A good board needs to be well balanced and diverse, and to evolve to meet the challenges an organisation will face. An effective board will be a well-managed one.
Board management is key to securing its effectiveness. From evaluation processes, to succession planning and board pay, organisations need to manage their boards well to ensure good governance.
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The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. Board evaluation provides a powerful and valuable feedback mechanism for improving board effectiveness, maximising strengths and highlighting areas for further development. The evaluation process should aim to be objective and rigorous.
Evaluation of the board should consider:
The chair should act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the board and, where appropriate, proposing new members be appointed to the board or seeking the resignation of directors.
Individual evaluation should aim to show whether each director continues to contribute effectively and to demonstrate commitment to the role (including commitment of time for board and committee meetings and any other duties).
The board should state in the annual report how performance evaluation of the board, its committees and its individual directors has been conducted.
Like induction and board development, evaluation should be bespoke in its formulation and delivery. The chair has overall responsibility for the process, and should select an appropriate approach and act on its outcome. The senior independent director should lead the process which evaluates the performance of the chair. Chairs of board committees should also be responsible for the evaluation of their committees.
The outcome of a board evaluation should be shared with the whole board and fed back, as appropriate, into the board’s work on composition, the design of induction and development programmes, and other relevant areas. It may be useful for a company to have a review loop to consider how effective the board evaluation process has been.
The UK Governance Code recommends that FTSE 350 companies have externally‐facilitated board evaluations at least every three years. This is echoed in the Federation’s 2015 code of governance. Whether facilitated externally or internally, evaluations should explore how effective the board is as a unit, as well as the effectiveness of the contributions made by individual directors. Some areas which may be considered, although they are neither prescriptive nor exhaustive, include:
The National Audit Office published a board evaluation questionnaire specifically for public sector boards that members may find of interest.
Well-informed and high quality decision making is a critical requirement for a board to be effective and does not happen by accident. Boards can minimise the risk of poor decisions by investing time in the design of their decision‐making policies and processes, including the contribution of committees.
Good decision-making capability can be facilitated by:
Limits on effective decision making include:
contributions from other directors
Some factors known to distort judgment in decision making are conflicts of interest, emotional attachments, and inappropriate reliance on previous experience and previous decisions.
For significant decisions, therefore, a board may wish to consider extra steps, for example:
Boards can benefit from reviewing past decisions, particularly ones with poor outcomes. A review should not focus just on the merits of the decision itself but also on the decision‐making process.
The board should put in place a formal succession planning strategy and programme for the appointment of non-executive directors.
The skills, knowledge and experience needed to run the business should be informed by the corporate and business strategy, the housing association’s risk assessment and management strategy and the outcome of the annual board appraisal and board effectiveness evaluation. It also needs to consider any selections that are enshrined in contract or the rules or articles of the association, for example tenants or local authority nomination agreements to the board.
When it is identified that new non-executives are required to serve on the parent body, subsidiary board or committee there should be a formal, rigorous and transparent procedure for the appointment led by the nominations committee.
The nominations committee will need to determine whether the organisation has the resources and skills to lead the recruitment process or whether it is beneficial to appoint external specialist advisors. It should be very clear about the services required from any outside body and agree with that third party the scope and costs of the assignment in advance.
Following the formal selection process new board members should be provided with formal written terms of their appointment clearly setting out the role, expectations and where appropriate, the fee/allowance payable.
As part of the appointment process all directors should receive a thorough induction programme on joining the board. There should be a regular review and refresh process to ensure their skills and knowledge remain valid and up-to-date as a non-executive director. The annual board effectiveness process and personal appraisal process may also identify training and development needs of board members and the board as a whole.
The chair may consider it appropriate to introduce a formal training plan for the board.
Board directors will be more likely to make good decisions and maximise the opportunities for the association’s success in the longer term if the right skill sets are present in the boardroom. This includes the appropriate range and balance of experience, knowledge and independence, and skills relevant to the challenges facing the organisation.
