HSBC-全球投資策略-聚焦治理：了解董事會(huì)有效性審查-2021.5.18-35正式版

18May2021

Governanceinfocus

ESG

Global

Understandingboardeffectivenessreviews

Boardeffectivenessreviews,ifconductedproperly,provideaninsightandindependentviewonboardpracticesanddynamics

Althoughtheyarebecomingthenormglobally,theirpurposeandpracticalimplicationsareoftenmisunderstood

Weexplorethekeyaspectsandinternationalrequirementsforreviewstoassistinvestorsintheirengagementwithcompanies

Importanceofboardeffectivenessreviews.Evaluatingboardeffectivenessisachallengingtask,butiscrucialwhenitcomestoimprovingcompanies’performanceandreducingthelikelihoodofcorporatefailures.Companydisclosure,whichfocusesonthemeasurableaspects,providesonlyapartialpictureofaboard’sfunctionality.Tickingalltheboxesdoesnotnecessarilytranslateintogoodgovernanceandcanadverselygiveafalsesenseofsecurity.

Wethinkthatboardeffectivenessreviews(BERs),especiallythosethatareexternallyfacilitated,areaneffectivetoolforassessingthequalitativeandquantitativeaspectsofboardeffectivenessandgivingthelevelofinsighttoinvestors,whichtheywouldstrugglefindingelsewhere.

BERsareparticularlyhelpfulwhenitcomestoassessingboarddynamics,which,asrecentresearchsuggests,isabetterpredictorofcompanyprofitabilitythananyindividualdirectordemographiccharacteristics.

Theroleofinvestors.BERsareslowlybecomingthenorminmanymarkets.Surveydatasuggeststhatinvestorsareinterestedincompanies’BER;however,mostofthecompaniessaythatinvestorshavenevershowninterestinBERprocessesandoutcomes.

Wethink,thereviewaddsvalueonlywhenitisnotperceivedasabasiccomplianceexercise.Wethinkinvestorsshouldaskforgreatervisibilityfrombothcompaniesandreviewersastohowboardreviewsareconducted.Theroleoftherevieweristoidentifyanyissuesrelatedtoeffectiveness;theroleoftheboardistotakeappropriateactiontoaddressthem;andtheroleofinvestorsistoholdtheboardtoaccountfortheeffectivenessofthoseactions.

Inthisreportwe:

provideourviewonthepurpose,benefitsandconcernsassociatedwithBERs;

suggestaframeworkforhowtoconductanexternalBER;

explainthekeystagesandoutcomesofBERswithacasestudy;

compareinternationalregulatoryframeworksforBERsin20markets;

presentalistoftenquestionstoassistinvestorsintheirengagement.

YarynaKobel

CorporateGovernanceAnalyst

HSBCBankplc

yaryna.kobel@

+442033596152

CamilaSarmiento

ESGAnalyst

HSBCSecurities(USA)Inc.

camila.sarmiento@

+12125255901

DylanWhitfield,FCA

HeadofForensicAccounting

HSBCBankplc

dylan.b.whitfield@

+442033595903

Wai-ShinChan,CFA

Head,ClimateChangeCentre;Head,ESGResearch

TheHongkongandShanghaiBankingCorporationLimited

wai.shin.chan@.hk

+85228224870

Disclosures&Disclaimer

ThisreportmustbereadwiththedisclosuresandtheanalystcertificationsintheDisclosureappendix,andwiththeDisclaimer,whichformspartofit.

Issuerofreport:HSBCBankplc

ViewHSBCGlobalResearchat:

ESG●Global

18May2021

Boardeffectivenessreviews(BER)

Whatquestionsshouldinvestorsask?

10

Howdothecompany’sBERpracticescomparewiththoseofitsglobalpeers?

9

WhatprogresshasbeenmadetowardstheagreedactionsfromthelastBER,andhowshouldthisinfluenceotherareasofengagement?

8

Arethereanyconcernsabouttherobustnessoftheprocess?

7

DoestheboardusetheBERtoevolveanddevelopitsgovernancepractices?

