clearly evidence of how

the functioning of the group interacts with

the traits of the individual to affect board

performance.

Finally, on a practical level, there is a com-

plexity in board evaluations of individuals

that springs from differences in the ease with

which a director’s skills and experience can

be assessed compared with how well she or

he works with others (Clarke & Klettner,

2010). As we move from more objective

assessments of experience and verifiable

skills into important concepts such as trust,

politics, power plays and decision flaws,

objective verification and personal percep-

tions become more important. These issues

are critical to board effectiveness, independ-

ent of the individual director’s abilities

(Finkelstein & Mooney, 2003; Huse, 2009b).

Evaluation of the levels – evidence

from the field

Despite the strong theoretical issues sur-

rounding selecting an appropriate level of

analysis, it is generally treated tacitly or

ignored in board evaluations. Spencer Stuart’s

(2010) 25th annual study of S&P 500 boards

found that of those companies evaluating

their boards, only 26% evaluate individual

directors in addition to the entire board – a

rise from 22% in 2009 (see Figure 13.1).

Conger and Lawler (2009) report that in large

US corporations, some 98% evaluate overall

board performance, 97% evaluate committee

performance and 84% evaluate individual

director performance.

At a more subtle level, our experience of

evaluating and assessing individual perform-

ance largely ignores the group nature of the

board’s work. Since directors share a common

legal liability (e.g., Baxt, 2009), most boards

assess the requirements of each individual

director with the same tool and requirements.

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Questions of preparation, contribution and

so on are uniform; however, each individual

director may bring a different set of

attributes and behaviours that are not suited

to uniform assessment. For instance, con-

sider the finding that some 28% of directors

reported that they did not understand the

basic insurance agreements housed in their

directors’ and officers’ (D&O) insurance

policy (PricewaterhouseCoopers, 2010).

While this is an obvious concern for an indi-

vidual director’s personal liability, is it a

concern for the board’s performance? If one

director does understand it, has assessed it,

and concluded it is appropriate, then the

impact of all other directors not knowing is

nil. We believe the lack of attention provided

to issues such as these is an area for future

development.

In summary, to carry out an effective

evaluation, boards need to consider the

level of effectiveness on which they want to

focus, bearing in mind deficiencies in a

higher-order level of effectiveness (e.g., fit-

for-purpose problems) may be caused by

lower-level deficiencies (e.g., inadequate

team development). For example, if a direc-

tor is not sufficiently engaged or competent,

he may not contribute to board discussions

and decisions for fear of appearing foolish.

As a result, the board can develop a climate

that does not encourage robust discussion

and debate, leading to ineffective perform-

ance of the board’s tasks – it may not exer-

cise decision control well over a proposed

capital expenditure, because not all possible

risks or flaws in the management proposal

are identified. An effective board is one

with a holistic understanding of the relation-

ship between the elements of effectiveness

and an approach to working and evaluating

all three levels over time.

Contingent nature of board

performance and resulting

corporate governance models

Finally, a key issue facing boards is the

highly contingent and complex relationship

between board effectiveness and firm per-

formance. The relationship between boards

and firm performance is often affected by

factors outside the board’s control (Clarke &

Klettner, 2010), particularly in the short term.

Economic conditions, industry conditions,

Full board and

committees,

50%

Full board only,

24%

Full board,

committees

and directors,

21%

Full board and directors,

Figure 13.1 Types of board evaluations conducted

Source: Spencer Stuart, 2010: 29.

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lifecycle, management development and

myriad other factors (e.g., Nicholson & Kiel,

2004) all affect the relationship between

board and firm performance. Importantly, the

board’s role is almost universally thought to

be contingent on these and other important

contingencies (e.g., Carter & Lorsch, 2004;

Hillman & Dalziel, 2003).

MODELS OF BOARD

EFFECTIVENESS – RESPONSES

TO CONTINGENCY

Most often, models of how boards work

assist researchers and practitioners under-

stand this complexity. In a board evaluation

context, governance models dictate the type

of data collected, the analysis process

employed and, from a practitioner’s perspec-

tive, the action plan that is developed. They

allow people to conceptualise the “inner

workings” of a board – what a board actually

does as well as the way in which it accom-

plishes its work.

Until relatively recently, the preponder-

ance of interest was in the way the board

could be used to monitor and control man-

agement (e.g., Smith, 1776) to overcome the

problems caused by the separation of owner-

ship from control (Berle & Means, 1932).

While there are clear models of this agency

relationship (Jensen & Meckling, 1976), there

was no real model of board effectiveness.

Thus, practitioner recommendations

focused on board structure (independence

from management in the form of outside

directors and separating the chair/CEO role),

but with divergent rationales (e.g., in a study

of 60 different governance codes recom-

mending board independence, Zattoni and

Cuomo, 2010 fail to identify a consistent

rationale). Similarly, academic research into

the monitoring role has failed to provide con-

sistent, robust evidence that independence is

how boards add value to their corporations

(Daily, Dalton & Cannella, 2003; Finkelstein

& Mooney, 2003).

Over the past several decades, views on

effective boards have evolved, however.

The following sections outline five such

models, and conclude with observations on

their commonalities and implications for

board evaluations.

Zahra and Pearce’s (1989)

integrated model

The first integrated and widely cited model

of board effectiveness was proposed by Zahra

and Pearce (1989) (see Figure 13.2). Their

review of 22 empirical articles revealed the

role of the board went beyond monitoring

and included what they termed the strategy

and service roles. Importantly, the authors

recognised that organisations face different

challenges during their life cycle and so

“boards are expected to perform qualita-

tively different roles at various points of

the cycle as exemplified by the different way

a board performs its control function in

an entrepreneurial firm as opposed to a well-

established, mature operation” (Zahra &

Pearce, 1989: 298).

Additionally, they provided a logic that

linked the antecedents (composition, charac-

teristics, structure and processes) to these

role requirements, and the complex relation-

ships that linked attributes to roles. Thus,

their contribution provides a contextual con-

tingency as well as a path from board

attributes through board roles to organisa-

tional performance.

Nicholson and Kiel’s (2004)

intellectual capital framework

Building on Zahra and Pearce’s (1989) con-

tribution, Nicholson and Kiel (2004) provide

a more detailed, group- and individual-

focused framework that attempts to link

boards and corporate outcomes. The three

advances in their model are: (1) an explicit

recognition of the group, individual and cor-

porate levels of performance required in a

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Organisation

Type

Legal

Framework

Constitution

History

Strategy

Human Capital

Individual

Social Capital

Cultural

Capital

Board Social

Capital

Structural

Capital

Individual

effectiveness

Team

effectiveness

Board

Effectiveness

Organisational

Performance

OutputBoard Intellectual CapitalInputs Context

Internal

Environment

External

Environment

Board Roles

Providing

advice to

management

Controlling the

organisation

Providing

access to

resources

The Individual

The Team

Board

Dynamics

Figure 13.3 The board intellectual capital framework

Adapted from Nicholson & Kiel, 2004: 456.

Composition

Size

Outsider vs Insider

Minority

Characteristics

Directors’ Backgrounds

Board Personality

Structure

Committees

Organisation

Flow of Information

Leadership

Process

Meetings

CEO–Board Interface

Consensus

Evaluation

Formality

Board Roles

Service

Strategy

Control

Corporate

Financial

Performance

External Contingencies

Environmental Variables

Industry Type

Legal Requirements

Internal Contingencies

Phase of Life Cycle

CEO-style

Company Size

Corporate Resource

Situation

Figure 13.2 Integrated model of board attributes and roles

Adapted from Zahra & Pearce, 1989: 305.

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BOARD EVALUATIONS: CONTEMPORARY THINKING AND PRACTICE

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board system; (2) the explicit recognition

that the attributes of board (what they

term the board intellectual capital) are them-

selves a result of the corporation’s context;

and (3) the emphasis that “an effective cor-

porate governance system requires a series

of components to be in a state of congruence

or alignment” (Nicholson & Kiel, 2004: 443).

Their overall model explicitly recognises

the notion that there is no one-size-fits-

all approach to board effectiveness (see

Figure 13.3).

Carter and Lorsch’s (2004) board

as a system

While presented differently, Carter and

Lorsch’s (2004) model of board effective-

ness shares several attributes with that of

Zahra and Pearce (1989), and Nicholson and

Kiel (2004). First, they explicitly recognise

the contingency of the relationship between

board roles and the company situation

(Figure 13.4). Second, they also propose that

the group’s performance is critical to board

effectiveness – it is often not so much how

individual directors perform, but how they

function together. Finally, they see that the

elements of the board need to align with the

role of the board. In so doing, they explicitly

call for performance reviews to assess board

behaviours and to collect information from

executives who “see the board in action”

(Carter & Lorsch, 2004: 178).

Charan’s (2005) board as a source

of competitive advantage

In line with all three preceding models,

Charan provides a view of the board that

has evolved from a compliance-focused, cer-

emonial body to one that is ideally active

and “liberated” (2005: 30). Based on his

extensive consulting practice, he viewed an

effective board as having: (1) good group

dynamics; (2) an appropriate information

architecture; and (3) a correct focus on the

substantive issues (Figure 13.5). These three

building blocks allow the board to carry out

the roles (or tasks) required of it.

As with Carter and Lorsch (2004),

Charan (2005) emphasises the importance

of group dynamics and the advantages of

peer-evaluation as part of a review process.

