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Home arrow Economics arrow Boards of directors of state-owned enterprises : an overview of national practices.

Board evaluations

The systematic evaluation ofSOE board increases professionalism and is commonly considered good practice. They serve directors (not least the Chair) as a vehicle for assessing and improving the board’s modus operandi, and they provide the ownership function with valuable information concerning possible changes to board composition. Administrations that run their SOEs relatively close to general government tend to rely on top-down approaches through which the ownership function evaluates the board in light of corporate objectives. In more commercial SOEs the trend is to rely largely on board self-evaluations. All such evaluations assess the workings of the board as a whole; some extend to an assessment of individuals. Self-evaluations are often assisted by external evaluators from private companies, or in some cases from within the general government sector. An evolving consensus is to create strong feedback links from the board (self) evaluations to the board nomination process.

Board evaluation, which has long been commonplace in large private sector companies, is becoming increasingly widespread in state-owned enterprises as well. Board evaluations are being encouraged by governments as a way of maximising board performance and minimising risk. Government interest in evaluations is also heightened as a result of increasing board autonomy, which has reduced the role of what we previously a process of monitoring from inside the board room.

Board evaluations are commonly recognised to be an important tool in promoting an effective functioning board. The SOE Guidelines suggest that SOE boards should conduct a yearly evaluation to assess their performance. Systematic evaluation is a crucial tool in improving SOE board professionalism, since it underlines the responsibilities of the board and the duties of its members. It is also helpful in recognising necessary competencies and board member profiles. From the perspective of the board they allow an assessment of the functioning of the board to improve the board's operating procedures and practices.

SOE Guidelines, Annotation to Guideline VI.F on board evaluation

The Annotations to the Guidelines make clear that a systematic evaluation process is a necessary tool in enhancing SOE board professionalism, since it highlights the responsibilities of the board and the duties of its members ... [and] it is a useful incentive for individual board members to devote sufficient time and effort to their duties as board members.

From the perspective of the ownership function, board evaluations can also serve a purpose in allowing those responsible for board nominations to assess the composition and functioning of the board on a holistic basis. Even where the nomination process is rigorous and well structured, the nomination of individual board members may be done as a succession of discrete decisions, with the risk that it neglects a consideration the overall needs of the board in terms of the balance of skills and experiences. Utilising the board evaluation processes as an input into nomination decisions provides a mechanism to make important decisions about board succession, director development activities, and actions to address any skills gaps in the boards (e.g. through subsequent appointments).

To be effective in achieving these goals, board reviews should be performance based, rather than simply focusing on mechanistic elements such as attendance levels and number of interventions. Involving the board in the review (even where an external review is conducted) is more likely to lead to substantive performance issues being addressed. Most countries adopt one of two approaches: either the ownership entity conducts an external review of board performance which they use to assess the functioning of the board or, alternatively, the board is tasked with reviewing its own performance. The challenge is to ensure that performance evaluations are conducted in a way to improve performance and inform the nomination process.

As illustrated below, in most countries evaluation ranges from informal evaluations by the Chair to more formal self-evaluations, to formal evaluations conducted by external experts and facilitators. Countries and companies also differ in respect of whether they merely evaluate the board as a whole or meter out individual evaluations of each board member and the chair. The remainder of this chapter looks at the role the ownership function, the board itself and external evaluators play in board evaluation. Finally it considers the extent to which board evaluations feed back into the board nomination process.

 
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