1

Whatarethemarket-orstock

exchange-specificBERrequirements

orrecommendations?

2

Doestheboardundertakearegular/annualBER,andwhenisthenextone?HasthecompanyhadanexternalBERwithinthelastthreeyears?

3

WhatareashavebeenaddressedintheBER?Morespecifically,doesitreviewboardroomdynamics?

4

Whofacilitatedtheexternalreview?Doesthisorganisation/personhaveanyconnectionstothecompany?

6

Whataretheboard’skeystrengthsandareasfordevelopment?Whatfollow-upactionshavebeenagreed?

5

Towhatextentshouldinvestorsget

involvedintheBERprocess?

Conflictofinterests?

56%

ofcompaniessaythatinvestorshavenevershown

interestinBERprocessesandoutcomes

75%

ofinvestorssaytheyarevery

interestedincompanies’BERs

ExternalBERfrequencybymarket Keyfactsandfigures

38%

66%

1

annually

2

years

3

years

UAE

SouthAfrica*

France,Italy,

oflistedcompaniesin

ofUKlistedcompanies

SaudiArabia,

Europecarryoutan

wouldundertakean

*therequirementisforanexternalorinternalreview

Spain,UK

externalBERatleast

externalreviewabsent

**notspecified:Singapore,India

US

everythreeyears

therequirement

Source:AllPartyParliamentaryCorporateGovernanceGroup2018,UK;Corporategovernancecodes,regulationsandlistingrules;HSBCanalysis

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Contents

Boardeffectivenessreviews

(BER)

2

Importanceofboard

effectivenessreviews

4

Boardeffectiveness:whatdoesit

mean?

4

Whyshouldinvestorscareabout

boardeffectivenessreviews?

5

Internalandexternallyfacilitated

BERs:positivesandnegatives

6

ThepurposeofexternalBERs

7

ThekeyaspectsofexternalBERs9

Ourframework

9

Whenitshouldtakeplace

10

ThemainobjectivesofBERs

11

Whoshoulddeliverthereview

11

Whoandwhatshouldbeevaluated12

Howitshouldbeconducted

14

BERoutcomesandreporting

16

Casestudyonreporting:SSEplc

16

BERinternationalframeworks

19

Overview

19

Americas

21

Asia-Pacific

22

Europe

24

MiddleEast,TurkeyandAfrica

29

Inconclusion…

31

Disclosureappendix

32

Disclaimer

34

WeacknowledgethecontributionofSanchitSethi,ESGanalyst,Bangalore,inthepreparationofthisreport.

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Importanceofboardeffectivenessreviews

DatasuggestthatinvestorsareinterestedinBERs;however,thereisscopeforinvestorengagementtoimprove

Giventhemixedviews,wethinkthatBERs’benefits,shortcomingsandpracticalimplicationsshouldbefurtherexplored

WegiveourviewonitspurposeandprovideaninsightintoBERs’keybenefitsandconcerns

Boardeffectiveness:whatdoesitmean?

Thereisnoonecomprehensivedefinitionofboardeffectiveness.TheUKcorporategovernanceregulatorstates:

Aneffectiveboarddefinesthecompany’spurposeandthensetsastrategytodeliverit,underpinnedbythevaluesandbehavioursthatshapeitscultureandthewayitconductsitsbusiness.

FinancialReportingCouncil,UK

Inourview,fortheboardtobeeffective,itneedstofulfilitsroleandresponsibilitiesandmaximisevalueforcompanies’investorsandotherkeystakeholdersoverthelongterm.Theboardshouldclearlydefineitsroleandcompanypurpose,havedirectorswhocanworkwellasagroupwhilefulfillingtheirindividualduties,andensurethatnewbusinessopportunitiesareidentifiedwhileeffectivelymanagingallmaterialexistingandemergingrisks.

