Top risks identified by boards in 2018. Risk 2: Continuous Review & Development

By March 27, 2019Uncategorized

The Governance Evaluator 2018 Governance Capability Benchmark Report analysed board evaluation responses from over 70 boards comprising almost 700 members to provide insights into the governance performance of boards across the health, aged care, government, waste/resources and community sectors.

In our monthly series of reports, we take a closer look at each of the five top risks identified for improvement by Chairs, CEOs and directors across all of these sectors.

This month we examine the topic of Continuous Review & Development.

What is Continuous Review & Development?

 

Continuous Review & Development represents the policies, processes and actions that ensure a board can fulfil its obligations of measuring its performance, monitoring identified performance issues and taking steps to ensure optimal performance. Boards need to undertake an annual review of their individual and collective governance capability to ensure alignment & compliance with regulatory guidelines, based on their specific sector, including ASX Corporate Governance Guidelines. Effective Continuous Review & Development is a vital component of a strong board and organisational culture.

Across all of the sectors we support, the Governance Evaluator questionnaire asks about Continuous Review & Development in relation to four themes; the board, the CEO, Governance Policy and Remuneration.

Each theme is explored via a series of targeted questions, each with four possible responses:

  • No: Represents an early capability assessment of the board in that area. Any responses in this category highlight the need for board capability improvement and education.
  • Yes, but qualified: Indicates that board capability is developing and not yet at a mature governance level. Again, these point to opportunities for focus and education.
  • Yes: Represents a mature governance capability within the board and the criteria wholly satisfied, as judged by the participants.
  • Unsure: Measures a construct other than overall board capability as it reflects individual members of the board or leadership team that are unsure of the board’s level of functioning.

These four themes of Continuous Review & Development are all identified by the 2018 Governance Capability Benchmark report by directors, Chairs and CEOs as key areas for improvement, and are explored in greater depth throughout this resource:

 

Board

Best practice

Standards Australia advises that ‘a board should regularly review and assess its own performance, and the performance of individual directors and that of committees’. Board effectiveness can only be gauged if the board regularly assesses its own performance. Benefits of evaluation include:

  • taking responsibility for the board performance
  • positive change to board processes
  • gathering viewpoints, which may otherwise not be heard
  • positive culture building
  • effective board/management interactions

Cross-Sector 2018 Benchmark Data key finding:

“Yes” in fig 1 below indicates the Board has a formal and effective process for reviewing the collective and individual Director performance. Almost half of the members report room for improvement in their board evaluation process.

Of interest, less mature boards state that after they complete their evaluation, they either don’t set, or set and forget, the resultant action plans and many times do not follow through with utilising resources and support training. Some boards also describe an issue being the time it can take to evaluate as a volunteer board when they do not have a set or simple annual process to follow.

However, the more mature boards speak positively about being engaged in an annual process which is typically Chair-led, but with the added rigour of an independent convener leading the process tri-annually. They also speak of how they benefit from a regular process that allows trending and benchmarking of results, with a focus on in the dividual director as well as whole board development. They also very much understand how this ongoing annual event leads by example the whole organisation’s culture for continuous review and development. These chairs, directors and CEOs endorse evaluation as a non-compliance driven activity that is engaging and capacity building.

 

 

Fig 1:  2018 cross-sector evaluation findings for Continuous Review & Development of the Board
Yes but qualified: The board has/does this but could improve

 

Top tips for board review & development

  • Schedule an annual board evaluation that is straightforward and relevant to your sector and can be delivered in an engaging way for building board capabilities. The ASX Revised Corporate Governance Guidelines (2019) state that board governance reviews of individual directors and the whole board should occur annually to identify gaps and developmental requirements. Also, evidence is required that these developmental needs are resourced and supported. These Guidelines also note that the review should be led by external conveners either bi or tri-annually.
  • Make sure you are ready for any accreditation process, external review or departmental requirements with documented evaluation results and action plans for both individuals and the whole board that demonstrate dedication to a culture of continuous review and development

 

Links to Resources

Governance Evaluator has sourced some resources which we think you might find useful to build any board’s capabilities in this area:

The DHHS Directors Toolkit can be accessed here.

The ASX Corporate Governance Guidelines are also a useful resource for all which can be accessed here.

Governance Evaluator customers can access the following, and other useful resources via the platform here.

  • Resource Manual – 9A: Effective governance board assessment fact sheet.

Not a customer? Access these resources here.

 

CEO

Best practice

The key role of the board is to appoint, oversee, support and annually review the CEO. Annual evaluation of the performance of the CEO is instrumental in CEO satisfaction, support and accountability to the board. Evaluation should be based on mutually-agreed performance objectives between the CEO and the board.


Cross-Sector Benchmark key finding:

Arguably one of the most important functions of a Board is to appoint, oversee, support and annually review the CEO and a “Yes” response in fig 2 below implies complete satisfaction with this function. Approximately one-third of members report room for improvement in this process.

Two key areas are noted for improvement. Firstly, the CEO needs well defined and board endorsed Key Performance Indicators (KPIs). Secondly, many boards note that the CEO review process does not vary in style and extent each year.  A good process would be, for example, cycling between a conversation with the chair about the KPI outcomes and a full peer review process including directors, executives and stakeholders. Many boards report that the chair and the executive committee review the CEO, with incomplete outcomes subsequently being made available to the board.

