|The NC recommends for the Board’s approval the objective performance criteria and process for the evaluation of the effectiveness of the Board as a whole, and of each board committee separately, as well as the contribution by the Chairman and each individual director to the Board.|
This Provision describes the key elements of a robust assessment process for evaluating the effectiveness of the Board.
It is an established practice for companies to have a system of regular appraisals for individual staff and the organisational units, the purpose of which is to assess their performances so that in part, they can be rewarded or penalised. More importantly, the goal is to improve on their future performance with the appropriate support and changes.
Although it is the highest governing body in the company, the Board should not be exempted from the evaluation process.
Board evaluations, however, differ from other evaluations in the company in one key aspect: the process is primarily one of self-evaluation. That is, the Board and its directors evaluate themselves and each other.
In this context, to ensure that the evaluation is effective, the following elements are important:
- Evaluation Process
There should be a robust evaluation process that is designed and approved by the Board. Such a process should ideally include the use of external facilitators (see Provision 5.2).
- Evaluation Levels
The evaluation should be comprehensive. It should be conducted at the following levels:
- The Board as a whole.
- Each of the Board Committees.
- Each individual director including the Board Chairman.
- The relationship between the Board and management.
- Evaluation Criteria
For a performance evaluation to be effective, it is important to set objective performance criteria against which results can be compared.
Practice Guidance 5 suggests that the board evaluation criteria should take into account:
- The Board’s composition (balance of skills, experience, independence, knowledge of the company, and diversity).
- Board practices and conduct.
- How the Board as a whole adds value to the company.
- Use of peer comparisons and other objective third party benchmarks.
- The criteria should not change from year to year; and where they are changed, the Board should justify such changes.
The Practice Guidance also suggests that the evaluation of an individual director’s performance should aim to assess whether he is willing and able to constructively challenge and contribute effectively to the Board, and to demonstrate commitment to his role on the Board (including the roles of Chairman of the Board, and chairman of a board committee).
- Communication and Actions
The evaluation process and performance criteria need to be communicated to, and be approved by, the Board before the evaluation is conducted.
Following the evaluation, the results are communicated to the Board as a whole and to individual directors.
The Chairman should then act on the evaluation results and, in consultation with the NC, propose, where appropriate, that new members be appointed to the Board, or that certain directors be asked to resign.
The board assessment process is disclosed (see Provision 5.2).
B. Practice Guidance
C. Related Rules and Regulations
D. CG Guides
- NC Guide 1.3: Terms of Reference [NC Composition].
- NC Guide Appendix 1C: Sample NC Terms of Reference [Sample NC Terms of Reference].
- NC Guide 2.2: NC Calendar [NC Agenda].
- NC Guide Appendix 2C: Sample NC Calendar [NC Agenda].
- NC Guide 6.1: Introduction [Board & Director Evaluation].
- NC Guide 6.2: Board Evaluation [Board & Director Evaluation].
- NC Guide 6.3: Board Committee Evaluation [Board & Director Evaluation].
- NC Guide 6.4: Director Evaluation [Board & Director Evaluation].
- NC Guide Appendix 6B-1: 360° Assessment Process for Executive Directors [Board & Director Evaluation].
- NC Guide Appendix 6C: Sample Board Performance Evaluation Form [Board & Director Evaluation].
- NC Guide Appendix 6D: Sample Board Committee Performance Evaluation Forms [Board & Director Evaluation].
- NC Guide 8.2: Disclosure Requirements [Disclosure Requirements].
E. Related Articles
- “Board evaluation: More can be done” by Yvonne Goh. (463KB)
- “The Importance of Evaluating the Board” by Philip Forrest. (457KB)
- “Seven steps to effective board and director evaluations” by Geoffrey Kiel and James Beck. (626KB)
- “The nominating committee and its role in identifying directors for renewal and new appointments” by Kala Anandarajah. (112KB)
- “Using evaluation to build strong boards” by Na Boon Chong and Grace Wu. (96KB)
- “What makes for a high-performing board?” by Luke Meynell and Rae Sedel. (144KB)
- “Making ‘ownself check ownself’ work” by Willie Cheng. (148KB)