Wethinkthatindividualboardsaretodecideonthegovernancearrangementsmostappropriateforthemtobeeffective.Atthesametime,thereissomedegreeofconsensusonimportantdriversofaboard’seffectiveness:anappropriatestructure,sizeandcomposition,includingdiversityofskills,backgroundandpersonalstrengths.1

Muchmoreofwhatconstitutesboardeffectivenessisbehavioural:thebehavioursdirectorsdisplayindividuallyandboarddynamicsasateam.Trust,openness,robustdebateandconstructivechallengesignalaneffectiveboard.

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1FRC,GuidanceonBoardEffectiveness,July2018

4

Twocategoriesofboardeffectivenessaspects

Linktofinancialperformance

Acomprehensiveviewisrequiredtounderstandhoweffectivetheboardis

BERsareuseful…h(huán)owever,theyarenotwidelyemployedbyinvestors

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Wethinktherearetwobroadcategoriesofboardanddirectorcharacteristicsinfluencingboardeffectiveness:

quantitativeaspectsthatareeasytoassess,includingstructureandsizeoftheboard,independence,ageandtenureofdirectors,genderdiversity,numberandlevelofmeetingattendance,and

qualitativeaspectsthataremoredifficulttoassess:human,psychologicalandbehavioural.

Researchershavetestedanumberofboardanddirectorquantitativecharacteristicsandtheirdirectimpactonfinancialperformance.Resultsareinconsistent.Someofthemestablishedapositive(ornegative)impactoftheseattributesonacompany’sfinancialperformanceandpromotingshareholdervalue,includingboardsize2,independence3,genderdiversity4andseparatechairandCEOroles5,whileothersfoundnolink.

Onthequalitativecharacteristics,researchsuggeststhatboarddynamicshasasignificantimpactonprofitability.Theimpactofaboardfunctioningasacohesiveteamisaneighttimesgreaterpredictorofcorporateprofitabilitythanindividualdirectordemographics6.

Whyshouldinvestorscareaboutboardeffectivenessreviews?

Wethinkinvestorsshouldconsiderboarddynamicsandotherqualitativeaspectsintheirassessmentofacompanytoreceiveamorecomprehensivepictureofboardpracticesand

potentialassociatedgovernancerisks.

Inourview,investorsshouldbetterunderstandhowtouseaboardeffectivenessreview(BER)7,whichprovidesabetterviewofhoweffectivetheboardis.

Asfigure1shows,investorrespondentstothesurveycarriedoutbyLintstockforTheAllPartyParliamentaryCorporateGovernanceGroupindicatedthattheyareinterestedincompanies’BER;however,companiesdonotobservethesamelevelofinterest.Giventhemixedresponses,wethinkBERs’purposeandpracticalimplicationsshouldbefurtherexploredbyinvestors.

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2Kiel,G.C.,Nicholson,G.J.,2003.Boardcompositionandcorporateperformance:howtheAustralianexperienceinforms

contrastingtheoriesofcorporategovernance.Corp.Govern.:Int.Rev.11(3),189205.

3Klein,A.,2002.Auditcommittee,boardofdirectorcharacteristicsandearningsmanagement.J.Account.Econ.33(3),

375400.

4Nielsen,S.,Huse,M.,2010.Thecontributionofwomenonboardsofdirectors:goingbeyondthesurface.Corp.Govern.:

Int.Rev.18(2),136148

5Coles,J.,McWilliams,V.,Sen,N.,2001.Anexaminationoftherelationshipofgovernancemechanismstoperformance.

J.Manage.27(1),2355.

6CharasS,2015,Improvingcorporateperformancebyenhancingteamdynamicsattheboardlevel,InternationalJournalofDisclosureandGovernanceVol.12,2,107–131

7Alsoknownasboardeffectiveness/performanceevaluationorreview,orself-assessment.Alltermsareusedinterchangeably.

