Board Evaluations: How to Minimize Conflicts of Interest

Regular self-assessments of board effectiveness help to continuously improve a board’s performance and add value to the company's functioning and performance. 

Most national corporate governance codes recommend this as good practice. Many also recommend that boards consider periodically engaging an independent reviewer to lead or support these evaluations, typically every three years.  

As with other third-party services provided to companies, such as external audit, there are potential sensitivities when a board reviewer also provides other services to the board or company. There is a perception that the reviewer might be tempted either to ‘go easy’ on the board or that their findings might be influenced by the hope they will result in further work. 

This is not a black-and-white issue. An outright ban on board reviewers providing companies with other services might prevent board reviewers from undertaking follow-up work to the review, including assessing in more depth specific aspects of board performance highlighted in the initial review, which would not necessarily benefit the company. 

However, companies need to be sensitive to the real and perceived conflicts of interest of the board reviewer when providing other services, particularly if the value of those services is higher than the fees for the board review. Some investors have drawn parallels with using the external auditor to provide non-audit services. 

In its recent statement, ecoDa recommends that companies develop a policy for the pre-approval of any additional board services covering both the type and value of such services, including, if appropriate, an exclusion list of services that the board reviewer cannot carry out in any circumstances. ecoDa also highlights the example of using executive search firms as a potential conflict where the scope of the evaluation includes assessing the board composition or the performance of individual board members.  

The length of the relationship between the company and the board reviewer is potentially another source of conflict of interest. This is because of the perception that the relationship will become too cozy and unchallenging after a certain period. Even if this is not the case, boards might benefit from the fresh perspective that a different reviewer could bring.  

There are parallels to external audit, where in many markets, there are mandatory limits on the length of tenure of individual audit partners and, in some cases, the audit firm. To our knowledge, no markets currently impose such restrictions on board reviews, but in the UK, listed companies are recommended to set their own voluntary upper limit for the number of reviews undertaken by the same reviewer.