Boards have a responsibility for defining and setting the company’s purpose, values and strategy, defining culture and making decisions. They should ensure the prosperity and sustainability of the company, creating long-term value for its stakeholders. It is therefore no surprise that a high-performing and well-functioning Board is essential for a company’s success and good corporate governance.
As companies find themselves navigating a period of great domestic and international uncertainty, Board performance reviews are more important than ever.
As corporate governance codes and standards of best practice have evolved, it has become standard practice for listed companies and some large private companies to undertake a formal board performance review. In recent years, following the failure of several high-profile UK companies, there has been increased investor scrutiny on how boards are performing and the outcomes of board evaluations. This article considers best practices for listed public limited companies and large private companies when conducting a board performance review and explains why board evaluations add value and improve board effectiveness.
MSP Company Secretarial can assist with carrying out a Board Effectiveness Review. To speak to us, click here.
What is a board performance review?
A board performance review is designed to formally assess the performance of the board and its directors, focusing on how well the board is functioning, identifying strengths and weaknesses and helping highlight areas for further improvement. Reviews can be carried out either by an internal reviewer or facilitated by an external review provider.
Board performance reviews allow an opportunity for the board to reflect on the feedback provided by the directors and to agree on outcomes which will help improve its effectiveness and enhance its governance.
As important practices to foster better Board and company performance, reviews feature prominently in governance codes, as follows.
What are the corporate governance requirements for board performance reviews?
The UK Corporate Governance Code (UKCGC) was last revised in January 2024. The UKCGC requires boards of listed companies to annually assess their own performance and act on the outcomes of performance reviews. Boards should also report on the performance review process undertaken, the resulting outcomes and actions and how the evaluation process has or will influence future board composition.
UKCGC Code Provisions
The provisions on board performance reviews and effectiveness are:
- Principle L: Annual evaluation of the board should consider its performance, composition, diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively.
- Provision 21: There should be a formal and rigorous annual evaluation review of the performance of the board, its committees, the chair and individual directors. The chair should consider having a regular externally facilitated board performance review. In FTSE 350 companies, this should happen at least every three years. The external board reviewer should be identified in the annual report, and a statement should be made about any other connection it has with the company or individual directors.
- Provision 22: The chair should act on the results of the evaluation board performance review by recognising the strengths and addressing any weaknesses of the board. Each director should engage with the process and take appropriate action when development needs have been identified.
- Provision 23: The annual report should describe the work of the nomination committee, including how the board performance review (evaluation) has been conducted, the nature and extent of an external reviewer’s contact with the board and individual directors, the outcomes and actions taken, and how it has or will influence future board composition.
Additionally, the Financial Reporting Council’s (FRC’s) Code Guidance (also revised and updated in 2024 alongside the UKCGC) suggests board performance reviews should be continually monitored and improved through rigorous performance reviews and should be bespoke in both formulation and delivery.
MSP Company Secretarial can provide support by acting as a third-party board reviewer and providing guidance on review provisions. Click here to contact us.
QCA Corporate Governance Code and board performance reviews
Similarly, the QCA Corporate Governance Code, which is widely adopted by companies listed on AIM and the Aquis Stock Exchange, aligns closely with the UKCGC requirements for board performance reviews. In November 2023, the QCA published its updated corporate governance code and supporting guidance. This updated Code applies for financial years beginning on or after 1 April 2024, with the first disclosures against the 2023 Code expected in 2025.
Principle 8 of the 2023 QCA Code makes it clear for board performance to be reviewed annually and includes ‘opportunities for improvement with respect to the performance of the chair and the operation of the board and its committees’. The 2023 Code also expects boards to disclose the board performance review process, plans for external board performance reviews and the succession planning process.
The Wates Principles for Large Private Companies
It should be noted that board performance reviews do not apply only to listed companies. In July 2018, the Wates Corporate Governance Principles for Large Companies were developed and introduced by the FRC to provide a corporate governance framework for large private companies.
Under the Companies (Miscellaneous Reporting) Regulations 2018, a company is defined as a large private company if it employs more than 2,000 employees globally, or it has a turnover of more than £200 million globally and a balance sheet total of more than £2 billion globally.
The Wates Principles set out several ‘apply and explain’ provisions for large private companies to report on their corporate governance arrangements. Principle Two provides that large private companies should commit to the professional development of their board and regular board evaluations, and the chair should act on the recommendations of these evaluations.
Annual Reports: Board performance review disclosures
Investors and other stakeholders expect greater accountability from companies as to how board reviews are conducted. Additionally, boards are expected to provide details in their company annual reports on the objective and scope of the review and outline how the board performance review process was undertaken. They are expected to identify the individuals and groups that were sought in the review process, who in the company oversaw the review process and communicate outcomes of the review and recommendations, actions, and timeframe for review of progress against agreed outcomes.
In its Review of Corporate Governance Reporting, the FRC’s findings on the disclosure of board evaluation in 2020 highlighted that reporting on board performance reviews could be improved in several areas, such as reporting on how the board works together as a unit, the tone set by the chair, and the chief executive, the relationships between board members particularly chair and chief executive, chair and senior independent director, and executive and non-executive directors. Reporting should also provide a greater explanation of why the chosen evaluation tools or method was considered to be the best method of reviewing board effectiveness, and describe outcomes of the board performance review process.