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Figure1.[Tocompanies]Haveinvestorsshownaninterestintheboardeffectivenessreviewprocessesandoutcomes?(2018)

[Toinvestors:]Howwouldyourateyourlevelofinterestincompanies'boardeffectivenessreviews?(2018)

Source:AllPartyParliamentaryCorporateGovernanceGroup2018,UK Source:AllPartyParliamentaryCorporateGovernanceGroup2018,UK

TheBERisafeedbackmechanismforimprovingboardanddirectoreffectiveness,maximising

WhatisBER

theirstrengthsandhighlightingareasforfurtherdevelopmentandfocus.BERsareusefultoolshelpingcompaniestoimproveandevolveintheinterestsofinvestorsandotherstakeholders.

BERsareparticularlyhelpfulwhenitcomestocapturingboarddynamicsandculture.Itis

WhatBERscancapture

challengingotherwisetogetinsightintosomebehaviouralandpsychologicalaspectswithouttheabilitytoobservetheboardinaction.

Reviewingpublicdisclosuresislikelytobeineffectivewhenattemptingtoevaluateaboard

BERscanbeusedtogetaninsightintoboardpracticesanddynamics;however,webelieveitspotentialhasnotbeenfullyusedbyinvestors.

Companydisclosure,whichfocusesonthemeasurablecharacteristicsofboardstructure,meetings,andcomposition,providesonlyapartialpictureofaboard’sfunctionality.Reviewingpublicdisclosuresandtickingalltheboxesdoesnotnecessarilytranslateintogoodgovernanceandcanadverselygiveafalsesenseofsecurity,especiallywhentherearenoobviousredflags.

Aninternalreviewoffersmorepersonalreflection,whileanexternalreviewbringsobjectivity

InternalandexternallyfacilitatedBERs:positivesandnegatives

TherearetwomaintypesofBERs:internalandexternalreviews,whichdifferinformalityandmethods.Bothhaveclearbenefitsandwillhelpwithrecalibratingfocus,raisingissuesorpromptingopendiscussion.

However,wethinkthatanexternallyfacilitatedBERisamoreeffectivetoolforassessingallaspects(especiallyqualitativeaspects)ofboardeffectivenessandgivingthelevelofinsighttoinvestorsthattheywillstruggletofindelsewhere.

InternalBER,whichisconductedbyacompanyonitself,mayfeatureagreaterdepthofcompanyknowledgeandamorepersonalreflectiononaboard’sfunctioning.Internalreviewalsolessensconcernsovercommercialconfidentiality.Atthesametime,itsshortcomingsincludelessobjectivity,asitishardtoachieveimpartialityinself-evaluation.

ExternalBER,whichisfacilitatedbyathirdparty,offersafresh,independentandobjectiveperspective,newwaysofthinking,aninsightintobestpracticeandbreadthofexperience.Third

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partiesareabletoviewacompany’spracticesdispassionatelyandfreefrompre-existingbiases.Theyshouldalsofeelmorecomfortableaskingchallengingquestions(or‘stupid’questions)anddeliveringchallengingrecommendationsintheirfinalreport.Boardmembersmayalsobewillingtodiscusstheirconcernsmorefreelywithanexternalfacilitator.However,inadditiontoconcernsaboutcommercialconfidentialityandinsufficientunderstandingofthecompany,anexternalBERbringsextracost.

Despitetheseconcerns,companiesseegreatvalueinexternallyfacilitatedreviews:66%ofUKlistedcompaniessaytheywouldstillundertakeanexternalBEReverythreeyears,absenttherequirementintheUKCorporateGovernanceCode8.

66%

ofUKlistedcompanieswouldundertake

anexternalreviewabsenttherequirement

ThepurposeofexternalBERs

Broadlytherearetwomainviewsonitspurpose,whichinformexpectationsabouthowtheBERiscarriedoutandwhatitisexpectedtoachieve.AccordingtotherecentreviewofindependentBERsintheUKlistedsector,theyare:

thatthepurposeofevaluationistosupportacontinualprocessofself-improvement,whichmightincludemakingchangestotheboard,andthatdisclosureshouldprovideevidenceofarobustprocessandawillingnesstoactontheoutcomes.Bydoingso,theboardcanprovidesomereassurancetoinvestorsandothersthatittakesitsresponsibilitiesseriouslyandisendeavouringtocarrythemouttothebestofitsability;or

thatthepurposeofevaluationistoprovideanassessmentofwhethertheboardisorisnoteffective,ineitherabsoluteorrelativeterms,andthatthepurposeofdisclosureistoprovideassuranceastothefutureperformanceoftheboardandcompany.9

Inourview,externalBERsarenotintendedtoprovideassuranceasthiswoulddramaticallyreducethedirectors’opennesswiththereviewer;anditwouldraiseunrealisticexpectationsastotheabilityofthereviewtopreventanyfailings.