By concentrating on continual improvement,

he advocates for the board as a source of

competitive advantage.

Huse’s (2007) value-creating board

Huse’s (2007) most recent conceptualisa-

tion of the board as a system (e.g., see

Huse, 2000 for earlier versions) provides a

broader, societal focus for understanding

how boards add value. In line with all the

previous models, the value-creating board

model concentrates on how the board’s com-

position and routines, processes and policies

allow it to execute the role set required by

its context.

Figure 13.4 The board as a system

Adapted from Carter & Lorsch, 2004: 9.

Company

situation

Board’s role

Structure Membership

Processes

Culture

Behaviour

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Competitive Advantage

Right CEO and

Succession

Plans

CEO

Compensation

Right Strategy

Leadership

Gene Pool

Monitoring

Health,

Performance,

and Risk

Three Building Blocks

Group Dynamics

• Between directors, and between

directors and management

• Constructive dissent

• Widely participative

Information Architecture

• Focused, timely, and digestible

• Directors “know” the business

• Management anticipates board

needs

Focus on Substantive Issues

• Right balance between

performance and conformance

• Value add, anticipatory mind set

Figure 13.5 The board as a source of competitive advantage

Source: Charan, 2005.

External

actors

Internal

actors

Board task

performance

Board task

expectations

Board

members

Context /

resources

Value

creation

Decision-making

culture

Interactions

Structures

Figure 13.6 The value-adding board framework

Adapted from Huse, 2007: 4.

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MODELS OF BOARD

EFFECTIVENESS – SOME

SHARED ATTRIBUTES

While there are clear differences between

these models, there are some important

similarities they share that can inform a

board evaluation. First, they highlight that

the relationship between organisational per-

formance and board effectiveness is com-

plex and not easily studied (Cadbury, 1997;

Herman & Renz, 2000) and varies from

company to company – there is no “one size

fits all”. Similarly, they aim to look beyond

simple agency theory approaches (Daily et al.,

2003) and the consequent monitoring role

of the board.

Another commonality is a shared pattern

of thinking of how boards add value. First,

the board has a set of roles or tasks that it is

required to perform. These roles/tasks vary

with context and allow the board to work

with, and through, management to add value

to the company it governs.

Second, the board has a series of attributes

that will determine how well these roles

are executed. The attributes involve three

broad headings: (1) the composition of the

board; (2) the policies, processes and rou-

tines the board uses; and (3) the relationships

between board members and the board and

management. Again, the key inference is that

board effectiveness involves getting the fit

between these components right, rather than

fulfilling any singular recommendation for

every board.

We bring these common elements together

in Figure 13.7, which also recognises the

impact the board has on company perform-

ance directly: for example, through the deci-

sions it makes, the resources it can bring to

the organisation, and through the support the

board can give to management, because of its

range of skills, knowledge and experience.

Hard to measure and few metrics

An interesting feature of the board evaluation

terrain is the plethora of tools available to

boards – a Google search of the term “board

evaluation tools” revealed 15,400 hits, many

of them to resources that boards can down-

load for free. Despite the enormous number

of tools, we are aware of only four with any

kind of empirical validation process.

Gill, Flynn and Reissing’s (2005)

Governance Self-Assessment

Checklist (GSAC)

One useful resource is the Governance Self-

Assessment Checklist (GSAC) developed by

Gill, Flynn and Reissing (2005). While it

does exhibit sound psychometric qualities,

Figure 13.7 Board effectiveness: a synthesis of the models

Situation or Context

Board attributes

• Composition

• Policy, processes

and routines

• Board

relationships,

culture and

dynamics

Board roles

• Either listed (e.g.,

strategy,

compliance,

monitoring, etc.)

• Typologies (e.g.,

Tricker’s model)

• Academic roles

(e.g., control,

access to

resources)

Company

performance

Management

performance

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there are a number of potential difficulties.

There are two concerns with the GSAC,

common to the other instruments. First, the

tool centres on board effectiveness as a single

construct with what appears to be a large

number of redundant items in the scale. The

checklist has 12 dimensions or scales, with

an average 12 items per scale or 144 items.

The tool may well benefit from removing

items, as suggested by the very high reliabil-

ity scores (Cronbach’s alpha) reported.

Second, while the instrument is explained as

a 12-dimension, single construct (board

effectiveness), the technique used to validate

this structure could have been more robust.

Slesinger’s (1991) Board Evaluation Tool

Herman and Renz (1997, 1998, 2004) have

produced a stream of research investigating

Slesinger’s (1991) board evaluation tool.

Like Gill et al. (2005), they have a single

construct (board effectiveness) that is made

up of 11 questions drawn from 11 different

dimensions of effectiveness. This instrument

produced wide variability in effectiveness

ratings between raters. Additionally, “both

board members and chief executives appar-

ently regard the financial condition of the

organisation as the true measure of board

effectiveness” (Herman & Renz, 1998: 700) –

an interesting phenomenon in a sample of

non-profit organisations. It appears to con-

firm the difficulty (particularly for respond-

ents outside the boardroom) to differentiate

between (1) organisational and board per-

formance and (2) financial performance and

other important aspects of performance.

Holland’s (1991) BSAQ

The BSAQ (Holland, 1991) is perhaps the

most extensively published instrument

designed to measure board effectiveness. It

conceptualises board effectiveness as requir-

ing six dimensions (i.e., context, education,

interpersonal, analytical, political, and strate-

gic skills). It appears the BSAQ is evolving

as the number of items reported varies across

the studies: for example, 69 items in Holland

(1991); 73 items in Jackson and Holland

(1998); unreported in Holland and Jackson

(1998); and 37 items in Brown (2005).

Reliability measures in the studies have

ranged from good (Brown, 2005) to marginal

(Holland, 1991).

An area of potential concern involves the

construct dimensions. As with Gill et al.

(2005), board effectiveness is presented as

multidimensional, and the papers report

subdimensions load on a single factor. It is

difficult to assess the attributes of the instru-

ment as presented, because we cannot assess

the cross-loadings across factors or dimen-

sions. A more convincing case could be made

through the use of multiple factor analytic

techniques including confirmatory factor

analysis undertaken with structural equation

modelling (e.g., Anderson & Gerbing, 1988;

Arbuckle, 2003). Additionally, the sample

involved US seminaries or smaller liberal

arts colleges/universities and so the instru-

ment may not generalise, although, in fair-

ness, Brown (2005) did report a more

generalised sample.

Nicholson and Newton’s (2010)

Board Roles

The most recent validated tool to be pub-

lished is Nicholson and Newton’s (2010)

Board Roles instrument. In what is an early

stage of their research, they build on the

work of Nicholson et al. (2008) to develop an

instrument to measure ideal and board role

performance. They report a five-dimensional

model of board roles performance (strategy,

oversight and mentoring of the CEO, risk and

compliance, oversight of the governance

system, and access to resources) with good

psychometric properties. As with Holland

(1991), it would benefit from replication and

a greater breadth of sample.

Few metrics

Overall, these tools are definite steps forward

in helping boards improve their performance.

However, there are potential drawbacks

when applied to governing bodies, particu-

larly in more diverse contexts. First, all

tested tools are focused on one issue – board

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effectiveness – and not the possible issues

leading to board effectiveness. There are

potential statistical problems with the dimen-

sionality of the BSAQ and GSAC as well as

unclear reliability traits. Third, there are

some unique samples used in the research

that would appear to differ substantially from

many board contexts – several of these

instruments were tested on samples drawn

from small US liberal colleges, seminaries,

entirely non-profit samples, and similar.

In summary, there are few hard metrics or

systems to conduct board evaluations and

many of the advances in measuring organisa-

tion and management performance have yet

to transfer to the measurement of board

performance (Epstein & Roy, 2004b). While

some steps to improve measurability of board

performance, including metrics, include the

adaptation of the Balanced Scorecard meth-

odology (Epstein & Roy, 2004a) and more

rigorous approaches to measuring aspects

of what boards do (Nicholson & Newton,

2010), these methods are either only part

of the solution or based on normative views

of governance effectiveness.

Overcoming individual resistance to and

negative perceptions of board evaluations

requires us to address the issues we have

outlined. The subjective nature of inputs and

the complex measurement issues involved in

assessing director and board performance are

important considerations to any evaluation

process (Ingley & van der Walt, 2002).

Problems in self-rating

Another practical problem involves identify-

ing appropriate data to verify effectiveness.

Most boards operate in commercially sensi-

tive environments. Consequently, few indi-

viduals outside the board (and generally

only a few select individuals such as the

company secretary, CEO and CFO) have

any substantial exposure to the work of the

board. Thus, board evaluations most often

rely largely (if not solely) on self-evaluations

or, at best, the feedback of individuals in a

subordinate position. As a result, any conclu-

sions need to be treated with care, as they

may suffer from a number of biases.

Perhaps the key problem associated with

board self-evaluations is the general tendency

for people to rate themselves as superior

compared to an “average” or generalised

other, sometimes called illusory superiority.

In fact, some studies indicate that more than

90% of respondents will overrate themselves

(Gramzow et al., 2003) and that it will occur

across a range of different criteria (Robins &

John, 1997). Importantly, this tendency to

overrate is correlated with positive self-

esteem (Brown, 1986), a person’s need for

achievement (Gramzow et al., 2003) as well

as poor prior performance (Gramzow et al.,

2003). In the case of boards, it is reasonable

to conclude that individuals at the apex of the

organisation have both high self-esteem and

a high need for achievement.

