Has your company remembered to include in your Annual Report, the right information regarding your 2022 board evaluation?
In the article below we highlight some good examples.
Every year, Leadership Advisor Group does in-depth desk research to understand how companies are reporting the procedure and conclusions of their annual board evaluations.
Good reporting shows transparency and will help build stakeholder trust.
Guidelines differ across countries. For example, in Norway the guidelines suggest public reporting of whether or not the company has done a board evaluation, but reporting the actual results only to the Nomination Committee. Meantime, in the UK it is recommended to report even the results to the public. UK companies should report not only on how the board evaluation has been conducted, but also identify the external evaluator (if one was used), show a statement about the nature and extent of an external evaluator’s contact with the board and individual directors (to ensure the evaluator’s objectivity and that no consultant do board evaluation, non-executive / executive search or auditing etc. for the same client within the same year), show the outcomes and actions taken, and include how the evaluation has or will influence board composition.
To inspire companies who are striving to achieve “best-in-class” status on board evaluation reporting, below are the verbatim texts from two brilliant examples we found.
ISS (Denmark)
ISS: Annual Report 2021, page 42:
https://brand.issworld.com/m/9b28468c2bcb3bf/original/ISS-Annual-Report-2021.pdf
SSE (UK)
SSE Annual Report 2022, page 115:
https://www.sse.com/media/blhnuywb/sse-full-annual-report.pdf
Extract from pages 143 to 144:
Based on international best practice, Leadership Advisor Group recommends that all listed companies, as well as those who are striving to become “top class”, should, as a minimum, report the process for the assessment (i.e the elements included in the procedure), as well as the conclusions (strengths and development areas) in the annual report, on the company’s website, and at the company’s annual meeting.
If you’d like our guidance on how to improve the reporting of your board evaluation, please contact us at reception@leadershipadvisorgroup.com
For reference, below we have inserted relevant extracts of the governance codes for Norway, UK, and Denmark:
The Norwegian Code of Practice for Corporate Governance, page 34:
https://nues.no/wp-content/uploads/2021/10/2021-10-14-The-Norwegian-Code-of-Practice-for-Corporate-Governance.pdf
The work of the board of directors
The board of directors should evaluate its performance and expertise annually.
(continues on page 38:)
The board of director’s evaluation of its own work
The board of directors’ evaluation of its own performance and expertise should include an evaluation of the composition of the board and the manner in which its members function, both individually and as a group, in relation to the objectives set out for its work. Such a report will be more comprehensive if it is not intended for publication. However, such reports or relevant extracts therefrom should be made available to the nomination committee. The board of directors should consider whether to use an external person to facilitate the evaluation of its own work.
The UK Corporate Governance Code, page 8:
https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf
3. COMPOSITION, SUCCESSION AND EVALUATION
Principles:
Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively.
Provisions
1.There should be a formal and rigorous annual evaluation of the performance of the board, its committees, the chair and individual directors. The chair should consider having a regular externally facilitated board evaluation. In FTSE 350 companies this should happen at least every three years. The external evaluator should be identified in the annual report and a statement made about any other connection it has with the company or individual directors.
2.The chair should act on the results of the evaluation 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.
3. The annual report should describe the work of the nomination committee, including: how the board evaluation has been conducted, the nature and extent of an external evaluator’s contact with the board and individual directors, the outcomes and actions taken, and how it has or will influence board composition.
The Danish Corporate Governance Code, page 27:
https://corporategovernance.dk/sites/default/files/media/anbefalinger_for_god_selskabsledelse_engelsk.pdf
3.5.1 The Committee recommends that the board of directors once a year evaluates the board of directors and at least every three years engages external assistance in the evaluation. The Committee recommends that the evaluation focuses on the recommendations on the board of directors’ work, efficiency, composition and organisation, cf. recommendations 3.1.-3.4. above, and that the evaluation as a minimum always includes the following topics:
• the composition of the board of directors with focus on competencies and diversity
• the board of directors and the individual member’s contribution and results,
• the cooperation on the board of directors and between the board of directors and the executive management,
• the chairperson’s leadership of the board of directors,
• the committee structure and the work in the committees,
• the organisation of the work of the board of directors and the quality of the material provided to the board of directors, and
• the board members’ preparation for and active participation in the meetings of the board of directors.
Comment
It may be considered to have procedures in place for the evaluation of the board of directors, which as a minimum describes how the evaluation of the board of directors is founded with the entire board of directors, the frequency and scope of the evaluations, how the board of directors reports on the evaluations and how the board of directors optionally involves external assistance.
The evaluation may consist of an anonymous questionnaire focusing on the topics set out in the recommendation and subsequent individual interviews between the chairperson and the individual members during which feedback may be given based on the survey.
When the board of directors engages external advisors, interviews may be conducted with the individual members of the board of directors and the executive management.
The vice chairperson or another member of the board of directors should on behalf of the board of directors handle the feedback to the chairperson in respect of his/her performance.
A successful evaluation of the board of directors will identify the competencies, which the board of directors possesses and ought to possess in order for the company to develop. In light of this, the board of directors can identify requirements in respect of competencies, knowledge and diversity for prospective members of the board of directors.
3.5.2. The Committee recommends that the entire board of directors discusses the result of the evaluation of the board of directors and that the procedure for the evaluation and the general conclusions of the evaluation are described in the management commentary, on the company’s website and at the company’s general meeting.
3.5.3. The Committee recommends that the board of directors at least once a year evaluates the work and results of the executive management according to pre- established criteria, and that the chairperson reviews the evaluation together with the executive management. In addition, the board of directors should on a continuous basis assess the need for changes in the structure and composition of the executive management, including in respect of diversity, succession planning and risks, in light of the company’s strategy.
If you’d like our guidance on how to improve the reporting of your board evaluation, please contact us at reception@leadershipadvisorgroup.com
