Governance Bites #92: board evaluations, with Heather Roy

In this episode, Mark Banicevich talks to Heather Roy about board evaluations. Heather outlines what they are, why they should be done, and how they can be performed. They discuss stakerholder involvement, common challenges, and addressing underperformance. Heather also shares the best governance advice she has received. 
Heather Roy is a professional director and business consultant through her company Torquepoint Ltd (https://torquepoint.co.nz/). Her current board roles include independent chair of Financial Advice NZ and the Security and Reliability Council (an advisory body to the Electricity Authority), and a director of Port Marlborough. Former chair or director roles include the Utilities Disputes, Marlborough Chamber of Commerce, Advertising Standards Authority, Foxplan and Medicines New Zealand. Heather is a former NZ Minister of Consumer Affairs, Associate Minister of Defence and Associate Minister of Education, and she has been an Officer in the NZ Army Reserves, a physiotherapist and a medical researcher. 
#governance, #leadership, #corporategovernance, #boardcraft, #director, #decisionmaking, #makingadifference, #ceo, #governancebites, #boardevaluation

Transcript

0:00

Hi, my name is Heather Roy. I'm a professional director and I have worked in this area now since 2012. I've had a number of roles. I currently am the chair of Financial Advice New Zealand, where I first met Mark. I am the independent chair of an advisory council to the Electricity Authority, the Security and Reliability Council, and I sit on the board of Port Marlborough, where I'm also the chair of the Health and Safety Committee. And through your consultancy, Torquepoint, you do board evaluations. Yes. Which is our topic today. That's right, yeah. I do quite a lot of governance training, so no, looking forward to talking about board evaluation. It's something that a lot of boards don't do much of, or often enough. Hi, I'm Mark Banicevich, and as you just heard, today I have the pleasure of spending time with Heather Roy. Heather, thank you very much for your time. Oh, you're welcome. It's a pleasure. I'm really pleased to talk to you about this topic, because this is something that you do on a regular basis, about evaluating boards. I'll start with a general question: what are board evaluations, and why should boards do them? Right, well, board evaluations, that's pretty self-explanatory. It's where boards measure their performance, either themselves or with an external party. And as I mentioned, boards should be evaluating their performance. We spend a lot of time evaluating our Chief Executives. We expect them to be evaluating their staff and their performances, the organisation's performance, and so boards, too, should be doing the same things. They should be examining their own performance. As Drucker said, "What gets measured gets done," and that happens at every level of an organisation, not just at the operational level. Right. So it's really important to have the people who are at the top guiding the business accountable themselves. Exactly. And so that's what it's for. How are they performed, and on what areas do you focus? There's a real raft of ways that you can measure a board's performance. So if I start at the really sort of lower end, it's boards evaluating their performance at each board meeting. It might be an annual performance that they perform internally, right through to bigger evaluations where you get an external consultant in to do a board evaluation for you, which can be very thorough, and where you often invite stakeholders to participate and give their feedback on how they think the board is performing. Board members are often asked to evaluate their peers sitting around the table, and then so it's very thorough feedback that they're getting, more in a 360° sort of aspect than a self-evaluation would be. Okay, are there any particular areas that you focus on when you're looking at board evaluations? Yeah, yeah there are, and it differs widely from board to board. So with my boards, for example, that I chair, I will always appoint an observer to each meeting. That's one of the board members whose job it is just to be thinking about how the performance of the board is that day. And at the end of the meeting, that person is invited to give some feedback. So it's very informal feedback, but they'll be asked to provide feedback on what went really well in that meeting, what discussions did we have that were productive and flowed well, and where does that person think that some improvement could have been made in that meeting, so that decisions were reached more quickly perhaps, or better decisions were reached. So that's a very informal way of doing it. When I'm chair, I meet with each of my board members at the start of every year and just have an informal conversation with them. I ask them what's going well for the organisation, where we could be doing better, what the board could be doing better to help the organisation's performance, and if there's anything that they would like to do in terms of professional development. That's something that's really overlooked with most boards. We expect our Chief Executives and our staff to be professionally developed. Directors