Consequently, most board members view

their performance as above average. Figures

13.8 and 13.9 provide an insight into

this phenomenon. Each is a histogram of

the average board rating in response to the

question, “Overall, how well is your board

performing?” Figures 13.8 and 13.9 provides

the data from a board evaluation company

Effective Governance and a summary from a

similar question asked of non-profit boards

in the Developing Your Board research

program run out of the Queensland University

of Technology (QUT). Out of 95 boards

comprising 870 directors, not one rates itself

below average (5/10). Of the directors, only

55 individuals rated their boards as less than

5/10 out of the 870 – some 6.3%.

While it is possible to compensate for this

consistent bias across respondents (for exam-

ple, standardising scores or simply trans-

forming the scores downwards), more

difficult issues arise when poor performance

is associated with greater than normal exag-

geration. In our experience, there is often an

inverse relationship between a board’s rating

of itself in this question and the performance

of the board as observed by the team under-

taking the board assessment. This point is

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Figure 13.9 Rating of board effectiveness by each director (n = 870)

Source: Courtesy of the DYB Project, QUT.

100

150

200

250

300

12345678910

Number of directors

Rating out of 10 (1 is low, 10 is high)

Figure 13.8 Average self-rating of board effectiveness by members of the board (n = 95)

Sources: Courtesy of the DYB Project, QUT.

1>2 2>3 3>4 4>5 5>6 6>7 7>8 8>9 >9

Number of boards

Rating out of 10 (1 is low, 10 is high)

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BOARD EVALUATIONS: CONTEMPORARY THINKING AND PRACTICE

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reinforced by evidence from the field that

often directors performing poorly have been

known to give themselves “outlandishly pos-

itive scores” in self-assessments (Behan,

2006: 50). While this could be a general ten-

dency in people (Gramzow et al., 2003), we

hypothesise (in line with the overconfidence

bias and a lack of situational awareness) that

it often occurs on boards and with individu-

als who have little governance experience to

act as a reference point.

These observations raise another issue in

board evaluations – Is it possible to bench-

mark boards? Some commercial organisa-

tions offer benchmarking services where, by

using a common questionnaire over multiple

boards, comparisons can be made as to how

one board rates relative to others. Based on

the discussion above, this process is quite

misleading. First, as noted, the absolute

rating of a board on a construct is a function

of the level of insight of the directors – high

scores do not necessarily represent high per-

formance. Second, as covered in our previous

theoretical discussion, board performance is

both contingent and equifinal, a point that is

ignored where a score is simply contrasted

with a sample of other scores.

Although a concern, there are several ways

to compensate for this effect. First, using a

mixed method approach will likely highlight

potential issues irrespective of the individual

ratings of items that directors make. Similarly,

involving outsiders in the review (either as

the source of data or to facilitate the review)

can help. Finally, work on cognitive biases

indicates that simple awareness can go a long

way to overcoming the negative outcomes

associated with a decision-making heuristic

(e.g., Bazerman, 2002). Thus, making boards

aware that they are likely to overrate them-

selves, may go some way to ensuring they

discount this possible bias in rating.

Time-based problems

Finally, there are significant problems in

assessing the impact of the board due to the

confounds of time: the lag between board

activity and firm or management perform-

ance. While the board’s decisions may result

in substantial immediate performance effects

(e.g., responding to a crisis), board decisions

generally involve long-term time horizons.

For instance, hiring a new CEO is unlikely to

have any immediate effect on organisational

performance (here we exclude any possible

announcement effect), but rather a medium-

to longer-term impact, as the new CEO gains

a solid understanding of the company and

begins to implement substantive change.

Similarly, capital expenditure decisions and

changes in strategy take significant time to

implement and flow through to clear corpo-

rate performance. Thus, the ability to link

board activity to overall corporate perform-

ance is problematic. Variable and long time

lags, problems of reverse causality (e.g.,

declining CEO performance may lead to

greater board involvement in their oversight

of the position) all inhibit our ability to meas-

ure and demonstrate board effectiveness.

STEPS FOR AN EVALUATION

Having outlined the trends in evaluations

and the major challenges facing boards

and academics, we now turn to the key

issues involved in developing a successful

board evaluation. This section is based on

Kiel and Nicholson’s (2005; Kiel, Nicholson,

& Barclay, 2005) model for designing an

evaluation process (see Figure 13.10). It

shares many attributes with other work in

area – for example, Minichilli, Gabrielsson

and Huse’s (2007), “Who does what, for

whom, and how?”

What are your objectives – Why

are you doing it?

The first (and, in our view, most important)

aspect of any evaluation is establishing why

you are doing it. Without a solid rationale

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shared by the board members, any evaluation

is likely to meet resistance and/or fail. Rather

than focusing on the actual areas of govern-

ance for review, the first step is to be clear on

the why – What is your board’s motivation in

undertaking a review? The real value in a

board evaluation springs not from following

what others are doing, but focusing on what

your board wishes to gain from the process.

Most directors report they experience pos-

itive outcomes from evaluations (Clarke &

Klettner, 2010). In this section, we detail the

key reasons to undertake a review. These are

to: (1) highlight areas for improvement,

either in a general or specific way; (2) model

good performance management to the execu-

tive and organisation; (3) signal to stakehold-

ers that you value governance; (4) comply

with requirements of the regulator; and

(5) act as a mechanism to protect directors.

Problem identification and resolution

The most common reason for board evalua-

tions is improvement at the group level. As

Sonnenfeld (2002: 114) highlights:

People and organizations cannot learn without

feedback. No matter how good a board is, it’s

bound to get better if it’s reviewed intelligently ... .

If a board is to truly fulfill its mission – it must

become a robust team – one whose members

know how to ferret out the truth, challenge one

another, and even have a good fight now and

then.

An effective board evaluation can improve

the working conditions of the board, in par-

ticular the development of the requisite team

capacity to perform the roles required of it.

For example, an evaluation may clarify indi-

vidual and collective responsibilities (Conger

& Lawler, 2009). As a result, an effective

evaluation can assist boards to attract and

retain good directors (Nadler, 2004), as well

as build the culture of the board (Stybel &

Peabody, 2005). Unlike retirement age or

term limit policies, board evaluations con-

tribute to board renewal in a targeted way

that distinguishes between high and low

performance (Behan, 2006) such that eval-

uations can feed into the training and devel-

opment approach of the board. For instance,

in the UK, Hampel (1998) provides norma-

tive advice for targeted director training

(recommendation 3.5) informed by a process

for assessing collective and individual per-

formance, a position carried over into the

Combined Code in 2006 (Principle A.6)

(Dulewicz & Herbert, 2008).

These effects are noted in the literature,

particularly for decisions about board com-

position. Dulewicz and Herbert (2008) report

that board evaluations influenced a director’s

decision to resign in nearly one-third of cases

and the appointment of directors in over two-

thirds of cases in their sample drawn from

the FTSE 350. Similarly, board evaluations

provide a basis for the chair (or lead director

or similar) to discuss strategies for personal

development with each director, often sepa-

rately (Tricker, 2009).

Perhaps the most important way a board

evaluation helps is by enabling the board

to recognise both straightforward and com-

plex issues and bring them to the surface

for resolution (Wolf & Stein, 2010). Thus,

board evaluations can address important

board−management relationships, concerns

1. What are our objectives?

2. Who will be evaluated?

3. What will be evaluated?

4. Who will be asked?

5. What techniques will be used?

6. Who will do the evaluation?

7. What will you do with the results?

Figure 13.10 Board evaluation framework

Source: Kiel, Nicholson & Barclay, 2005.

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BOARD EVALUATIONS: CONTEMPORARY THINKING AND PRACTICE

303

surrounding individual directors and power

issues in organisations (Stybel & Peabody,

2005; Conger & Lawler, 2009), especially in

situations where individuals might feel reti-

cent about raising problems without being

asked directly. As part of this process, it can

allow directors to ensure that what they per-

ceive or espouse as the issue is in fact the

cause of problems. For instance, Nadler (2004)

reports how a board espousing problems

around the CEO/president role ambiguity

actually related to wanting more information

about acquisitions being pursued.

This factor also transfers through to the

individual level of analysis, where it provides

important feedback for directors on their

performance. Evaluations contribute to direc-

tor satisfaction (Nadler, 2004) and provide an

important basis for self-development for the

individuals involved.

Performance improvement itself, however,

has a number of dimensions. It can range

from a review of previous evaluations or a

simple check-up against a governance frame-

work, through a process designed to address

known challenges to the situation where a

board knows that something is wrong, but is

unsure of exactly what it is or what they

can do about it. Figure 13.11 provides a con-

ceptual framework for thinking about this

important aspect of a board review.

Modelling performance

management and culture building

From an organisational perspective, board

evaluations can also play an important sym-

bolic role as the board leads by example

(ICSA, 2009), models performance manage-

ment to the senior managers (Behan, 2006)

and sets the tone for a continuous impro-

vement approach within the organisation

(Clarke & Klettner, 2010). A highly struc-

tured approach can include benchmarking

the board’s performance, although this will

take the commitment and time required to

build sufficient goodwill and trust to make it

possible (Garrett, 2003).