WethinkthemainpurposeofexternalBERsistoensurethattheboardimprovesitsowneffectivenessandtheperformanceofthecompany(inlinewithitsstrategyasmeasuredbytheKPIs).Atthesametime,wethinkareviewershouldincludetheiropinionorindicationonrelativeeffectivenessaccordingtotheframeworkormethodologyused,whichwouldallowtheboardtobettertrackitsprogress.

______________________________________

815YearsofReviewingthePerformanceofBoards,TheAllPartyParliamentaryCorporateGovernanceGroup,2018

9ReviewoftheeffectivenessofindependentboardevaluationintheUKlistedsector,TheCharteredGovernanceInstitute,

2021

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ThepurposeofBERistoprovidesomereassurancetoinvestors

BERislikelytoreducetheriskofcorporategovernancefailure

TherearemultiplebenefitsandusesofBERs’outcomes

Inordertoprovidesomereassurancetoinvestors,companiesshouldalsodiscloseorcommunicatetoshareholdersandotherstakeholderstheirprogressagainstagreedobjectives(andnotonlytheirwillingnesstoactontheoutcomes).

BER,inourview,islikelytoreduce,ratherthaneliminate,theriskofcorporategovernancefailure.Thisisonlytrue,however,whenthereviewisnotperceivedasabasiccomplianceexercise,butratherwhentheboardiscommittedtocontinuousimprovement,andinvestorsareactivelyfollowingtheoutcomes.

Keybenefits,insightsandchallengesforinvestors

Inadditiontoprovidingsomereassurancebytheboard,reportingonoutcomesofexternallyfacilitatedBERsgivesinvestors:

morecomprehensiveinformationonqualitativecharacteristicsofboardeffectivenesscombinedwithotherqualitativefacets,whichisspecifictothecompany;

anindependentandobjectiveviewofboardpracticestoenhancetheirunderstanding;and

aclearsetofareasforconsiderationtogetherwiththereviewer’srecommendations(inotherwords,focusareasforfurtherengagementandfollowup,ifneeded,andriskassessment).

Somecompanies,especiallyinemergingmarketswherethereisnoestablishedpracticeofboardreviews,maybereluctanttoinvolveanexternalparty(forthereasonsmentionedabove)and/orshareanydetailsofthereview.Thismaycreateatensionorconflict.

Wethinkinvestorsshouldaskforgreatervisibilityfrombothcompaniesandreviewersastohowboardreviewshavebeenconductedtosatisfythemselvesthattheyarebeingundertakenrobustly.Atthesametime,engagingareviewerdoesnottransferoverallresponsibilityforthereviewtothem–itstayswiththeboard.

Theroleoftherevieweristoidentifyandreportonanyissuestoimproveboardeffectiveness,while…

…theroleoftheboardistotakeappropriateactiontoaddressthem;andtheroleofinvestorsistoholdtheboardtoaccountfortheprogressonthoseactions.

ICSA:TheCharteredGovernanceInstitute

AndnowletusdiveintotheBERprocessandoutcomes.

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ThekeyaspectsofexternalBERs

Thepracticesofreviewersvaryinapproachandquality,asexternalBERisarelativelynewphenomenon

WethinkthatclarityaroundtheprocessandoutcomesisofcrucialimportancetoachieveBERs’purpose

WesuggestaBERframeworkofhowreviewscouldbeconductedtomaximisetheirbenefits

Ourframework

Thepracticesofreviewersvarysignificantly.Webelievethatrobustnessofthereviewprocessiskey,soaclearframeworkshouldbeusedbycompanies.Theprocessoutlineshouldbealsosharedwithinvestors.