Recognising there is further room for improvement in the quality of disclosures on board performance reviews in annual reports, the Corporate Governance Institute (CGI) has produced guidance for listed companies to assist with their reporting obligations under the UKCGC.
The value of board performance reviews
The board performance review process needs to enable boards to examine their own processes, structures, strengths and weaknesses. Outcomes from the board’s performance review should inform the board’s work in several areas, such as assessing board composition and succession planning, and embed learning to drive continuous improvement across the company.
Reviews are by nature iterative, reviewing common elements of the board’s performance as the company’s circumstances change, particularly during times of great uncertainty, aiming to adapt and optimise Board performance and support functions.
MSP Company Secretarial can help you define your board review process. To find out how, arrange an introduction meeting here.
Annual Board Review Process
It should be noted that there is no ‘one size fits all’ approach in determining the objectives and scope of a board performance review, as the review should be tailored to the needs of the company. The corporate governance codes rely on boards to apply the Code requirements, set objectives for what is to be achieved from the board performance review and focus on areas that the chair and board feel require the most attention. This may influence the methodology used and the type of questions for the board performance review.
Questionnaires and interviews
Many boards use surveys or a self-assessment peer review questionnaire in combination with face-to-face interviews or informal discussions to help gauge views on the performance of the board and committees. These techniques also help gauge peer feedback, the value and level of contributions from board members and comment on substantive areas of concern. Using a mixture of open and closed questions may provide a more effective way of bringing issues to the surface that may go unaddressed.
What areas should a good Board Performance Review assess?
The board performance review process should not just look back at previous performance but should also help the board continuously improve its own performance. The FRC Guidance includes a list of areas that may be considered to ensure that the board performance review process is rigorous. Example areas that are typically included in an evaluation report are:
- Strategy and strategic priorities for the company
- Regulatory environment and competition
- Board composition, balance, skills, diversity and expertise
- Board relationships and dynamics, individual contributions and leadership
- Board meetings, their focus and priorities
- Development and training, and induction
- Board succession, senior management and retention of talent
- Quality of information and board support
- Risk management
- Decision-making processes
The role of the Board Chair in board performance reviews
The chair of the board has a critical leadership role in the board performance review process. Paragraph 171 of the FRC’s Corporate Governance Guidance highlights the responsibility of the chair for facilitating the review process, establishing the scope of the review and selecting the reviewer, fostering participation of members of the board and guiding the board in developing and agreeing the actions arising from the performance review.
Analysis of feedback
The analysis of the responses collated from the board performance review should help to inform the discussion on the issues arising from the board performance review. Ahead of the discussion, the board should receive a report of the performance review results and a selection of anonymised responses to help guide discussions on key themes for debate.
Follow up and review
The most important aspect of the board effectiveness review process is capturing the agreed outcomes in an improvement plan and setting clear timescales for their implementation, and reviewing progress against these during the year.
How MSP Company Secretarial Can Help
MSP Company Secretarial offers a tailored Board Effectiveness Review focused on outcomes that will help the Board work better as a collective to achieve the organisation’s aims.
We can offer a tailored approach to develop an independent view on the compliance with governance best practice. Our effectiveness reviews can include:
- External facilitation reviewing the Board’s structure and composition
- Board benchmarking
- External reviews of governance
- Designing an assessment survey and a skills audit
- Board and Committee meeting observation
- A final report and/or presentation to the Board on findings
- Follow-up reviews on progress made against recommendations
Contact us to find out more about how we can optimise the performance of your board.
Board performance reviews: Frequently asked questions
Do board performance reviews need to be externally facilitated?
The UK Corporate Governance Code requires Boards of FTSE 350 listed companies to conduct an externally facilitated board performance review at least every three years. This requirement has also been reflected in other corporate governance codes, such as the QCA Corporate Governance Code. In the intervening period, boards may conduct internal self-assessments.
The main advantages that an externally facilitated review can provide to the board performance review process are independence and objectivity, the ability to benchmark results of the review against similar companies, as well as providing a greater degree of rigour and structure compared to an internally facilitated evaluation. However, these advantages would need to be balanced against the time commitments and the commensurate cost of conducting an externally facilitated review.
Are board performance reviews mandatory under UK corporate governance rules?
All listed UK companies are required to undertake a performance review exercise of the performance of their board, its committees, the chair and individual directors on an annual basis. Additionally, the UK Corporate Governance Code provides that the annual report should describe how the board performance review has been conducted, the nature and extent of an external reviewer’s contact with the board and individual directors, the outcomes and actions taken and how the review has or will influence future board composition.
How can board performance reviews improve relationships with investors and regulators?
Board performance reviews are an important tool in assisting boards to improve governance and lead to increased investor and public confidence in the effectiveness of the board. They foster accountability, transparency and demonstrate the board’s commitment to good governance. This is important for building trust with investors, regulators and other stakeholders.
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