Signalling to stakeholders

Externally, evaluations perform a number

of roles. First and foremost, evaluations are

often viewed as an accountability mecha-

nism for investors (Conger & Lawler, 2009)

and, therefore, are prescribed in guidance on

good governance (e.g., ASX, 2009; Walker,

2009). Similarly, they can also be a key

source of legitimacy and signalling, particu-

larly to investors and stakeholders (Connelly

et al., 2011). We have noticed this is parti-

cularly the case where there is a concentrated

share ownership – say in the case of a

Review previous evaluations

Identify emergent issues

Recognise “unmentioned”

issues

Evaluation objectives

Figure 13.11 Setting your evaluation objectives

Source: Kiel, Nicholson & Barclay, 2005.

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government-owned corporation or company

with significant institutional shareholdings.

Compliance with regulatory

or stakeholder requirements

Regulatory requirements for board evalua-

tions are closely aligned to, but different

from, signalling. Whereas signalling is vol-

untary, mandatory evaluations provide an

ends of themselves with recommendations

or requirements under various regulatory

regimes, codes of conduct and listing rules

fast becoming one of the major reasons for a

board evaluation (Ingley & van der Walt,

2002).Table 13.1 highlights the widespread

recommendation of board evaluations.

However, care should be taken so that

compliance does not become the sole driver

of the process, as it is seen as the worst moti-

vation for an evaluation (Tricker, 2009). A

compliance focus quickly turns an evaluation

into a “pesky ‘checklist’ item” and boards

fail to spend “the time and effort to conduct

a comprehensive assessment process” (Wolf

& Stein, 2010: 17). Consequently, there

is little benefit as they “skate by with paper-

and-pencil surveys comprising recycled

checklists cobbled together by another

company’s attorney” (Nadler, 2004: 104).

While boards may complain that regula-

tion and standards encourage a tick-the-box

approach, it is in fact the boards themselves

that make this decision when they adopt “a

ritualistic approach to important and subs-

tantive governance processes” (Clarke &

Klettner, 2010: 9) and effectively ignore

the benefits that an effective evaluation can

bring will range across the organisation,

group and individual level.

Mechanism to protect directors

Finally, on a very practical level, evaluations

can provide a modicum of protection for indi-

vidual directors. When successful, evaluations

improve the board’s functions, demonstrate

due care and diligence to the task and actu-

ally safeguard each director’s assets and

reputation (Garratt, 2003). As a result, there

are also reports in the literature of evalua-

tions decreasing director and officer insur-

ance premiums (Stybel & Peabody, 2005).

Table 13.2 sets out the potential benefits

of board evaluation for various aspects of

governance.

DRAWBACKS OR REASONS NOT

TO EVALUATE

Thus far, we have presented board evalua-

tions as a positive step for all boards.

However, there is a school of thought that

sees them as adding little value (Kazanjian,

2000). While most commentators would

disagree with this stance on whole-of-board

evaluations (e.g., Sonnenfeld, 2002; Nadler,

2004; Huse, 2007; Charan, 2009), our obser-

vation is that criticisms are based on failed

implementation rather than a general criti-

cism of board evaluations. For instance, we

have already covered off the problems with

a compliance-focused evaluation process

(see earlier) and we note that criticisms of

low value tend to focus on process- rather

than content-orientated approaches (e.g.,

Kazanjian, 2000).

One issue that has been raised by some

boards is the legal issue of the discoverable

nature of board evaluations. The argument is

that to be useful, the board evaluation will

need to raise some issues critical of current

governance practices. In situations where a

nation’s legal code allows for discovery of

relevant documents in civil and/or criminal

court actions, the existence of a board evalu-

ation could provide evidence for parties

bringing an action against the company,

board and/or individual directors. There is

some merit in this argument. However, on the

other hand, boards leave themselves open to

criticism in such actions, if they have not

undertaken a board evaluation. This can be

seen as the board failing to institute a process

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Table 13.2 Potential benefits of board evaluation

Benefits To organisation To board To individual directors

Leadership • Sets the performance

tone and culture of the

organisation

• Role model for CEO and

senior management team

• An effective chairperson

utilising a board evaluation

demonstrates leadership to

the rest of the board

• Demonstrates long-term

focus of the board

• Leadership behaviours

agreed and encouraged

• Demonstrates

commitment to

improvement at individual

level

Role clarity • Enables clear distinction

between the roles of the

CEO, management and the

board

• Enables appropriate

delegation principles

• Clarifies director and

committee roles

• Sets a board norm for roles

• Clarifies duties of

individual directors

• Clarifies protection of

directors

• Clarifies expectations

Teamwork • Builds board/CEO/

management relationships

• Builds trust between board

members

• Encourages active

participation

• Develops commitment and

sense of ownership

• Encourages individual

director involvement

• Develops commitment

and sense of ownership

• Clarifies expectations

Accountability • Improved stakeholder

relationships, e.g., investors,

financial markets

• Improved corporate

governance standards

• Clarifies delegations

• Focuses board attention on

duties to stakeholders

• Ensures board is

appropriately monitoring

organisation

• Ensures directors

understand their legal

duties and responsibilities

• Sets performance

expectations for individual

board members

Decision making • Clarifying strategic focus and

corporate goals

• Improves organisational

decision making

• Clarifying strategic focus

• Aids in the identification of

skills gaps on the board

• Improves the board’s

decision-making ability

• Identifies areas where

director skills need

development

• Identifies areas where the

director’s skills can be

better utilised

Communication • Improves stakeholder

relationships

• Improves

board−management

relationships

• Improved board−CEO

relationships

• Improves

board−management

relationships

• Builds trust between board

members

• Builds personal

relationships between

individual directors

Board operations • Ensures an appropriate top-

level policy framework exists

to guide the organisation

• More efficient meetings

• Better time management

• Saves directors’ time

• Increases effectiveness

of individual contributors

Source: Kiel, Nicholson and Barclay (2005).

that is widely seen as conducive to good gov-

ernance. In this legal sense, a board may be

damned if it does an evaluation, which

reveals governance issues, but conversely

may be damned if it cannot present evidence

of a rigorous review. Our view is that gener-

ally boards should not be concerned with

undertaking rigorous reviews, but should

ensure that they have taken action on any

issues the review highlights. In this way,

the board can demonstrate that it is taking

its governance responsibilities seriously and

is engaged in a process of continual self-

improvement.

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Individual director evaluations are a more

controversial subject, with varying views on

whether they are useful (Clarke & Klettner,

2010). Importantly, individual director evalu-

ations often rely on the views of peers and

this has the potential to undermine a direc-

tor’s independence (Clarke & Klettner, 2010).

Similarly, poor evaluations can overempha-

sise the output of a homogeneous “perfect”

director at the expense of how the individual

contributes to effective governance (see our

earlier discussion on the individual- vs group-

level of analysis).

Even when there is agreement that a

board evaluation can add value, it will often

meet with resistance from directors (Ingley

& van der Walt, 2002). The most commonly

reported source of resistance involves the

evaluation undermining the working rela-

tionships of the board. Directors fear that

an evaluation will open a Pandora’s box of

governance issues and undermine board

cohesion (Ingley & van der Walt, 2002) and

disrupt the boardroom dynamics (Kazanjian,

2000). Other reasons cited for resistance

include a fear of alienating directors, objec-

tion to the amount of time the review will

take, fear of litigation arising because of the

review (e.g., Stybel & Peabody, 2005) and

concerns with the “accuracy and meaning-

fulness” of evaluations (Ingley & van der

Walt, 2002: 173).

While some of these concerns may be jus-

tified, our experience is that they are all

manageable and that the major source of

resistance is that a board evaluation can be

particularly daunting for the individual. Many

directors may not have faced an evaluation

for a long time (Steinberg, 2000) and may

fear that any assessment will find them lack-

ing (Garratt, 1996). This creates a threat to

their reputation (Stybel & Peabody, 2005;

Behan, 2006), particularly if they are very

senior and the results will be disclosed in any

way (Kazanjian, 2000), even to other direc-

tors. Thus, it is important for a review to

carefully consider how the results will be

used and who they will be fed back to during

the process.

Setting the objectives – agreeing

the why

While there are many positive reasons for

undertaking a review, boards also need to

understand the constraints. Key factors

include the context of the organisation – the

scale of the performance problem (if any),

the size of the board, stage of organisational

life cycle, changes in the firm’s environment

and so on (Kiel & Nicholson, 2005).

Feasibility will also play a role, and the

board will need to consider the scope of the

review and resource implications. Major

resources will be money, a reviewer with suf-

ficient skills and the time availability of the

reviewer and participants.

On a practical level, it is important that all

board members understand this rationale.

Normally, this involves the delegated indi-

vidual (the chair or lead independent direc-

tor) or group (the nominations or governance

committee) documenting the objectives for

the review and obtaining sign off from the

board. With the objectives or rationale of the

evaluation in place, the process is ready to

move on to the “what” of the evaluation.

What will be evaluated?

As with the other key decisions in the proc-

ess, deciding what will be evaluated depends

on the purpose and scope of the review.

While evaluations will have a targeted objec-

tive (e.g., addressing a specific, known

problem in governance), the complexity of

possible sources and solutions nearly always

requires a broad selection of topics on which

data will be collected. Most governance

issues involve complex interactions between

the board’s composition, relationships (e.g.,

between the board and management) and

supporting policies, procedures and proc-

esses (Nicholson & Kiel, 2004; Huse, 2007).