also should feel an obligation, I think, to be professionally developed, and that means that boards, too, should actually provide some funding to do those things. And then the bigger evaluations, which we've just talked about, might be done for a lot of organisations perhaps once every three years or so. That's a bigger evaluation, perhaps taking that 360° view, and often an external agent will be asked to come and do that evaluation for you, and it brings out other issues that sometimes people are more reluctant to talk about when you're self-evaluating. Right. Because a lot of the questionnaires and things the board members do on each other and - Yes. - on themselves are anonymised, aren't they? That's right, yeah. So people will get aggregated feedback, not individual feedback from a particular person,- Right. - which is, people are more willing to be free and frank in that situation, on the whole. Yes. You mentioned other stakeholders being involved, particularly in those external valuations. What sort of stakeholders would you involve? Well, if you're part of a membership organisation, you might ask some key members who have a lot of involvement with the way the board operates or the strategy is developed to provide some feedback. You might do a survey amongst a few key stakeholders, people that you have a lot of toing and froing with, or engagement with, you might ask. So if you took the example of Financial Advice New Zealand, you might ask the FMA [Financial Markets Authority] how they would evaluate the board's and the organisation's performance. So that's just one example, but they will have a view on how the organisation is operating, and often it's really helpful to know what that view is. Would some of those stakeholders sometimes be key suppliers or providers of... Yes, they could be, yeah. If they're involved at that level. Yeah. It just, it does depend on the make-up of the organisation and how it operates, so it might be key customers, it might be regulators, it might be other organisations that you aren't necessarily competing with, but who you have a lot of engagement with. Right. And how are they involved? Is it through questionnaires or is it through focus groups or interviews? Yeah. It can be any of those things, and often a combination is really helpful, actually. You might interview a few key people, and you might ask, you know, 10 to 20 other people to fill out a survey for you. So that's a big evaluation that you're undertaking when you do that stuff, but the feedback is invaluable. And you talked about doing that external one about every three years. Yeah. You're doing a kind of an internal one once a year when you're talking to each board member, - Yes. - and then each board meeting you've got somebody observing to give some feedback. Yes. And in that way, covering your bases, you're doing a variety of things to get the feedback. What you're looking for, of course, is consistency. Are you getting a consistent message from that very low-key type of evaluation and your annual evaluation and your three-year evaluation? Yeah, right. Okay. What are some of the common challenges you face when you're conducting board evaluations, and how do you overcome them? Yeah, again, it depends on the type of organisation, but I think people are often, especially when you start a process like this, put a program in place of how you're going to evaluate the board, people are often quite nervous about how that might pan out. Are they personally going to be criticised? Is there any reputational issue that might come to the forefront that you'd be nervous about shareholders or stakeholders knowing about if the information becomes public? Those sorts of things. So I think those, for most organisations, are the biggest challenge. I do find when I'm the external agency helping boards do an evaluation, the more confident an organisation, the more willing they are to bear their souls because they want that feedback. They know they're doing a pretty good job, but they want that continuous improvement, which we should all be striving for. Organisations that aren't as mature or not as confident are often much more worried about what the outcome might be, and so you sometimes have to do a bit of cajoling to sort of get them to the point where the evaluation provides the best for the organisation itself. That actually modifies what I was thinking about asking you. Yeah. And that is, I could see three scenarios where you'd have a board member who's never done an evaluation before. You'd have a board member who's done evaluations with other boards but not necessarily this particular company. Yes, with that one. And you have those people that are, confident they've done it on a number of occasions with the same company - Yes. - or with the same group of board members, - Yeah. - and I can imagine them reacting in different ways. Yeah. Do you tend to find that people that have done board evaluations on multiple occasions before are more relaxed about it and more comfortable? Yes. I think they are. They've seen the process right through. They've seen what the outcome is, and hopefully they've seen the value in doing that, so that the board's able to change some things to operate more effectively. You know, sometimes it's