Saturday 13 May 2017

Board Effectiveness Assessment, Why Have It?

Board effectiveness assessments have been practised for a while in Malaysia. There are any ways of approaching this difficult subject but somehow corporate Malaysia has been able to apply some versions of assessment to meet stakeholders' expectations.

The new Code on Corporate Governance (the Code) has brought this topic to a notch higher by requiring Large Companies, those which are listed in the top 100 companies on Bursa Malaysia or those with market capitalisation exceeding RM 2 billion, to engage independent experts periodically to facilitate objective and candid board evaluations. The Code explains that independence in this context means no connection with the company, directors and major shareholders.

The Code states that the annual assessment on individual directors should the evaluation of their:

  • Will and ability to critically and ask the right questions;
  • Character and integrity in dealing with potential conflict of interests situations;
  • Commitment to serve the company, due diligence and integrity; and 
  • Confidence to stand up for a point of view.
It would certain be beneficial for the individual director and the board as a whole in understanding how the above expectations were discharged. However, the assessment would not be easy for a number of reasons.

  • The minutes may not be detailed enough to indicate the performance of each board member as some companies prefer to record the key issues and decisions without attributing specific remarks or points to any specific member of the board;
  • Self-assessments by board members and individual board members assessing their peers may not be objective enough;
  • The definition of the keywords such as "critically", "integrity", "commitment" and "confidence" may have various meanings and understood differently by different people; and
  • Assigning a particular scoring with respect to each of the expectations would be highly subjective.
However, the subjectivity and difficulty in performing the assessment should not be a factor discouraging boards to take this issue seriously. Not only such assessment fulfils the expectation of the Code but it should also allow actions to mitigate whatever gaps discovered in the process to be pursued. Like any other regulatory intervention, this exercise would lead to a long term or even a continuous journey to keep on improving performance in the boardrooms.

Like examination, board effectiveness assessments is not about looking at things at the point of assessment but should encompass a proper plan for the performance to be demonstrated at every meetings of the board or its committees, before any assessment could be made. Hence, it would helpful for boards to plan ahead in terms of improvement steps and be mindful about seeing expected outcomes to be achieved as they progress through the year.

These assessments are not for show but for the own good of individual board members in discharging their fiduciary duty. If the substance are there and positive outcomes could be demonstrated, reporting the value of the process would be just a natural step.

Let's observe how board effectiveness assessments evolve, moving forward.

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