More mature boards, however, work hard with their CEOs to develop KPIs that reflect more than just the strategic plan, and move through an engaging and constructive annual review, support and reward process that the whole board is aware of as the CEO’s employer.

 

 

 

Fig 2:  2018 cross-sector evaluation findings for Continuous Review & Development of the CEO
Yes but qualified: The board has/does this but could improve

Top tip for reviewing and supporting the CEO

  • Boards must ensure CEOs have meaningful, targeted Key Performance Indicators (KPIs) which cover more than just the strategic plan. KPIs should include areas such as culture, HR, values, quality and safety. The board must also add the details of the CEO review into their annual calendar include agreed mechanisms for review, support and reward.

Links to Resources

Governance Evaluator customers can access these and other useful resources via the platform here.

  • Resource Manual – 9B: CEO Review fact sheet
  • Resource Manual – 5C: The Chair-CEO Relations Fact Sheet
  • Governance Manual – 9.1: CEO Review process

Not a customer? Access these resources here.

 

Governance Policy

Best practice

Governance policy and procedure documents effectively guide the key roles and responsibilities for the good governance of the organisation. It is recommended practice for the board to review these documents annually and ensure that all directors understand them.

 

Cross-Sector Benchmark key finding:

A “Yes” response in fig 3 below attests to the existence and operation of sound governance policies that are understood, current and effective. Approximately one-third of members report room for improvement either in the clarity or development of their board’s governance policy.

Some boards state that they aren’t aware of the board’s policies and procedures, and others report that while they may be introduced to a manual during their induction process, this manual is not subsequently used. Boards also note the lack of an effective system for noting the status of policies and procedures as they are reviewed.

In contrast, more mature boards report that they have living policies and procedures that are genuinely owned, reviewed and discussed by the board, and are actually used to support and inform best practice.

Fig 3:  2018 cross-sector evaluation findings for Continuous Review & Development of Governance Policy
Yes but qualified: The board has/does this but could improve

Top tip for improving governance on policy

  • Boards need a governance manual, which is regularly reviewed and annually endorsed. A governance manual outlines the expectations of the whole board and individual directors’ behaviours and duties, making it a guiding resource for current and new directors.

Links to Resources

Governance Evaluator has sourced some resources which we think you might find useful to build any board’s capabilities in this area:

  • Governance Evaluator customers can access the following, and other useful resources via the platform here.
    • Governance Manual – 9.2 Governance Manual Checklist
    • Governance Evaluator TV – Governance 101
  • Not a customer? Access these resources here.

Remuneration

Best Practice

The board (or a remuneration committee operating under a written charter), is responsible for overseeing the remuneration policy, plans, and practices covering directors, executives, and all employees; and for ensuring these procedures do not create risks that are reasonably likely to have a material adverse effect on your organisation. Remuneration is one of the six drivers of engagement with an organisation’s culture and, within the public health system, an area of regulation.

The board (or remuneration committee) is also accountable for setting the actual remuneration levels for directors and key executives, and for ensuring that the remuneration policies and processes ensure a clear separation of responsibilities between the recommendation, review and approval of remuneration arrangements.

The organisation should formulate a remuneration policy that:

  • motivates executives to pursue the long-term growth and success of the organisation
  • ensures that any incentive arrangements reflect a clear relationship to performance and risk management while encouraging the desired behaviours and values
  • appropriately balances fixed and ‘at risk’ pay and short and long-term incentives
  • outlines how remuneration will be informed and guided by competitive market information and pay levels
  • is sufficiently clear and transparent to inform key stakeholders, whether or not disclosure is required

Cross-Sector Benchmark key finding:

A “Yes” response in fig 4 below is confirming that appropriate remuneration oversight, controls and principles are documented and support the effective, lawful, fair and transparent operation of the organisation. A third of members are reportedly unclear about the existence/appropriateness of their organisation’s remuneration framework.

Most directors who complete this question feel that if they are not paid in the role, the topic does not apply to them. However, it is still important to have a policy for any form of reward or reimbursement at the board level. Many boards also believe that it is the role of the CEO to set the remuneration of other staff, and as this is often guided by set funding guidelines it is not their responsibility.

Conversely, more mature boards report that it is important that they are aware of the organisation’s remuneration policy as they understand this has a significant effect on engagement in a positive culture.

 

Fig 4:  2018 cross-sector evaluation findings for Continuous Review & Development of Remuneration
Yes but qualified: The board has/does this but could improve

 

Top tips for effective remuneration

  • Ensure there is a formal and transparent process to establish and monitor CEO KPIs and a process for the Annual Review of Remuneration.
  • At a minimum, the board should have a remuneration policy, understand the remuneration requirements (e.g. GSERP) and know the remuneration policy of the organisation is fair, lawful and supports engagement in a safe and quality culture.

Links to Resources

  • The Aon 2018 Trends in Global Employee Engagement report provides an interesting perspective on the connection between remuneration and engagement and can be accessed here.
  • Governance Evaluator customers can access the following, and other useful resources via the platform here.
    • Governance Manual – 9.3 Establishing a remuneration policy
    • Governance Evaluator TV – Remuneration, engagement and culture webinar
  • Not a customer? Access these resources here.