The nominations committee, usually led by the chair, should be responsible for board recruitment. The process should be continuous and proactive, and should take into account the association’s agreed strategic priorities. The aim should be to secure a boardroom which achieves the right balance between challenge and teamwork, and fresh input and thinking, while maintaining a cohesive board.
It is important to consider a diversity of personal attributes among board candidates, including:
A board requires directors who have the intellectual capability to suggest change to a proposed strategy, and to promote alternatives.
The chair’s vision for achieving the optimal board composition will help the nominations committee review the skills required, identify the gaps, develop transparent appointment criteria and inform succession planning. The nominations committee should periodically assess whether the desired outcome has been achieved, and propose changes to the process as necessary.
Executive directors may be recruited from external sources, but associations should also develop internal talent and capability. Initiatives might include middle management development programmes, facilitating engagement from time to time with non‐executive directors, and partnering and coaching schemes.
But good board appointments do not depend only on the nominations committee. A prospective director should carry out sufficient due diligence to understand the organisation, appreciate the time commitment involved, and assess the likelihood that he or she will be able to make a positive contribution.
In March 2014, the Federation published board member pay: what housing associations need to know, a comprehensive guide for the sector on the issue, and this should be considered before any decision to pay is made. (Housing associations that are registered charities, or exempt charities, should also consider the Charity Commissioners 2012 publication ‘The Essential Trustee’ C3, as well as Charity Commission Guidance on Trustee expenses and payments CC11.)
The board member pay publication states:
“While the decision to pay boards rests with associations, and each association must satisfy itself that the decision is the right one for itself, associations also need to be mindful of the views of the key organisations that regulate them.
"The RSH no longer has any specific regulatory requirements in relation to the payment of board members and there is no longer a regulatory requirement to obtain consent from the RSH before introducing payment. However, the RSH can, and will, indirectly regulate decisions made about board member payment through the overarching Governance and Financial Viability Standard. It is a required regulatory outcome that associations should ensure their governance arrangements ‘safeguard taxpayers’ interests and the reputation of the sector’.
"At the very least, this requires associations to be transparent in their decision-making. The regulator will also consider whether an association’s decision-making process and outcomes of its decision-making process are consistent with the RSH’s Value for Money Standard.
"The level of board pay is a matter for the board to determine taking account of a range of factors, in particular the Federation’s guidance, and their particular governance code. The Federation’s governance code states that “the board must ensure that is has an objective mechanism for establishing payment levels.”
The board should be particularly sensitive on this issue. Whilst the sector is in a period of transition it is critical that boards are able to attract and retain high quality non-executives. Payment may be part of the strategy but has to be carefully planned, risk assessed and transparently implemented avoiding allegations of self-interest. Transparency is a fundamental principle of good governance and must apply to the payment of board members, regardless of the quantum of the payments made.
It is clear that board diversity can help to improve the governance of the organisation. Research has shown that the best performing boards are the most diverse. Diversity, in this context, goes beyond age, gender, disability, race and sexuality and extends to skills, competencies, philosophies and life experiences.
Leading a complex business in a rapidly changing world is already a challenging role. It is vitally important that the board understands the importance of creating and maintaining a balanced, diverse and effective board for the long-term success of the organisation. A diverse board will be beneficial for the following reasons:
In the recruitment process it is imperative that this broad definition of diversity is tested to enable the board to appoint the best candidate who will improve the performance of the board and with it the association.
Subject to the rules or articles of association it is sometimes appropriate to fill skills, experience or knowledge gaps on the board or committees through the process of co-option.
It is good practice to go through a formal process to select the most appropriate individual to be appointed. If this is the route the board chooses it is critical that there is a very clear letter of appointment setting out the terms of the appointment. It is also imperative that the board determines the decision-making/voting powers that the individual has within the overall governance framework of the organisation.
Using the co-option approach may be a good opportunity to support the organisations diversity agenda and enabling the board to develop skills and experience of under-represented groups so that they can apply for full role on the board at a later date.