Survey reveals problems in board evaluations

Board evaluation is a tool that has been considered more and more crucial for the building of a good governance system. A small but growing number of Brazilian companies follow the practice in different ways. The “Brazilian Corporate Governance Code – Listed Companies” recommends it in its item 2.4: “The company should evaluate the performance of its board of directors and committees, such as deliberative bodies, the chair of the board, (individual) board members and the governance body, if any, on a yearly basis.”
Since last year, according to the CVM Instruction 586/18, companies should inform – based on the “comply or explain” approach – whether they evaluate their board. They should also report the criteria used in the evaluation, whether external experts participated in it and how often, whether the process considered the diligence in the evaluation and debate of the matters discussed, the active participation of members in decision making processes and their commitment to the exercise of their functions, main areas for improvement and the corrective measures implemented. The practice, however, is not adopted by most companies. According to a survey conducted by EY, this is one of the code’s items with the lowest level of adherence. 40% of the companies reported they do not evaluate their boards and do not turn to external consultants.
Even companies that already adopt or intend to adopt the practice have doubts about whether the process is actually effective. A recent survey conducted by Minerva Analytics shows that many times the process does not meet its objectives, being only a box-ticking exercise. An example of that is Carillion, one of UK Government’s biggest contractors, which collapsed as a result of frauds and accounting problems. In its last report, the evaluation concluded that “the board, each of its committees and the directors continue to be highly effective,” in addition to highlighting the board composition and expertise and the board’s approach to risk management and internal control.
Some of the problems mentioned include the appraisers’ market concentration and the lack of transparency about the evaluation results. The Dutch fund Robeco published its positioning about the topic in its 2016 Stewardship report:
“We believe all boards should undertake regular self-assessments, and that these should be carried out on a yearly basis. An external party should be involved in the process of these assessments at least every three years to provide independent judgment. The results and follow up actions from these board assessments should be available to shareholders. Best practice in self-assessment can therefore be broken down into two steps: 1) performing an appropriate level of self-evaluation and 2) reporting to shareholders on these activities.”