In 2018, The Financial Reporting Council introduced the Nigerian Code of Corporate Governance (NCCG), which mandates companies to carry out an annual board evaluation to assess the effectiveness of each director, the chair, the board committees, and the overall ability of the board in achieving organisational objectives and ensuring that the organisation is led in the right direction. Through evaluating the collective and individual performances of the board, organisations identify areas of improvement and strengthen their corporate governance practices. Below are 7 benefits of board evaluation exercises and why they are essential.
#1 Improved Board Performance
Board evaluations expose organisations to areas that are lacking in the pursuit of its objectives. For an organisation to thrive, it needs to effectively manage the workforce and key stakeholders. Therefore, by engaging in periodic board evaluations, boards can identify areas where they can improve their performance, such as communication, decision-making processes, and governance practices. By addressing these areas, boards can work together more efficiently and make better decisions that benefit the organisation.
#2 Increased Accountability
Board evaluation fosters a culture of accountability within organisations. When board members are accountable for their actions and decisions, they are more likely to act responsibly and make decisions that align with the organisation’s objectives. Through board evaluations, board members can gain a better understanding of their individual and collective responsibilities and become more aware of the consequences of their actions. This increased awareness can lead to greater transparency and improved governance practices. Ultimately, engaging in board evaluations can help organisations build a culture of accountability that benefits all stakeholders.
#3 Better Risk Management
Board evaluations improve risk mitigation and management. By evaluating their performance, boards can identify areas where they need to improve their risk management processes, such as identifying and mitigating risks or ensuring compliance with regulations. By frequently assessing risks and scrutinising risk management practices, boards can identify potential risks and develop measures to minimise them. These measures may include devising risk mitigation strategies, enhancing regulatory compliance, or implementing frameworks such as enterprise risk management (ERM) to provide an all-inclusive approach to risk management.
#4 Builds Organisational Collaboration
Another essential benefit of regular board evaluations is the positive impact they can have on relationships within the organisation. Strong relationships are founded on open and truthful communication, and board evaluations create a platform for such conversations. Regular evaluations allow individual board members to express their concerns freely, while the organisation can gain valuable insight into the board’s operations. Each board evaluation process can be viewed as an opportunity to strengthen relationships within the organisation. By conducting these evaluations regularly, boards can improve their teamwork and collaboration, leading to better decision-making and more effective governance in the future.
#5 Better Decision Making
To facilitate sound decision-making, support is needed from board members and executive management who have access to high-level information and different perspectives. These kinds of decisions must be effective in protecting the interests of stakeholders and ensuring the organisation’s long-term sustainability and relevance.
With this prerogative in mind, board evaluations can provide the necessary information to decision-makers. These evaluations assess the board and its committees’ effectiveness in decision-making, the outcomes of those decisions, the level of collaboration between the board and executive management, and the timeliness of decisions.
This process can aid decision-makers in identifying:
- How to leverage the expertise of board members more effectively.
- Ways to improve the board’s contribution to the organisation.
- High-risk areas and emerging risks.
- The need for strategic changes.
- Other valuable insights.
#6 Increased Transparency
Maintaining transparency is important for enabling lasting relationships with stakeholders, establishing trust, and safeguarding the organisation from any unfavourable activities that could lead to a reputational crisis. By conducting regular evaluations, the board can enhance transparency by allowing all stakeholders to gain a better understanding of:
- The board’s actions
- How the board serves the organisation
Moreover, these evaluations provide a platform for board members to practise transparency with each other and maintain accountability.
#7 Improved Boardroom Equity
Board evaluations can also help promote boardroom equity by ensuring that all board members are given an equal opportunity to contribute to an organisation’s success. By identifying areas where certain board members may be underutilised or where their skills and expertise are not being fully leveraged, board evaluation can help to promote a more equitable distribution of responsibilities and opportunities within the boardroom. This can help to ensure that all board members have a voice and are able to make meaningful contributions to the organisation’s decision-making processes. Additionally, board evaluations can help to identify and address any potential biases or barriers to diversity, equity, and inclusion (DEI) within the boardroom, helping to create a more diverse and inclusive environment.
As a board director, it’s crucial to recognise that the success or failure of your organisation hinges on the performance of the board. This means implementing measures and policies that ensure board members, individually and as a collective, are effective in carrying out their duties. It’s therefore essential to prioritise board performance to ensure the organisation is headed in the right direction and fulfilling its responsibilities to stakeholders.
In conclusion, it’s important that the board and every relevant party involved in board evaluations support and actively participate in the process. It’s the only way your organisation will see positive results.
About The Society for Corporate Governance Nigeria
SCGN is a registered not-for-profit organisation committed to the development of corporate governance best practices in Nigeria. Today, the Society is the foremost institution committed to the development and promotion of corporate governance best practices in Nigeria.