Three Key Issues Boards Must Consider Before Appointing An Independent Reviewer

There are many providers of board evaluation services – a 2021 review in the UK identified over 30 being used by FTSE350 companies alone. They include organisations that specialise only in board evaluation, and others that provide a range of services (for example, accounting and executive search firms). Also available are individuals such as experienced former directors.  

There is considerable variation in the qualifications, experience, and capacity of these providers, and in the methodology and processes they use. Understandably, companies can find it challenging to assess which are best suited for their specific needs. 

Both the AMF in France and the Financial Reporting Council in the UK have recently published recommendations to boards on the scope and process of board evaluations conducted by independent consultants.  

In addition, ecoDa (the organization representing the main national institutes of directors in Europe) issued a statement highlighting the potential for conflicts of interest that might impact the independence of the reviewer and setting out its views on how these conflicts can be minimized in a statement.  

Between them, these three documents identify three key issues that boards should consider before engaging an external reviewer.  

1. How to ensure there is appropriate oversight of the appointment process  

2. How to identify the most suitable reviewer  

3. How to minimize conflicts of interest 

Before doing any of that, however, the board needs to be clear about the objectives and scope of the planned evaluation.  

Defining the objectives and scope of the evaluation 

One board's need for external support may be very different from another, depending on its circumstances. Therefore, clearly defined objectives and evaluation scope before the appointment are necessary to obtain the best match between the board's needs and the capabilities of the potential reviewers.  

The updated FRC guidance identifies many different aspects of board effectiveness that could be a useful starting point for boards when defining the scope. These aspects include, for example:  

• How effectively the board has discharged its various responsibilities 

• The mix of skills, experience, and knowledge on the board 

• How the board works together as a unit  

• The board’s relationship with and oversight of management 

• The structure and effectiveness of the board’s committees 

• The quality and timing of papers and presentations to the board  

• The support provided by the secretariat 

Those are typically the core elements of any board evaluation, but some companies also ask independent reviewers to look at other factors that impact board effectiveness, including:  

• The performance of individual board members 

• The functioning and effectiveness of board committees 

• The views of shareholders and other key stakeholders 

• The possible implications for board composition of changes in the company’s operating environment (for example, geopolitical risks or new regulations) 

Companies should reflect on their specific circumstances and objectives for the board evaluation when deciding on the scope.  

For example, some companies may prefer an evaluation covering all the aspects identified above. This can be particularly valuable when the Chair or a significant number of board members are new, there has not been a comprehensive board review for a few years, or the company is embarking on a new strategy or direction.  

In other circumstances, companies may prefer to focus in more depth on specific aspects that have previously been highlighted as needing improvement.  

The ownership structure of the company might also influence decision-making. New ownership might mean that greater priority needs to be given to assessing specific governance processes. For example, the relationship with the boards of the parent or subsidiaries where the company of a group or the relationship between the board and a controlling shareholder.  

Growing companies, particularly those considering an IPO, may wish to focus on the need to adjust their board operations or composition, or their formal compliance with new regulatory requirements and the increased expectations of other stakeholders. Some companies find it helpful to be able to compare their governance arrangements with those of other companies in the same sector. 

QUESTIONS THE BOARD SHOULD CONSIDER:  

• What are the objectives? Is it a general ‘health check,’ or are there specific issues that must be addressed? 

• Will the performance of individual directors be included in the scope, or will that be assessed through other methods? 

• Are there specific perspectives on the board’s effectiveness that need to be considered (e.g., major shareholders, parent company, regulators)?  

• What is the available budget? This clearly impacts the breadth and depth of the independent review.  

Contributing authors: 

Chris Hodge, Special Advisor 

Lena Eriksson, Special Advisor