Regular Board Evaluation:  Key To Business Growth And Investor Confidence

As businesses continue to grow and evolve, governance has become a focal point for investors and stakeholders,[1] therefore, there is the need to monitor businesses’ adherence to corporate governance best practices. One of the essential corporate governance practices is regular board evaluation.[2] This article explores the role of board evaluation in companies and why conducting it regularly can help businesses thrive.

WHAT IS BOARD EVALUATION?

Board evaluation is the monitoring of the activities of the board and its members to determine its effectiveness, the quality of its decision-making, strategy, and its interrelationship with the executive management.[3] Principle 14 of the Nigerian Code of Corporate Governance, 2018 stipulates thus:

“Annual Board evaluation assesses how each Director, the committees of the Board and the Board are committed to their roles, work together and continue to contribute effectively to the achievement of the Company’s objectives.”

RECOMMENDED PRACTICES FOR BOARD EVALUATION

The Nigerian Code of Corporate Governance, 2018 establishes the following recommended practices:

1.     The Board should establish a system to undertake a formal and rigorous annual evaluation of its own performance, that of its committees, the Chairman and individual directors. This process should be facilitated externally by an independent external consultant at least once in three years.

2.     The evaluation system should include the criteria and key performance indicators and targets for the Board, its committees, the Chairman and each individual Board member.

3.     The evaluation of the Board should consider the mix of skills, experience, objectivity, and competence of members of the Board, its diversity (including gender), knowledge of the Company and its strategic direction, attendance at meetings, how the Board works together and other factors relevant to its effectiveness.

4.     The result of the Board performance evaluation should be communicated to and discussed by the Board as a whole, while those of individual directors should be communicated to and discussed with them individually by the Chairman.

5.     Where the performance of a director is considered to be unsatisfactory, the Board should provide appropriate training to address the identified gaps.

6.     The results of a director’s performance evaluation should be considered in the Director re-election process.  [4]

KEY AREAS FOR BOARD EVALUATION

Some of the key areas to cover under board evaluation include but are not limited to;

1.     The Quality of The Monitoring and Risk-Management Role:

With the rise in financial crises and scandals, it has become vital for board members to pay attention to monitoring and risk management. As evident in the contemporary regulatory context, a board must devote energy to monitoring compliance. This can help avoid penalties and regulatory fines. A strategic means of achieving this is adopting a whistle-blower approach and adequate monitoring of related party transactions to avoid conflicts.

2.      The Quality of The Strategic and Other Business-Related Advice:

This evaluation is necessary to determine whether the board is providing valuable insights that drive growth and strategic connections. By reviewing the board’s ability to navigate external relationships with government, regulators, and other stakeholders, the assessment ensures the board is positioned to offer impactful guidance on critical business decisions.

3.      The board dynamics and board members’ pro-active participation.

Board members must be committed, alert, and engaged to maximize company performance. The evaluation should include the participation of board members in meetings, preparation for meetings, regular attendance, and meaningful and strategic contributions. Evaluating this area ensures that board members are actively engaged and committed to their roles, which is crucial for effective decision-making.

4.     The Board Composition and Diversity

The composition of the board is vital for enhanced efficiency. Evaluating board composition and diversity is necessary to confirm that the board has a well-rounded mix of skills, knowledge, experience and perspectives. This assessment helps ensure that the board can respond to evolving challenges, particularly by integrating technology and digital innovations, which are increasingly essential for operational efficiency and informed decision-making.

5.     Overall Performance of The Organization and The Board’s Contribution.

This involves assessing how well the organization is achieving its strategic goals, financial objectives, and long-term vision. The board’s role in guiding, overseeing, and supporting management in these areas is critical. Evaluating the board’s contribution helps ensure that directors are actively participating in the decision-making process, providing valuable insights, and holding management accountable for performance.

WHY IS BOARD EVALUATION NECESSARY?

Simply placing competent people of goodwill around a boardroom table will not necessarily result in an effective functioning board. This is because issues of structure, process, and behavior can detract from or add to the board’s effectiveness. Hence, it is important to conduct regular board evaluations for the following reasons.

1.     Compliance with Codes of Corporate Governance.

Regular board evaluation is a requirement under the Nigerian Code of Corporate Governance, which all companies must comply with to ensure effective governance. Non-compliance can result in penalties enforced by the regulators. Other industry regulators, such as the Central Bank of Nigeria for financial institutions and the National Insurance Commission for insurance companies, also have codes with similar requirements alongside penalties for non-compliance.

2.     To Strengthen the Corporate Structure of A Business.

A weak corporate structure is a major contributor to the failure of an organization's corporate governance. Conducting regular board evaluations is a viable answer to this problem. One study, conducted at Georgia State University and published in December 2004, revealed that public companies with independent boards of directors have higher returns on equity, higher profit margins, larger dividend yields, and larger stock repurchases.

Similarly, this study was consistent with another study of 250 companies by the MIT Sloan School of Management which concluded that, on average, businesses with superior information technology (IT) governance practices generate 25 percent more profits than firms with poor governance, given the same strategic objectives.

3.     To Secure Investor Confidence.

Board evaluation helps build investor confidence by demonstrating that the company follows sound corporate governance practices, ensuring that investors’ interests are considered in the company’s internal management.

4.     To Examine the Structure, Process, and Regular Activities of The Board.

Regular board evaluation helps identify potential issues such as the effectiveness of board meetings, the timeliness and sufficiency of the information provided by management, and the overall efficiency of the board in business operations.

5.     Examination of the Expertise Gap Existing Within the Board.

It serves to examine whether the composition of the board is optimal in terms of its members’ skills, knowledge diversity of experience, and outlook, thereby helping board members identify “expertise gaps” on the board. Where the board requires an upgrade, suitable recommendations are made to help remedy any identified weaknesses. 

6.     To Foster Efficient Decision-Making.

Board evaluation is a vital tool for directors to review and improve their performance. When conducted properly, it will eventually lead to significant value-creation opportunities for organizations. An evaluation will determine if discussions are open, frank, and constructive, allowing all perspectives to be considered, or if they are dominated by a few key individuals.

WHEN IS THE APPROPRIATE TIME TO CONDUCT A BOARD EVALUATION?

The Nigerian Code of Corporate Governance, 2018 stipulates that board evaluation be conducted annually and an evaluation process should be externally facilitated by an independent external consultant at least once in three years.

CONCLUSION

Good corporate governance is a key driver of corporate accountability and business prosperity. A good way to ensure the efficacy of existing structures, management, and strategy of the business is to conduct regular board evaluations.  These have proven to enhance the structures of business in many sectors. It is important to note that the potential benefits derived from board evaluation are pivotal to the organization, the board, and individual directors.

La Peritum Law Practice has within its team, corporate governance experts who are ready to assist your organization conduct board evaluations. For inquiries, please email us at enquiries@laperitum.com or click here to contact us directly.

[1]The role of board effectiveness reviews in corporate governance < https://boardclic.com/blog/the-role-of-board-effectiveness-reviews-in-corporate-governance  > accessed 6 November, 2024

[2]Ibid

[3] what is board evaluation < https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-is-a-board-evaluation/?srsltid=AfmBOooq-Qh7woebN0x6lTEDEaJYa1s5EzHiZcninyqha6u5bbYz9V1u >accessed 1st November, 2024.

[4] Principle 14.1 – 14.6 Nigerian Code of Corporate Governance, 2018