Board Evaluation Appointment Process: Oversight and Selection
05 September 2024
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Regular self-assessments of board effectiveness help to continuously improve a board’s performance and add value to the company's functioning and performance.
Investors see the process by which companies appoint an independent reviewer as an indicator of the likely robustness and independence of the review. Concerns could be raised if a reviewer was appointed without a formal and transparent bidding process.
Often, companies choose to engage reviewers they have worked with previously as they have existing knowledge of the company or reviewers recommended by board members who have used their services in other companies. This approach has some advantages for the company. However, even in these cases, it is considered good practice to invite at least one other reviewer so that the company can compare what it has to offer.
It is also considered good practice not to delegate the decision on appointment to a single board member or employee in order to avoid any perceptions of favorable treatment.
For this reason, ecoDa recommends that either a Nomination or Governance Committee be responsible for assessing the qualifications of potential reviewers. The AMF also views this approach as good practice. If the Committee is given this role, it would be sensible to also be responsible for drawing up the shortlist of candidates.
Often, the Board Chair will be a member of the Nomination Committee, but where this is not the case, the company should consider how to involve them. The Chair must have confidence in the appointed reviewer’s ability to conduct the evaluation.
A good practice is to ensure the entire board has formally approved the appointment of the reviewer so that board members are content with the proposed reviewer and bought into the process and resulting outcomes.
KEY QUESTIONS THE BOARD SHOULD CONSIDER:
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Is the Nomination Committee best placed to lead the appointment process? If not, who should do so?
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Should the appointment be subject to the approval of the whole board?
Following the establishment of a robust oversight process, one of the most important factors that boards need to consider when selecting a reviewer is whether they have the necessary competence and capabilities to conduct an evaluation that will meet the board’s objectives.
The Nomination Committee (or whoever leads the appointment process) should assess potential reviewers’ expertise, experience, and capacity by examining their track record, the quality and size of their team, and other resources.
Some of this information may be available on the reviewer’s website, which can help draw up a shortlist. Still, candidates should also be asked to provide evidence that they are qualified to undertake the review. Depending on the scope of the evaluation, this might include, for example, expertise in governance and behavioral issues, interpersonal skills, knowledge of the sector or market, or relevant professional knowledge and qualifications.
Understanding how the reviewer proposes to undertake the review is also an important consideration when selecting. A robust methodology is key to the reviewer’s ability to assess the board’s effectiveness.
For example, both AMF and FRC recommend that external reviewers interview board members and other key individuals because solely questionnaire-based approaches are unlikely to understand the dynamics in the boardroom.
In our experience, observing board and committee meetings can also provide the reviewer with valuable insights.
KEY QUESTIONS THE BOARD SHOULD CONSIDER TO ASSESS SUITABILITY
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Has the reviewer worked with other organizations of a similar size or in the same sector?
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Does the reviewer have a broader knowledge of developments in governance and markets that can help to identify issues that the board may not be aware of but that may need to be addressed?
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Does the reviewer have sufficient capacity to ensure they can do the work thoroughly and to the expected standard?
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Is the proposed methodology robust enough to rely on the findings?
Contributing authors:
Chris Hodge, Special Advisor
Lena Eriksson, Special Advisor
Topics
Summary
Discover the most important factors that boards need to consider when selecting an independent reviewer.
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