really simple things, too, like people aren't happy with the way the agenda is organised and want to see some change, but they just never raise it around the board table. You know, sometimes it's just little things like that that actually help them streamline their processes. Interesting. Other times, it can be quite big things. So if you've got a couple of board members who are often in conflict or they have different views about things, sometimes those personality- or style-type issues come out in a bigger evaluation, and it does mean that you can then start to tackle those. It's easier to sort of ignore them and just hope that people will behave well on the day, but sometimes that's not the case, and having an external evaluator can sometimes help you work through those issues. So you find yourself being mediator as well as an evaluator. Sometimes. Not terribly often, but have struck that, yes. Right. Which actually relates to my next question. I'm going to ask you how do you address underperformance or conflict within the board during the evaluation process? And if you've got any examples that you can blindingly share. Yeah, I'll think about that. So are you talking about conflict as the process is, or conflict around the board table? Either of those things could happen, yeah. Okay, yeah. I think that firstly it's important to identify the behaviour and why it's happening. You know, sometimes there's very good reasons for it, but they're just not obvious to everybody. You'd hope that a chair would have already identified that there's an issue and spoken to the individuals involved, particularly in a conflict situation, and tried to get to the bottom of that themselves. If that's not been productive or helpful, sometimes an external evaluator can help with those. But I think there's always explanations for why conflict happens and how it's evolved, and sometimes getting to the root of that and being able to then tackle it with a clear understanding of why the behaviours exist is, you know, you've got to be a psychologist really. And a mediator, and an evaluator. Yes. Right. The role is getting bigger. That's right. And if those things can't be resolved and it's interfering with the way the board is able to make wise decisions, then one of those people, or probably both of them, may have to go. Right. And which I guess kind of, is going to come towards answering the other situation is about underperformance. Yes, yeah. If you've got one or more underperforming directors, how do you deal with that as an evaluator? Yeah, I think it has to be clear to everybody that that's happening, and why. And so I think when board members evaluate each other, particularly when they do it in survey form or in an individual interview, people are much more forthcoming than they might be around a board table. We're polite in New Zealand, aren't we. We just don't like offending people. Yes. And sometimes they're difficult conversations to have. But if somebody is underperforming and once that's identified, if their performance can't be lifted, then that needs to be tackled head-on. Sometimes it's just the fact that people actually require some training. They might be new to governance, but they might have good skills and experience. It's just they're not quite sure how to bring those out around the board table and during meetings. So that's the first port of call, I think. Try and tackle it by by lifting that performance. Professional development is important for directors as it is for every part of, every member in an organisation. If it's something more than that and the person just isn't suited to the role, you'd like to think that a rigorous recruitment process will have screened that out, but if it hasn't, then ultimately the chair probably needs to move to do something a little more radical about about an underperforming member. And in terms of recruitment, often that's determined by the resources of the entity, right. So the larger end of town, - Yes. - you've got a lot of resource to do that. Yeah. Not for profits, smaller businesses, often they take directors who are willing to stick their hand out. Yeah, and particularly voluntary organisations, which still need to perform at a particular level, but you're right. And I, in my boards, end up doing quite a lot of the recruitment process myself, because I think that nobody understands and appreciates the skills and experience you need sitting around your board table than you do. And so the board subcommittees for recruitment are very important. Right. And recruiters can be expensive, particularly for organisations that don't have a lot of money. If you've got people with good skills and can do the recruitment process themselves, you can get really good quality directors sitting around your table. And there's a lot of people looking for directorships, so usually if you advertise in the right way and reach out to the right people, there's no reason why even small organisations with very little in the way of funds can't recruit good quality directors. Any particular media you would suggest for people that are looking to recruit directors? I think in New Zealand we tend to go to Appoint Better Boards [https://www.appointbetterboards.co.nz/] and the IoD [Institute of Directors]. They both