Consequently, most evaluations do not

involve a single issue, but rather a system-

atic review of the likely causes and conse-

quences. This ensures the process is broad

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enough to: (1) clearly articulate areas for

improvement (or any problems); (2) identify

the underlying mechanisms (i.e. source of

the problem or how to make improvements);

and (3) test potential solutions (Nicholson

& Kiel, 2005). Similarly, if the review’s

objectives are to provide an overall check-up

(or benchmark) then the review should focus

on a wide range of areas. This will allow

the process to collect information across the

levels of analysis described earlier in the

chapter and the associated wide variety of

areas for improvement.

For these reasons, board evaluations gen-

erally use some form of governance “best

practice” framework (Kiel & Nicholson,

2005). There are many such frameworks

available. In addition to the models detailed

earlier in this chapter, frameworks include

Carver’s Policy Governance model(e.g.,

Carver & Carver, 1997), Kiel and Nicholson’s

(2003) Corporate Governance Charter frame-

work, and regulatory frameworks and advice

such as The UK Corporate Governance Code

(Financial Reporting Council, 2010), the

OECD Principles of Corporate Governance

(OECD, 2004) and the Australian Securities

Exchange (ASX) Corporate Governance

Council’s (2010) Corporate Governance

Principles and Recommendations. While a

detailed review of each is beyond the scope

of this chapter, they provide a sense of topics

on which boards can focus.

Selecting a framework provides a focus for

the evaluation. The next stage involves trans-

lating the framework for the objectives of

the review and the context of the specific

board. An example might assist: say a board

wants to review its composition (objective of

the review) and selects Huse’s (2007) value-

creating value-adding board as their frame-

work. The task then becomes developing an

idea of the data the review needs to collect.

This is often accomplished by developing

a series of questions that we might want

answered. An example is provided in

Table 13.3, where an extract of the elements

of the value-creating value-adding board

framework are translated into questions to

guide a review of composition. As this

example demonstrates, the combination of a

framework and clear objectives leads to a

successful evaluation.

Deciding the topics on which to concen-

trate is a critical component of the evaluation

design. Yet, the evidence from practice sug-

gests that boards often do not agree what will

be evaluated in terms of both agreed target

activities and clarity of expectations around

those activities. For instance, in a survey of

companies from the FTSE 350, Dulewicz

and Herbert (2008) report that an agreed list

of performance criteria were used in only

62% of cases. To address this concern, the

individual running the process treads a deli-

cate balance between providing sufficient

detail to meet the objectives of the review,

while also ensuring the project is manageable

with the resources available to the organisa-

tion and board.

Who will be asked?

The next step in the process involves decid-

ing on data sources – Who will be asked to

provide a view on the board’s effectiveness?

As indicated earlier, evidence suggests that

most evaluations are self-evaluations based

on director feedback (Spencer, 2007;

Dulewicz & Herbert, 2008; Roy, 2008), which

are sometimes referred to as 180-degree proc-

esses (Blake, 1999). While a self-evaluation

allows a board to ask itself how it is contrib-

uting to organisational effectiveness (Stybel

& Peabody, 2005), there are major weak-

nesses to overcome unless there are other

inputs to the process – it is almost impossible

to fully evaluate performance (Epstein &

Roy, 2004b) and self-evaluations are best

used when the individual(s) involved have

high levels of self-awareness. It is our experi-

ence that the board as a whole is often unable

to assess its task performance. Quite simply,

the board is doing all it can to carry out its role

and believes it is executing its roles and tasks

appropriately – if they thought they could do

things better, they would change things.

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Table 13.3 Key questions

Element of framework Questions

Board members • Who are the current board members?

• What skills and attributes do they bring?

• Are there any obvious gaps?

Interactions • Do board members have appropriate relationships and interactions with each other

(respect, capacity to disagree, trust, etc.)?

• Does the board have appropriate relationships with management?

• What are the interactions between the board and chair like? The CEO and chair?

• Is information shared in an appropriate way?

• Would changes in the composition improve or undermine these relationships?

Structures • How does the board structure compare with regulatory and other practice guidelines

(e.g., independence, diversity)?

• Would changes in composition address any gaps here?

Decision-making

culture

• Does each director contribute to decision making?

• Is there a free and frank exchange of views on the board? Why or why not?

• Is a change in composition necessary to improve the decision culture?

Board task

expectations

• Do board members have the same expectations of their role and tasks?

• Do they have the same expectations of the relationships they will have with each other

and management?

• Do they have the same expectations of the way board discussions and decisions should

take place?

• Do they have the same expectations of how information should be shared?

• Would a change in composition improve these shared expectations?

Board task

performance

• Is the board performing its roles and tasks appropriately?

• Do individual directors contribute to task performance?

• Do directors work well as a team together to execute tasks?

• Could changes to composition be made to improve task performance – and what would

they be?

This is where other internal and external

sources of information become crucial. Often

referred to as 360-degree feedback (Kiel et al.,

2005), they allow the reviewer to corroborate

insights and views from board members with

others both within and outside the organisa-

tion. Internal participants could include

senior managers (particularly the CEO and

company secretary). Sometimes other man-

agement personnel and employees can con-

tribute, if the data sought is about general

governance issues (e.g., issues affecting cul-

ture), but our experience is that the lower the

level of interaction between the board and the

participant, the less useful it becomes. For

instance, shop-floor employees often have

little insight into how the board is perform-

ing, so a targeted approach is most useful.

One possible area of sensitivity with using

other internal sources involves the possible

dynamic it can create, if the board is not

ready for full and frank feedback or there is a

poor relationship between the board and

management. Implemented poorly, feedback

from executives can lead to an “us versus

them” dynamic; for instance, if there are sig-

nificant ratings differences on director knowl-

edge or understanding reported (Clarke &

Klettner, 2010). Although a potential prob-

lem, this can be handled sensitively using

alternative techniques (e.g., using interviews

rather than surveys) and through ensuring

an appropriate feedback loop.

State-of-the art views on board evaluations

would also favour both external sources

of information and participants (Kiel &

Nicholson, 2005; Minichilli et al., 2007;

Conger & Lawler, 2009). External sources

of information include auditors, financial

commentators and institutional investors

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(Tricker, 2009). Depending on the company,

government departments, major customers

and suppliers with close links to the board

may also provide insight (Kiel & Nicholson,

2005). Of course, a constraint of external

sources is that they may have little exposure

to the board and their responses are often

more about organisational performance than

board performance. As with non-board inter-

nal sources of information, the information

source needs to be targeted and relevant,

having some knowledge of the actual role the

board is playing. Table 13.4 provides a sum-

mary of possible participants in a review, as

well as the benefits and drawbacks of each

particular participant.

An important and common question often

arises around whether retiring or new direc-

tors should participate in board evaluations.

Retiring directors are thought to be less com-

mitted and new directors may lack the neces-

sary insight into how the board operates.

Again, consensus from the field indicates

that both retiring and new directors can

assist, as they can provide different perspec-

tives on the issues (Wolf & Stein, 2010).

Once the advantages and disadvantages of

participation have been assessed, the deci-

sion on who should participate involves

understanding:

1 Who has the knowledge required to inform the

questions formulated in the previous step.

2 Whether the board is open to hearing the view of

that person/group (even if anonymous).

3 What the potential impact might be for the

person or group who will be asked.

4 Whether it is feasible to collect this information

(resources, access and so on).

Thus, there is no standard list of participants

for a review – rather, it requires a considered

review of context, objectives and feasibility.

What techniques will be used?

Method selection is critical to an effective

board evaluation (Behan, 2004). Since eva-

luations are a specific context for social

science research, determining a suitable fit

between research aim and research method is

essential. Our observation is that this is an

underestimated aspect of board evaluations,

as practitioners often lack any grounding in

research methodology and fail to consider

the strengths and weaknesses of different

techniques and approaches. Alternatively,

many academics are trained in a single

research tradition (or even technique) and/or

have a single area of investigation that drives

their method decision. In both cases, those

developing the process may pay insufficient

attention to the scope of the evaluation

and, to some degree, come with their prepre-

pared tools or approach. As the saying goes,

if you only have a hammer, everything looks

like a nail.

The most basic question in method selec-

tion involves the decision to use quantitative,

qualitative or mixed (i.e. combined) meth-

ods. For most people, research is associated

with experiments, statistics and careful meas-

urement. These generally involve quantita-

tive methods, or approaches that allow the

researcher to precisely measure the topic of

interest (often called a construct) and identify

the strength of relationship between that con-

struct and other constructs of interest. In

contrast, qualitative methods use rich or thick

data from which the researcher draws con-

clusions. Rather than focus on measuring

quantity, qualitative methods focus on the

nature or quality of the phenomena under

study. For example, if we were interested in

“board contributions,” and were using a

quantitative method, we could measure the

number of minutes a director spent talking in

a board meeting or the percentage of meet-

ings he or she attended. A qualitative method

would take a different approach and might

involve watching the director in question,

interviewing her or his colleagues and review-

ing the minutes of previous meetings. Based

on these sources, it may be possible to con-

clude whether the director was a good or

poor contributor. The difference between the

two approaches – possessing the quality of

being a “good contributor” versus the precise

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Table 13.4 Who has the knowledge?