Infigure2,wesuggestastructuretoaidthinkingthroughtheprocess.Theboardshouldagreeoneveryquestionandlookforinvestorinputonsome(ifnotall)ofthesteps.

Figure2.Boardeffectivenessreviewframework

Source:HSBC

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Externalreviewsshouldbeconductedatleasteverythreeyears,whileinternalreviewsshouldbemorefrequentorcontinuous

Whenitshouldtakeplace

Inpractice,thedecisiontoconductareviewismostlytriggeredbythecountry-,regulator-orstockexchange-specificrequirements.Themostcommonpracticeisforboardstoundertakeareviewonanannualorbiannualbasis,whichisinlinewithmostoftherulesorrecommendationsspecifyingthefrequencyofBERs.

WearesupportiveoftherecommendationtoconductaBERatleastannually.Atthesametime,BERsaredynamicinnatureandboardsarefreetoundertakethemanytime,especiallywhenseriousissuesfeatureprominently.Itisagoodresponsestrategyfortheboardstodecide(andforinvestorstosuggest)tohaveareviewwhentheyencounterchallengesofsomekind,e.g.changesinthecompany’soperationsorboardcomposition,appointmentordepartureofthechairorCEO.

Wethinkthatboardsshouldassesstheireffectivenessmoreoftenthanonceayearorevencontinuouslyconductinternalreviewsonspecificissues.However,reportingonthereviewoutcomesmayonlybenecessaryonceayear.

Amorecomprehensiveexternallyfacilitatedreviewistypicallyundertakeneverythreeyears.Itshouldcoverallkeyareas,aswediscussbelow,adjustedinlinewiththecompany-specificneedsandcircumstances.Overall,38%oflistedcompaniesacrossEuropecarryoutanexternallyfacilitatedreviewatleasteverythreeyears.10

38%

oflistedcompaniesinEuropecarryout

anexternalBERatleasteverythreeyears

Also,aswediscussinGovernanceinfocus:7keythemesfor2021,11March2021,inlightofsocialdistancingmeasures,withboardmeetingsgoingvirtual,therehasbeenashiftinoverallboarddynamics,withsomecompaniesstrugglingtoensureeffectivecollaborationbetweenboardandmanagementaswellascopingwithotherchanges.AsbusinesseshaveaddressedtheimmediatechallengesarisingfromtheCOVID-19crisisandadaptedtonewwaysofworking,wethink2021isagoodtimetoconductanexternalreviewtobetterunderstandtheeffectivenessofnewpracticesandboarddynamics.

Formoreinformationonrequirementsandrecommendationsindifferentmarkets,pleaserefertofigures3and4.

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10ReviewoftheeffectivenessofindependentboardevaluationintheUKlistedsector,TheCharteredGovernanceInstitute,2021

10

AnyBERshouldbefitforpurposeandhaveclearobjectives

Reviewerindependenceshouldbecarefullyconsidered

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Figure3:InternalBERfrequencybymarket

NotSpecified

Annual

Every2years

Canada

Brazil

SouthAfrica

MainlandChina

France

Germany

Indonesia

HongKong

Italy

India

Netherlands

Mexico

SaudiArabia

Turkey

Singapore

Spain

Switzerland

UAE

UK

US

Source:HSBCanalysis,corporategovernancecodes,regulationandlistingrules

Figure4.ExternalBERfrequencybymarket

NotSpecified

Annual

Every2years

Every3years

Singapore

UAE

SouthAfrica11

France

India

Italy

SaudiArabia

Spain

UK

US

Source:HSBCanalysis,corporategovernancecodes,regulationsandlistingrules

ThemainobjectivesofBERs

AnyBERshouldbefitforpurpose.ExternalBERshouldincludesomeclearconsultancyinthisregardwithkeystakeholders,startingwiththechair,toclarifytheobjectivesofthereview,whichthenwilldrivemorestrategicanswerstothenextquestions.Wethinkinvestorinputwouldalsoaddvaluetothisstep.

