All Party Parliamentary CGG
Evaluating the Performance of UK Boards: Lessons from the FTSE 350
In October 2007 the UK All Party Parliamentary Corporate Governance Group (CGG) published its findings on Board effectiveness based on interviews with FTSE 350 companies.
Introduction
The notion of board evaluation was first outlined by Derek Higgs in his 2003 review of the “Role and Effectiveness of Non-Executive Directors”. In this report he proposed a revised “Combined Code on Corporate Governance” which included a suggestion that UK companies with London Stock Exchange listing undertake a formal, annual, evaluation of the performance of their boards, of their board committees and of their individual directors.
Five years later the CGG examined whether Higgs’ proposals had actually led to a real improvement of board performance. The study examined a number of aspects including the scope and timing of board evaluations, different methodologies, and associated costs. The CGG then examined the impact of the evaluations on the performance of the board as a whole and the performance of individual Directors. The study was based on the participation of around 150 FTSE 350 companies and in-depth interviews with 4 Chairmen.
Key Findings
The Key findings are grouped under three central themes:
- Scope and timing of Board evaluation
- The methodologies and cost of Board evaluation
- The impact of Board evaluation
In summary they are:
| Scope and Timing |
More than 80% of FTSE 350 companies conduct a formal annual review of board and individual director performance. Most companies have not gone as far as 360 degree reviews
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| Methodologies and Cost |
Only 36% of FTSE 100 and 16% of FTSE 250 companies have undergone a board evaluation led by external facilitators. A significant number of other companies use external facilitators in a supporting or auxiliary capacity
A growing number of companies alternate between internal and external evaluations and/or between different types of survey instrument to keep directors ‘on their toes’ and the process alive
The cost of external facilitation averages £45k for FTSE 100 companies and £25k for FTSE 250 companies. Design and Admin of in-house board evaluations typically consumes 7 to 8 person days pa for companies (with the bulk being borne by the Company Secretary)
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| Impact |
Questions generating the most “insightful answers” were those concerning the board’s role in testing and developing strategy (particularly amongst FTSE 250)
More than 85% of companies felt that evaluations had a positive or very positive effect, with no companies reporting a negative effect
None of the companies felt the evaluations had a negative effect on the performance of individual directors, and 40% felt the impact had been neither good nor bad
Even if the Combined Code no longer required companies to perform board evaluations 83% of FTSE 100 and 77% of FTSE 250 companies said they would continue with them
Around 45% of companies have experienced a change in board composition as a direct result of board evaluation
The benefits of board evaluation were listed as surfacing issues, allowing directors to stand back from day to day matters, improving the board performance as a whole and improving board composition
Several study participants stressed the need for effective follow-up to board evaluations “the real challenge is what one does with the results”
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For the full report download the pdf here
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