Category Information sources Knowledge benefits Potential drawbacks

Internal sources

Board members • Should have key knowledge on

skills, processes, relationships,

level of shared understanding

• Suffer from biases (such as

groupthink)

• Little understanding of external

perceptions of the board

• Do not provide a “set of fresh

eyes” with which to examine

governance processes

CEO • Should have a different

perspective on all elements of

board activity

• Key insight into the advice role

of board

• Key insight into succession issues

• Potentially suffers from biases

• Potentially impression manages

for the board, particularly on

issues of management activities

• May have a limited or biased

understanding of external

perceptions

Senior managers • Generally good insights into

communication between the

board and management

• May not have enough exposure

to the board

• May be tainted by internal

company politics

Other employees • Should have insight into the

culture of the organization

• The further removed from the

board, the less likely employees

can comment on actual

performance

• Limited exposure to the board

External sources

Owners/ members • Understand ownership aims • Will depend on the ownership

structure (may be disparate)

Customers • Can have unique insights,

particularly if the company has

very few customers

• Most likely will have little insight

into how the board operates

• Potential to “game” the system

Government • Can have insightful views,

particularly in certain areas of

compliance, if these are critical

• Often limited interaction with

most companies

Suppliers • Can have unique insights,

particularly if the company has

very few suppliers

• Most likely will have little insight

into how the board operates

External experts • Useful benchmarking or best

practice insights

• May not understand company’s

context

Other stakeholders • Will depend on nature of the

company

• Will depend on nature of the

company

Source: Kiel, Nicholson and Barclay (2005).

measurement of an observable fact – is the

key distinction, not the data type.

What makes the situation more confusing

is that most board research tries to quantify

what are essentially subjective assessments.

Perception-based research (where we ask

governance actors their perceptions of spe-

cific events or activities) are qualitative

assessments of the phenomena. Whether

these questions are asked as part of an inter-

view (where we have the rich data of their

open-ended response) or as part of survey

(where we reduce the complexity of their

response to a point on a predetermined

scale), the source of the data is the same – it

is a subjective assessment of the enquiry.

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In general, quantitative methods are best

used when the topic being assessed is well

understood, the measurement tools are well

used and verified and/or benchmarking or

comparison is a key goal. In contrast, qualita-

tive research relies on induction (Glaser &

Strauss, 1967; Christie et al., 2000) and so is

often best used when conducting exploratory

research (e.g., Bowen, 2004) – where you are

not sure what the issues are. In practice, most

rigorous evaluations involve mixed methods

(both quantitative and qualitative data) –

generally, a combination of surveys, individ-

ual interviews and facilitated group sessions

(Behan, 2004).

Moving to the specifics, there are many

different approaches used in board evalua-

tions, including questionnaires, interviews

(van der Walt & Ingley, 2001), free-form

discussions (Wolf & Stein, 2010), “180- and

360-degree” reviews (Blake, 1999), best

practice benchmarking (Garratt, 1996;

Hawkins, 1997; Davies, 1999; Walker, 1999)

and psychometric testing and the use of

assessment/development centres (Garratt,

1996; Tricker & Lee, 1997). In the following

sections, we outline some of the more popu-

lar methods used in board evaluations.

Surveys

Surveys or questionnaires are reported as the

most common form of evaluation (Clarke &

Klettner, 2010). In addition to providing

summated ratings of director perceptions,

surveys can be examined to look at gaps

between current and desired performance or

engagement (e.g., Nadler, 2004) to provide

greater focus for change. Sometimes this can

involve a comparison between board and

management perceptions to highlight differ-

ences (positive or negative) and/or the simi-

larities or differences between self-perceptions

and colleague perceptions (Nadler, 2004).

A key concern is that surveys by them-

selves may not uncover the key governance

improvements required. For example, Behan

(2004) reports how in a NASDAQ company

experiencing high growth, a standard survey

revealed board members had concerns about

information flows, board leadership and cor-

porate strategy, while the CEO reported the

board took too long to make decisions. Only

a subsequent group discussion (a qualitative

group probing of the issue) revealed that

the board lacked a sufficient understanding

of the corporate strategy to make faster deci-

sions. There are myriad technical difficulties

involved in surveys that we have discussed

earlier or are beyond the scope of this

chapter: for example, measurement error,

problems with response bias (scaling diffi-

culties, whether to use an “average” rating

of the board and so on) that are usually not

considered during the evaluation process.

Individual interviews

One of the most prevalent techniques used in

board evaluations is interviews with direc-

tors. This may be a formal process, with an

independent advisor conducting the inter-

view, or it may take the form of an informal

“chat with the chairman” organised prior to a

board meeting. Both share the characteristics

of an individual session focused on identify-

ing strengths and weaknesses of the govern-

ance of the company. Important aspects to

the interview involve deciding (1) who will

conduct the interviews, (2) the line of ques-

tioning or format of the interviews and

(3) the level of confidentiality.

Deciding who will conduct the interview

will likely be determined by the answer to

who is conducting the review. Nevertheless,

it is important to recognise that interviewing,

particularly for research purposes, is a com-

plex skill that can be underestimated (Kiel

et al., 2005; King & Horrocks, 2010).

Building rapport and trust with directors

will go a long way to ensuring full and frank

views are collected during the process.

Similarly, an interviewer who is the cause of

governance problems (e.g., a dominant chair)

is an obvious concern.

Interviews can take many forms from

structured (i.e., only asking specific, pre-

written questions) to unstructured (i.e., no

specific questions) (Kiel et al., 2005; King &

Horrocks, 2010). The level of structure is

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best aligned with the aim of the evaluation:

more structure is generally useful where the

evaluation is focused on specific issues (e.g.,

a known problem), whereas less structure is

generally more useful where little is known

about the performance of the board.

A final factor to consider is the confidenti-

ality of interview material. Often it is neces-

sary to balance the feedback with the

confidentiality promised as part of the proc-

ess, and this is a key practical and ethical

consideration for the process. While promis-

ing confidentiality can engender trust and

forthright responses, it can make reporting

the findings difficult. One way to balance this

issue is to assure participants of non-attribu-

tion, but not confidentiality. The interviewer

can also provide a space for “off the record”

comments that the reviewer can use to find

other information.

Group interviews

It is also possible to collect the views of

directors in a group setting. This can be done

as a separate component of a board meeting

or at a dedicated setting. Boards that use this

method often conduct it as part of a regular

annual strategy and/or reflection setting.

Obviously, issues of the structure of the ses-

sion (e.g., topics raised) are important, as is

the session facilitator. Given that group ses-

sions (such as focus groups) are more com-

plex than one-on-one sessions, our suggestions

regarding sufficient facilitator skills and the

structure of the session are even more impor-

tant. Obviously, it is nearly impossible to

ensure confidentiality during these sessions,

although we are aware of some reviews using

networked computers to try to achieve this

through directors typing in anonymous

comments (which raises its own challenge).

A major advantage of the group interview

approach is efficiency – the facilitator and

participants dedicate time in the same ses-

sion, and there is often little need for prepa-

ration by the board members (Behan, 2004).

It also can provide collaboration and corrob-

oration of insights in real time, so that

the group can move quickly to an agreed

position on the issues facing the governance

of the organisation. It serves as a positive

team-building exercise at the same time as

data are collected (Behan, 2004).

As with the other techniques, there are

significant downsides as well. The most cru-

cial difference between group and individual

interviews is the obvious impact of the group

dynamic on feedback and insights. The group

approach works best where board members

share mutual respect and trust (Behan, 2004).

While there might be an obvious concern

with how forthright participants may be in a

group setting (particularly around sensitive

issues), there are other less obvious down-

sides. For instance, the ability of each indi-

vidual to contribute is constrained, the known

group effects of “piggybacking” (i.e. the first

idea mentioned tends to focus participants on

that issue, rather than a range of issues) as

well as the potential effects of impression

management (Goffman, 1959) and power

distance (Hofstede, 2001) (e.g., not wanting

to appear foolish in front of colleagues)

means that group interviews or focus group

approaches need to be carefully considered

and facilitated.

Observation methods

Researchers argue (e.g., Pettigrew, 1992;

Roberts et al., 2005; Brundin & Nordqvist,

2008; Petrovic, 2008; Huse, 2009a) that the

future research on boards should focus on the

actual behaviours demonstrated in the board-

room and this should be explored by being

there and observing. This will further help to

understand what directors actually do and

how decisions are made (Pettigrew, 1992).

While gaining access to boardrooms is not

easy, Huse (1995), Samra-Fredericks (2000),

Leblanc and Schwartz (2007) and Brundin

and Nordqvist (2008) show that it is possible

to study boards at work.

Observation involves reviewing the board

in action and is particularly useful when the

board is interested in an external review of

the dynamics of the board team or group.

Rather than dealing with perceptions (and

historical perceptions at that), the data is

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BOARD EVALUATIONS: CONTEMPORARY THINKING AND PRACTICE

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direct and to a large degree untainted by the

views of participants. While it is possible for

insiders or participants to conduct this review

(e.g., we know of several boards where there

is a review of the meeting efficacy at the

conclusion of each meeting), perhaps the

most useful approach involves using a trained

observer to sit in on one or more meetings

and using techniques well developed in soci-

ology and anthropology (e.g., Douglas, 1976;

DeWalt & DeWalt, 2002) to draw conclu-

sions related to the objectives of the board

review.

Observation most often occurs in one of

two instances: either a participant (or insider)

or an independent, trusted advisor. Again,

boards often need to consider the specialist

skills required to interpret group dynamics

as well as the potential bias that might

shape a participant−observation approach.