have their notice boards with advertisements. And some of the recruiting firms do recruit directors, fewer than for Chief Executives and operational roles, - Yes. - but some still do have that function. And look, there's nothing wrong if you're a small local organisation from advertising in the local freebie newspapers. They're always looking for advertisements, and local people read the local news, - Right. - so that's often quite a productive way of finding good people locally. Okay, great. How do you benchmark a board's performance against industry standards or, you know, some sort of standard level. Yeah, that's a bit harder. I think it's easier to benchmark against other governance standards. That's the easier part. I think an external evaluator can help a little with that. Information's there, but sometimes it's hard to find. And one of the problems, because New Zealand is a small market in the greater scheme of things, often you want to be benchmarking against your competitors. Yes. And so the sharing of that information isn't necessarily easy to get. No. I would say that boards generally know if they're doing a good or a bad job. There's a pretty good feel. Chairs need to take a leading role in understanding that, and in self-evaluation processes, things should come out that you can work on and improve your productivity and your relationships and the way you operate. So, it depends what industry you're in. Yes. And it depends exactly where you feel your gaps are in terms of where you need to lift your performance. Depending on the nature of the entity and the experience around the board table, you know, it's not uncommon to have boards of people that really haven't got any experienced directors around the table. Yes, that's right. As an evaluator, do you get involved in the board process, - Yes. - and you know, identifying those gaps and things, as well? Yes, absolutely. It's not just about the people. It is about the processes. And so we'll always, when we're doing a thorough board evaluation for a company, we will ask to see a set of board papers. We'll ask to see a maybe a more complex business case. We'll ask to see the agenda, the risk register, the annual work plan. Sometimes the boards don't have these things. Yes. And that in itself is a good learning exercise for them, and we will often share templates for areas where they do have gaps. But those processes are crucial, and the agenda, if I can just talk touch briefly on agendas. Yeah, please. You know, they really are very important to get right. So we've all been in meetings where it gets towards the end of the allocated meeting time and suddenly everybody's got to rush away half an hour early to catch a plane. If you've left your really meaty topics that need a lot of thought to the end of the agenda, you lose all of that expertise,- Yes. - and actually sometimes you lose your quorum and can't make a decision anyway. So my advice is always to do that, those hard thinking topics should be earlier on the agenda, and the more formulaic things like the minutes from the last meeting, which usually people have looked at before and had their chance to input to already, - Yeah. - are just a ticking off exercise. And you do that right at the end. And things like that can easily be left to the end of the meeting where it doesn't matter if you lose a person or two. So that's just one little example of how you can improve processes quite significantly, and get better value from your board members. Great, thank you. I've got one final question for you. Yes. What's the best governance advice you've ever received? I've always been very fortunate to have excellent mentors, and so I've received a lot of good advice over the years. I think if I really had to pick on one thing, it would be: spend more time listening and watching and less time talking, and don't be afraid to ask the questions that will give you the information that you need to make wise decisions. So people, particularly when you've been sitting with a board for some time, are reluctant to ask the silly questions. Yes. It's great when you have a new board member actually, because they've got a window of opportunity to ask those questions, and I always say to people, you still have to ask them even if you've been there for a while, because if you don't know the answer to that question, there'll be at least one other person in on your board who also doesn't know the answer to that question. Right. And so you've got to fill those gaps. So don't be afraid to, will in fact encourage, you're encouraging people to ask the questions that feel silly,- Yes. - but they really need to know the answers to do their job well. That's right. And extraverts hold your tongues, which is me. Listen more, talk less. Yes, two ears, one mouth, right. Heather, thank you very much for your time. I appreciate it. That's been great. You're welcome. I look forward to catching up again soon, and we'll see you next episode. Thank you for watching this episode of Governance Bites. We have more episodes on YouTube and your favourite podcast channel, where I interview directors and experts on various topics relating to Boards of Directors and governance. We'd love to see you back, and please like, subscribe, and share the videos and podcasts.