A board and directors need to have their effectiveness assessed at least annually.
The aim of the assessment is to identify areas of improvement and provide an opportunity for further director development and/or board renewal. Circumstances can changes such that new board capabilities – or greater diversity – are needed for the future.
Various activities related to the board itself (and the development and turnover of directors) are to be periodically scheduled for consideration and action. This is designed to:
- assess the effectiveness and performance of the board, committees, individual directors and chair
- consider director turnover, (re)appointment and resignation with regard to required composition, capabilities and structures for the future (and where situated in the public entity’s lifecycle)
- manage conflicts of interest and duty
- benchmark board performance and identify better practices
- transition/hand over to either a new chair or a board whose composition has significantly altered
- consider the ongoing development of directors to enhance their contribution to the board and public entity, including planning and reviewing the ongoing training and development of the public entity’s directors.
Checklists, guidance and/or templates for the assessment of and review of the relationship between:
- the board collectively
- board chair
- individual directors
- board committees (and chairs of each committee)
- board secretary (or by whatever name known)
- chief executive officer.
The board should implement performance assessment of the board as a whole, individual directors, the chief executive officer and the chair using a variety of feedback mechanisms.
The Public Administration Act 2004 concentrates on the performance assessment of individual directors. Many public entities also assess others involved in the process of governance. For example, it is possible to assess the board as a whole and the chief executive officer.
Performance assessment is compulsory for Division 2, Part 5 of the Public Administration Act public entities.
A board must ensure that there are adequate procedures for assessing the performance of individual directors and dealing with poor performance by directors (under s. 81 of the Public Administration Act).
Assessment of the board’s performance is separate to any assessment of public entity performance by, for example, internal and external audits.
To assess its performance, the board should:
- agree to a set of performance indicators (these may already exist in the board’s planning documents); for example, rates of completion on action items, numbers of meetings attended by directors, and whether the directors have prepared for the board meeting
- consider using specialist corporate governance consultants/facilitators – at least on alternate years, to manage the process impartially
- use a combination of approaches to collect information such as interviews and structured questionnaires
- invite the views of senior management of the public entity including the board secretary
- invite the views of other stakeholders who deal with the public entity
- examine the information collected to see if there has been improvement from one year to the next.
Marked differences in the assessments by different respondents may be significant. For example, further investigation would be warranted if directors believe that the boundary between board and management is clearly defined but management reports that it is not.
Reviewing the performance of individual directors helps those individuals better understand their strengths and weaknesses. They can then develop professional development plans to enhance their performance.
Assessment of directors may involve:
- a confidential question-and-answer session by a facilitator or the chair
- invite directors to comment on the strengths and weaknesses of their colleagues and compare their views to those in the directors’ self-assessment.
An annual assessment cycle is usual for directors. Also, a comprehensive assessment should be conducted when a director’s term is due to expire and the director is interested in applying for reappointment.
An annual assessment is appropriate also for the board as a whole. More thorough three-yearly reviews are also useful.
Director Professional Development
Professional development should be available to directors. It is the chair’s role to approve this. The board may undergo professional development as a board or individually.
The board must have a performance assessment procedure for individual directors. It must also have a procedure for dealing with poor performance by directors. Professional development is a good strategy to improve the performance of directors.
The need for such professional development may be an outcome of the board or individual director assessment and may be requested by a director.
At appropriate times each year, the board should schedule reviews of matters directly concerning the chief executive officer (CEO) and other executive positions as appropriate. Such a review includes:
- agreeing top-level performance expectations/plans and targets and related incentives (if applicable)
- actual performance achieved compared with the plan
- succession planning and senior staff development generally.
Matters to be covered at appropriate times during the annual cycle include:
- scheduled review of the CEO’s performance plan/targets and related incentives, including KPIs
- scheduled review of the CEO’s actual performance compared with the plan over the review period
- succession planning and staff development.
Assessment of the CEO by the board differs from the assessment of directors and will depend on how the CEO’s appointment is made and the resulting employment contract.
For example, the CEO may be assessed against key performance indicators established after discussion with the board early in the cycle or as part of employment contract negotiations. A committee reporting to the full board will usually assess the CEO.
The CEO should be assessed every 12 months. The types of qualitative criteria that may be applied are:
- exercise of vision and judgment
- the quality of advice to directors on priorities and strategies
- management of the public entity’s business planning, budgetary and financial affairs
- program development and the public entity’s progress in achieving its annual three-year business plan and budget targets
- success in representing the public entity to the media, stakeholders and other interested parties
- human resources management, including staff morale, availability of the appropriate skills, training, occupational health and safety, equal employment opportunity, and industrial relations practice
- audit outcomes.
Quantitative indicators may be included in the CEO’s contract and salary increases or bonuses may be dependent on meeting these. This will depend on the public entity’s arrangements for CEO employment under the Government Sector Executive Remuneration Panel guidelines.
Assessment of the CEO’s risk management, reviewing the effectiveness of control systems on information, finance and operations as reported to directors should be undertaken on a routine basis.
In other respects, the process that applied to directors can be applied to the CEO.