We also note that it is possible to video and

code board meetings (a current research

focus of the authors), which can provide

interesting quantitative data to highlight spe-

cific issues or corroborate qualitative insights.

Figure 13.12 provides an example of meeting

observation outcomes.

Document review or analysis

Another potentially useful technique used

for evaluations is a document review. Analysis

of board and committee agendas, board

papers, meeting minutes, director attendance

records and other documents can provide

meaningful insights into the work of the

board and even the contribution of individ-

ual directors (Tricker, 2009). Governance

documentation highlights the areas the

board emphasises. Gaps in the documenta-

tion can provide insights into the sophistica-

tion of the board and its understanding of

issues such as its legal responsibilities.

The flow of activities across time can also

highlight if boards follow through on deci-

sions and if matters are dealt with in a sys-

tematic way.

Board papers also provide an important

comparison point for the opinions of direc-

tors that might be evident in other techniques.

For instance, document reviews can be used

to compare what the board says it should be

doing with the record of its work (Behan,

2004). If the board believes its involvement

in strategy is the most important aspect of

its work, is this reflected in the minutes

Number of times talking

Participant

Chair Director 1 Director 2 Director 3 Director 4 Director 5 Director 6 CEO Executive

Figure 13.12 Meeting observation – Number of times participants spoke

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THE SAGE HANDBOOK OF CORPORATE GOVERNANCE

314

and board papers generally? How – or if not,

why not? Thus, document reviews can form

an important component of a rigorous review,

particularly when used to identify differences

between perceptions and records.

Psychometric testing and other

instruments

Given that directors’ personalities are often

seen as a key factor in boardroom behaviours

(ICSA, 2009), it is interesting that standard-

ised tests and instruments are not used more

during board evaluations. While we have

been involved in hundreds of evaluations, we

can only think of a handful of occasions

where they have been employed. Dulewicz

and Herbert’s (2008) findings corroborate

this, as only one of the 29 companies they

surveyed had used psychometric testing.

While a definite proportion of directors do

not subscribe to these tools, we conjecture

that for most high-status individuals, these

instruments are extremely threatening, as

they fear “not measuring up” or having their

weaknesses exposed.

Analysis

In addition to the techniques, the review

needs to have an appropriate analysis of

the data collected. Often, understanding the

results requires reviewing and coming to

an initial conclusion about the pattern of

responses as much as the averages them-

selves (Wolf & Stein, 2010). A response

to a survey item that yields three “strongly

agrees” and three “strongly disagrees” has

the same average as a board that has six

members rate “neither agree nor disagree.”

Clearly, these responses have different

conclusions.

A more subtle analysis issue involves

drawing unsupported conclusions from quan-

titative data – for instance, survey results or

measures of contribution. Just because a

director comes to every meeting, does not

mean he or she contributes more than a direc-

tor who has missed a meeting or two during

the year. Thus, a process that involves multi-

ple techniques reviewed by experienced

individuals is more likely to yield valid and

valuable conclusions.

Techniques – evidence from the field

While there is a wealth of techniques availa-

ble to boards seeking a robust evaluation,

evidence suggests that practice is dominated

by surveys administered to people within

the organisation. Table 13.5 provides a sum-

mary of the current practices of more than

820 US boards that responded to the Annual

Corporate Directors Survey conducted by

PricewaterhouseCoopers (2010). Column

one clearly highlights that more than two out

of every three board evaluations used surveys

and only one in three used interviews to

gather data. A very small 4% used some

other method and at least 90% of boards only

used data from participants within the organ-

isation. The dominance of one technique and

potential bias from using internal participants

is a point for reflection for the field.

Who will be evaluated?

While most board evaluations involve

reviewing the board as a whole, there are

several other options surrounding the selec-

tion of the individual or group that can

form the basis of a review. These are sum-

marised in Figure 13.13. Generally, boards

consider the work of the group and its sub-

groups (committees) as well as sometimes

focusing on individuals holding specific posi-

tions (such as the chair or lead independent

director or company secretary) and/or

individual directors.

Table 13.5 Evaluation techniques

Technique Source of data

Internal participant* External participant

Interviews 33% 9%

Survey 68% 0.5%

Other 4% 0.5%

* Columns may add to more than 100% because boards

may use more than one technique.

Adapted from PricewaterhouseCoopers (2010: 25).

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BOARD EVALUATIONS: CONTEMPORARY THINKING AND PRACTICE

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Who will undertake the review?

Another critical decision facing the board is

who will conduct the review. While a review

is often best performed by the board itself,

it does require “facilitation that provides

expertise, challenge and objectivity” (Aronson

2003: 8)

While there are at least five key categories

of facilitator, the major decision involves the

choice of an internal or external facilitator.

Internal reviews respect the board’s author-

ity, are more likely to provide directors con-

fidence surrounding the confidentiality of the

process (Kiel et al., 2005) and are likely to

cost less. All of these are important consid-

erations when making the decision.

There are, however, several limitations to

an internally conducted review. The internal

reviewer may lack the skills required (e.g.,

interview technique, survey design), they are

likely to have a bias (often unconscious) that

carries over into the assessment and it is a

less transparent process where the review

process is carried out by one of the board’s

own. Perhaps most significantly, the review

is likely to achieve little if the reviewer (e.g.,

the chair) is the source of much of the prob-

lems or it may not be appropriate given

the objectives of the review. For example, a

review focused on benchmarking requires

external data that an internal reviewer is

unlikely to possess and/or the review may

mandate or recommend an external facilitator.

An external facilitation, while more costly,

can offer a number of advantages. First, a

good external facilitator is more likely to

have undertaken a significant number of

reviews and will often provide important

insights into techniques, comparison points

and new ideas. Second, an external party

often aids transparency and objectivity,

which can be particularly important for

boards with an external constituency inter-

ested in the review (for instance, if they are a

government-owned corporation). Third, a

good external party can play a mediating role

for boards facing sensitive issues through

being the messenger for difficult issues

involving group dynamics and egos.

As with internal reviews, there are a

number of potential downsides to an external

facilitator. First, there is a great deal of vari-

ability in consultants, and the board needs to

have confidence in the reviewer’s ability and

that they will handle the review in a support-

ive manner (Clarke & Klettner, 2010).

Second, the reviewer needs to be able to

establish the confidence of the board, so that

they will be honest in their responses. Third,

the use of an external party is likely to

involve greater cost for the organisation than

an internally conducted review. An elabora-

tion of the benefits and downsides in the

Establish objectives and

scope of evaluation

Board

Governance

personnel

Board as a

whole

Board

committees

Directors

Chairperson

Lead

independent

director

Individual

directors

CEO

Company

secretary

Figure 13.13 Who will be evaluated?

Source: Kiel & Nicholson, 2005: 618.

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THE SAGE HANDBOOK OF CORPORATE GOVERNANCE

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Table 13.6 Chair, non-executive director and committee evaluations

Chair Non-executive director Committee

Advantages Disadvantages Advantages Disadvantages Advantages Disadvantages

• Part of

leadership

role – clear

acceptance by

board members

• Clear

accountability

• Can align

process with

overall board

agenda

• Possible bias

• Concentration

of power,

particularly if the

CEO is chair

• Heavy workload

• Clear

accountability

• More

independent

view

• More time to

devote to task

• Other

leadership

experiences/

skills

• Possible bias

• Possible effect

on board

dynamics

• Knowledge of

the company

will be less

than that of

the chair

• Relieves

chair/ non-

executive

director of

workload

• Less reliant

on the

viewpoint of

one person

• Less subject

to individual

bias

• Longer

process

• Demands

greater

resources

(time, money,

etc.)

Source: Kiel, Nicholson and Barclay (2005).

choice of who should conduct the review are

provided in Table 13.6.

Interestingly, national context appears to

play a role in who conducts the review. In

countries with a separate CEO/chair, the

chair or independent facilitator often plays a

key role. For instance, Clarke and Klettner

(2010) report that in Australian companies it

is common for the chair to lead the process.

In contrast, large US companies nearly

always have the governance or nominating

committee conduct the review (Clarke &

Klettner, 2010; Roy, 2008).

The majority of the normative literature

generally highlights that the chair will most

often conduct the review (e.g., Kiel &

Nicholson, 2003), an approach that has been

criticised as lacking the objectivity required

by a serious review (Tricker, 2009). Thus,

there is a distinct trend, reinforced by regula-

tory and code guidance, to use external par-

ties to conduct the process. For example, the

UK Corporate Governance Code recom-

mends that an external facilitation should

occur every three years (Financial Reporting

Council, 2010: B.6) and the OECD Steering

Group on Corporate Governance (2010) rec-

ommends the board be supported periodi-

cally by external experts (Kirkpatrick, 2009).

This matches the Australian experience that

outside facilitation can be very valuable, but

may not be necessary every time (Clarke &

Klettner, 2010). Practically, it appears that, in

Australia, around half of listed companies

use an external facilitator, at least periodi-

cally (Clarke & Klettner, 2010).

What to do with the results

Collecting and analysing the results is not the

end of the process; rather, it is critical that the

board decides what to do with the data. A

board’s response should be based on how to

satisfy the original objectives of the review.

In most cases, the objectives involve the

board reviewing the results and agreeing tar-

geted actions for governance improvement,

particularly when the focus of the review is

on whole-of-board improvement.

