As the new financial year progresses for your business organization(s), it is important to bring to fore certain corporate compliance and governance practices that are essential to your overall business success. In this edition of the Digest, we will be discussing “Board Evaluation: Assessing Board Performance and Effectiveness”.
The Financial Reporting Council of Nigeria (FRCN) issued the Nigerian Code of Corporate Governance (NCCG) in 2018, to replace all existing sectoral Codes of Corporate Governance in Nigeria.
One of the Principles of the NCCG 2018, which is applicable to all sectors of the economy is the conduct of an annual Board Evaluation by Nigerian Companies, particularly the Regulated Entities.
The NCCG provisions are mandatory for:
- public companies;
- private companies which are holding companies of public companies or other regulated entities;
- concessioned or privatized companies and regulated private companies that file returns to any regulatory authority other than the Federal Inland Revenue Service and the Corporate Affairs Commission (all the “Regulated Entities”).
Principle 14 of the NCCG 2018 NCCG 2018 explains that “Annual Board Evaluation assesses how each Director, the Committees of the Board and the Board are committed to their roles, work together and continue to contribute effectively to the achievement of the Company’s objectives.”
An effective Board of Directors is critical to the success of every Company. Hence, establishing a system for evaluating the Board’s collective and individual performances, to ensure that the Company is being steered in the direction of its vision and goals, and the Board’s purpose is achieved.
Essentially, Board Evaluation is relevant for a Company that desires to strengthen its corporate governance.
Conducting Board Evaluation
The NCCG 2018 recommends that the Board should establish and institutionalize a system to undertake a formal and rigorous evaluation of its own performance annually and facilitate the evaluation process by engaging an independent external consultant at least once in three years.
The focus of the Board assessment should be to identify areas of improvement in Board performance and effectiveness of the oversight function over Management.
Various parameters aid the assessment of a Board’s performance and effectiveness. This includes the recommendations of the NCCG 2018 that the Board Evaluation system should include the following:
- The criteria and key performance indicators and targets for the Board, its committees, the Chairman and each individual Board member.
- Consideration of the mix of skills, experience, objectivity, competence of members of the Board, its diversity (including gender), knowledge of the Company and its strategic direction by Board members, attendance at Board meetings, the Board’s teamwork and team efforts, and other factors relevant to the Board’s effectiveness.
An effective assessment of the performance of the Board provides an opportunity for Boards, Board Committees, and individual Directors to track their progress and renew their commitment to performing their oversight and governance responsibilities in the Company.
Further to the Board Evaluation, the NCCG 2018 recommends that:
- The result of the Board performance evaluation should be communicated to and discussed by the Board as a whole.
- The result of the performance of individual Directors should be communicated to and discussed with them individually by the Chairman of the Board.
- The Board should provide appropriate Board training to address identified gaps, where the performance of a Director is unsatisfactory.
- The results of the evaluation should be considered in the Company’s Director re-election process.
Board Evaluation Methodology
Board Evaluation exercise requires substantial time. This demands the participation of the Board and individual members in the process, reviewing the gaps identified and findings, addressing the issues identified, providing advisory and recommendations, and paying heed to recommendations made.
The methods adopted for the conduct of a Board performance evaluation or assessment may include:
- Review and analysis of relevant Board related documentation to gain insight into how the Board goes about making decisions and following up on the implementation of such decisions. The documentations include Board charters, minutes of Board and Committee meetings, policies, Board strategy papers, and road maps, etc.
- Administering of questionnaires and conducting interviews on the Board structure and composition, diversity, skills and experience, succession plan, frequency of Board meetings, participation of members, implementation of decisions, transparency, policies on disclosure of conflict of interest, Board trainings, the leadership of the Board, the effectiveness of the Board Committees amongst others.
The interviews include peer appraisals, to receive feedback on individual Board members, and one-on-one directors. Directors can raise areas of concern not covered by the questionnaire and give candid feedback particularly with respect to the Board Chairman and the Chief Executive Officer.
- Preparation of the Evaluation Report – A Report on key issues identified and recommendations are generated by the Committee which conducted the evaluation, where the process is internally facilitated, or by a consultant in the case of external facilitation to engender discussions of the results of the evaluation exercise by the Board. This gives rise to a prioritization of the issues identified, drafting of an action plan or road map to address the issues identified, and setting of timelines to monitor the implementation progress.
Board Evaluation allows the Board to clearly see its strength and areas that require improvement and potentially improve the governance culture of a Company, if properly conducted.
For further discussion on providing you with Board Evaluation and Nominee services, and assistance with filing any of your organization’s compliance returns to the Corporate Affairs Commission, the Nigeria Immigration Service, and application for Business Permit, Expatriate Quotas and the Combined Expatriate Resident Permit and Aliens Card (CERPAC), please contact us at email@example.com.