BERobjectivesshouldalwaysbecompany-specific;theywillvaryacrosscompanylifecycles(whetherrelativelynewormature),sectorsandcultures.Forinstance,ifacompanyseekstoexpandtoemergingmarkets,thereviewmayhavetheobjectiveofclarifyingwhethertheboard(andexecutiveteam)isreadyforthisexpansion.Thefocusislikelytobeonboardcomposition,forexample,aroundinternationalexperienceandlocalknowledgeofthenewmarketsrequiredoftheboard.

Whoshoulddeliverthereview

Typically,eitherthechair,leadorseniorindependentdirectorornominationcommitteeisresponsibleforthereview.Inpractice,theresponsibilityoftenlieswithacompanysecretary.

Wethinkthecompanysecretaryhasakeyroleinsupportingthechairorcommittee.However,thedecisionontheappointmentofareviewershouldnotbedelegatedtothecompanysecretaryoranysingleboardmember(e.g.chair)butshouldberatifiedbyeitherthefullboardorthenominationcommittee.

Boardsandinvestorsshouldpayattentiontohowareviewerhasbeenappointed.Wethinkcompaniesshoulduseatenderprocessforthispurpose.

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11ForSouthAfrica,therequirementisforanexternalorinternalrevieweverytwoyears

11

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Asreviewers’experienceand

approachesvary,wewouldsupporttheintroductionofbestpracticecodes

AsurveycarriedoutfortheAll-PartyParliamentaryCorporateGovernanceGroupin2018suggeststhat‘wordofmouth’isstillthemostcommonmeansbywhichcompaniesidentifypotentialreviewers12.Thismayhaveadirectimpactonreviewerindependenceandobjectivity.

Inaddition,thereareotherelementswhichshouldbeconsideredregardingindependence:

whetherthereviewerprovidesotherservicestothecompany;

thelengthoftherelationshipbetweenthem;and

anyotherconnections.

Wethinkreviewersshouldnotbepreventedfromprovidingotherservicestocompanies(e.g.advisory).However,theyshouldexplainhowanyconflictsofinterestorthreatstotheirindependencearemanaged.Inaddition,companiesshouldspecifyintheannualreportwhetherthefeespaidforthereviewexceedthosepaidforotherservices.Tonote,thefeeforaBERforaFTSE100companyisintherangeofGBP30,000-65,000,whilethemostexpensivereviewsforlistedcompaniesintheUSreachUSD75,00013:

Additionally,wethinkcompaniesshoulddiscloseintheirannualreportswhetherthereviewerhasanyotherconnectionwiththecompanyandexplainhowtheirindependenceissafeguardedinthesecircumstances.

Roughly,therearefourgroupsofexternalreviewers:

independentconsultancies;

searchfirms;

auditors;and

governingbodiesorassociationsofgovernanceprofessionals.Experienceismostlyaccumulatedwithconsultingfirms14.

However,asexperienceandapproachvary,itishardtomakeareliablejudgementabouttheoverallrobustnessandqualityoftheworktheycarryout.Wesupportthesuggestiontointroduceacodeofpracticeandtoencouragereviewerstobecomesignatoriestoit,asrecentlyrecommendedintheUK15.Wethinkthiswillprovideadditionalleverageforinvestorsandotherstakeholders.

Whoandwhatshouldbeevaluated

Whowillbeevaluated

Ingeneral,fourgroupsmaybesubjecttoreview:

board,

committees,

boardandcommitteechairs,

individualboardmembersorotheremployees.

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1215YearsofReviewingthePerformanceofBoards,TheAllPartyParliamentaryCorporateGovernanceGroup,2018

13GlobalBoardEvaluationPracticesandTrends,CorporateSecretariesInternationalAssociation,2018

14BoardroomDynamics,JeremyCross,2019

15ReviewoftheeffectivenessofindependentboardevaluationintheUKlistedsector,TheCharteredGovernance