In the case of individual director evalua-

tions, what to do with the results should

again reflect the objectives. Most individual

director evaluations are formative – they con-

centrate on providing the individual director

with feedback. In these cases, the results are

likely not shared with the whole board.

Instead, they are the subject of discussion

between the board chair (or process facilia-

tor) and each individual director, which

“(1) significantly reduces the threat of

a review to the individual and associated

resistance to the process, (2) provides an

appropriate venue for difficult performance

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BOARD EVALUATIONS: CONTEMPORARY THINKING AND PRACTICE

317

discussions, if they are necessary, (3) main-

tains the key aspect of objectivity and

accountability and (4) aligns with good per-

formance management practice and respects

each individual’s integrity.

Often the board will communicate aspects

of the review to different parties, particularly

where the board has agreed that govern-

ance improvement requires the group. For

example, if an area for improvement is the

board−management relationship, the relevant

results will generally be shared with manage-

ment. Sometimes this may also involve a

regulator or key shareholder.

Disclosing results more broadly is a topic

of increasing importance. This needs to be

agreed prior to commencing the review, as

full and frank views are likely to vary with

the confidentiality assured to participants.

Often the regulatory regime of a company

will specify that disclosures needs to take

place (e.g., see the Walker Review, 2009).

These requirements and recommendations

are put in place to improve transparency and

accountability; however, recent evidence

indicates that these rules-based regimes

encourage standardised responses, and even

in principles-based regimes like the UK

and Australia disclosure is often similar

(Clarke & Klettner, 2010). This is because

excessive disclosure is seen as problematic,

since it involves personal sensitivities and

can inhibit the work of the board (Clarke &

Klettner, 2010).

Interestingly, there are mixed views on the

disclosure of even non-sensitive aspects of

board evaluation, and it is dependent on the

reviews objectives and stakeholder group to

whom disclosure is made. Feedback from

boards indicates a reticence to communicate,

because it can inhibit a rigorous review and

because they see it as adding little value.

Thus, a willingness to disclose information

depends on who it might be disclosed to,

with Dulewicz and Herbert (2008) reporting

that virtually all boards think that disclo-

sure of board evaluation results to suppliers,

customers, employees, the media and banks

or lenders is inappropriate. A minority

believed it desirable to disclose the results

to senior management (29%) or major insti-

tutional investors (34%).

Consequently, those boards that do dis-

close results more broadly tend to divest

generic information with little insight for

those interested in the board’s work in this

area (Roy, 2008). For example, in a detailed

review of 30 large companies by Clarke

and Klettner (2010) only eight ( just over a

quarter) reported outcomes and, of these,

some three (or 1 in 10) gave examples of

specific actions taken. While there is little

investigation in the topic, disclosure of evalu-

ation results does not appear to be a major

concern for key stakeholders. For instance,

Australian fund managers report they see

little value in improving this disclosure

(Clarke & Klettner, 2010).

Getting practical – implementing

a review

Thus far, we have concentrated on outlining

trends in board evaluations, the major chal-

lenges involved in conducting an effective

evaluation and a review of the key decisions

that are required. In this final section, we

outline major implementation issues for

boards – how to use a single evaluation as

part of a system of continuous improvement.

The evaluation cycle

Board evaluations are not standalone proc-

esses, but rather form part of an integrated,

evolving cycle of corporate governance

accountability and improvement (Aronson,

2003). Effective evaluations require the board

to set annual objectives, collect, disseminate

information on progress toward the objec-

tives, then judge performance, and make

adjustments on an ongoing basis (Conger &

Lawler, 2009).

Agree standards

Since the role of the board will vary, so

should those performance criteria or agreed

standards (Collier, 2004). For instance,

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THE SAGE HANDBOOK OF CORPORATE GOVERNANCE

318

different board compositions work better

under different environmental conditions

(Rost & Osterloh, 2010) and it has long been

recognised that a company’s context will

affect its role set (e.g., Zahra & Pearce,

1989). Thus, the first step in an evaluation is

to be clear what is expected of the director,

preferably in the letter of appointment or

similar (Tricker, 2009), as this can form the

basis for the standards investigated in an

evaluation. Similarly, it is important that

the board agree the desired function of the

group as the starting point for assessment

(Blake, 1999).

Our experience is that this step is often not

carried out – and is a key stress point in

evaluations. Without agreed standards, dif-

ferent people have different ideas on what

they and the board should be doing. As Van

den Berghe and Levrau (2004: 471) report,

they found it “striking to observe the differ-

ent and even contradictory responses of

directors who are members of the same

board” around the issues involving board

evaluations.

Agree the broad cycle frequency

and focus

In addition to the standards, boards need to

have a sense of the frequency and pattern of

their reviews – how they will cycle through

the various important aspects of governance

over time. Most boards undertake an annual

evaluation process – for example, Clarke and

Klettner (2010) report 70% of their sample

undertook an annual review.

However, an annual review does not make

sense for some elements of governance. For

instance, if a remuneration committee meets

three times a year, they could conceivably

spend the first meeting discussing what they

thought the process should include, the

second meeting carrying out the review and

the third discussing the results. Evaluation

would be a constant agenda item. Instead,

many organisations have a changing approach

for evaluation – for example, BHP Billiton

alternates whole-of-board evaluations one

year with individual director evaluations the

next (BHP Billiton, 2010: 136). Similarly,

smaller update or check-in evaluations under-

taken in-house can be alternated with a rigor-

ous extensive review conducted by an external

party every two or three years. Approaches

such as these are made to balance the resource

implications of conducting an evaluation

with rigour.

Agree the implementation and integration

process

Another key to success is the implementa-

tion of change – or turning the review into

positive outcomes and improved perform-

ance (Aronson, 2003; Clarke & Klettner,

2010). Research indicates that this aspect of

the review could be substantially improved:

for example, Nadler (2004) reported that

only a quarter of boards conducting a

review reported they have a plan to address

issues they identify (Nadler, 2004), while

PricewaterhouseCoopers (2010) reported that

some 14% of respondents made one or more

major changes based on their evaluations.

Along with the implementation of any

recommendations for change, the results of

any board evaluation process need to be inte-

grated with other governance process such as

director selection or nomination processes,

or orientation and education programmes

(Roy, 2008), since an evaluation can inform

these areas.

CONCLUSION

As effective corporate governance has

become a major concern of governments,

investors, academics and directors them-

selves over the past two decades, so too has

interest in board and director evaluations.

Board evaluations are now part of the gov-

ernance landscape for a wide range of boards

in many countries and are not just confined to

large publicly listed corporations. They are

also seen as a valuable tool for non-profit

boards and boards in the government sector

whose increasing importance can be seen in

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BOARD EVALUATIONS: CONTEMPORARY THINKING AND PRACTICE

319

the significant increases in adoption of evalu-

ations over the past few years.

Experience has shown that board evalua-

tions require a different approach to the

managerial performance assessments, which

are now a routine process in many organisa-

tions. Board evaluations differ because of the

unique nature of the board as a decision-

making group: while the board is accountable

to the organisation’s members, only the

board members really know what goes on

inside the boardroom, leading to issues as to

whose views are taken into account in the

evaluation and the use of the evaluation out-

comes after the process is completed.

What has become apparent over the past

two decades is that there are a multitude of

approaches to (and techniques of) board

evaluations. These range from the chair’s

chat with the board to full-blown, consultant-

conducted reviews that involve question-

naires, individual interviews with directors

and others, who have insight into the

board processes, as well as an extensive dis-

cussion of the results with the board. In this

chapter, we have set out the key questions

that any board needs to ask itself when set-

ting out to undertake an effective board

evaluation. We believe this to be a useful

model and framework for understanding

board evaluations.

This chapter has also highlighted a number

of the theoretical issues related to board

evaluations. These issues include: having a

model of how boards work, which will

inform the approach to the board evaluation;

the unit of analysis; the appropriate use of

scales; the difficulties stemming from the

psychological construct of illusory superior-

ity and consequent issues to do with the

reporting and interpreting the results; and

attempts at benchmarking board perform-

ance. A further significant problem is that the

inclusion of board evaluations in various

codes and other requirements by regulators

for companies can lead to a “tick the box”

approach whereby boards seek to meet per-

ceived external requirements for a board

evaluation at the expense of using these

tools to improve their own performance.

While these are significant issues, experience

from the field suggests that boards are over-

coming these issues to provide real and

meaningful feedback, which leads to signifi-

cant improvements in board effectiveness

and individual director effectiveness and,

ultimately, organizational performance.

We believe that over the next two decades,

the processes and application of board evalu-

ations will continue to improve. There are

interesting developments in the use of meth-

odologies such as observation to help boards

reflect on their own performance. The use of

these new methodologies, as well as improve-

ments in existing methodologies such as the

use of standardised scales and more rigorous

qualitative methodologies such as individual

in-depth interviewing, should lead to more

effective board evaluations. However, ulti-

mately, the real success of any board evalua-

tion must be the commitment and honesty

that all members of the board bring to the

process. Boards that seriously seek to improve

their performance will do so – while boards

which are comfortable with mediocrity will

no doubt continue until external pressures

bring personnel and structural changes to

the board. Unfortunately, these mediocre

boards may impose significant costs on their

organisations until such change is forced

on them.

NOTE

1 This does not mean that the results need to be

disclosed, however – see section 5.7 on what to do

with the results.

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