This Way, Self-evaluation is No Longer a Routine Exercise

This Way, Self-evaluation is No Longer a Routine Exercise
How the mandatory self-evaluation is approached determines the difference between a Supervisory Board that simply does what is required and a truly effective Supervisory Board with added value for company and directors, argues Victor Prozesky of The Board Practice. What does it take to get more value out of mandatory self-evaluation?

Self-evaluations are now standard practice among the vast majority of Supervisory bodies. Frameworks have also been developed to standardize and structure this process. Based on our international experience, we estimate that about half of the Supervisory Boards actually handle this process well and, more importantly, do it for the right reasons. The best Boards see self-evaluation as a valuable tool to really discover how they are functioning and how things can be done even better and more effectively. Other Boards still do it mainly because they have to. Not because they don't want to learn or don't want to do it well, but they simply don't see the added value of the necessary investment in time and money. For example, they apply general frameworks that are not tailored to their sector or company, they assess compliance rather than effectiveness and they mainly answer the standard questions: Are our meetings long enough? Are we getting the right information from management? Do we have the right committees? Those questions are important, but not as crucial as the underlying dilemmas. More vital, for example, is the question of whether all critical issues have been addressed in sufficient detail and focus. The implicit understanding in some SBs seems not to thoroughly address the really difficult and complex issues, with the result that they continue to hover beneath the surface.
We also find that most SBs are frustrated by the amount of time spent in regular meetings to address governance and compliance issues, compared to the opportunity to discuss the future of the company. Evaluations can also be used to determine the level of discomfort about this and to examine how other SBs achieve more in-depth deliberations, for example by changing the order of the agenda.

Pink elephant in the room
What is needed to get more value out of mandatory self-assessments? First, the pink elephants need to get out of the room. No subject should be left out. The focus should be on the most important and likely risks and issues that affect the company or cause discomfort to the  Supervisory Board. In practice, these are mostly people-related issues. A good example of such a pink elephant in the room is CEO succession. Of course, there is no Board that does not anticipate the departure of the current CEO in some way, but because discussing careers and the future of people is inherently difficult as well as confidential, the topic is often kept "close to the chest" and mainly the Chairman of the Supervisory Board consults with the CEO about his or her succession.
The same goes for evaluating the CEO's non-financial performance, such as general leadership and the extent to which he or she can change a culture, attract top talent or live up to company values. This is often discussed with the CEO by the Supervisory Board Chairman at the end of the year, but he or she benefits more if he or she has a chance to reflect on it with the entire Board. A well-functioning Supervisory Board makes questions about how to deal with succession and leadership a structural part of the self-evaluation and discusses it in an open, professional, non-confrontational and non-emotional way.

Peer review and benchmarking
Another elephant in the room is peer review. Especially in Dutch business, in my experience, this is sensitive. Understandably so, because if you don't handle such a review properly, it tends to disrupt rather than strengthen relationships within a Supervisory Board. In addition to using the correct procedure, it is especially important to emphasize that it is not about criticizing each other or making mutual comparisons (who performs best?), but about the constructive question of how the Supervisory Board as a whole can function better when each individual Supervisory Board member is functioning optimally and learning continuously. In consideration of confidentiality, it is often desirable to use an external party with extensive experience in conducting peer reviews.
If the process is dealt with internally, normally someone like the company secretary would be the appropriate person to collect all the reviews and analyze the results. In this case that doesn't work, because the company secretary reports to the Supervisory Board and is (if all goes well) part of the self-assessment. The same goes for the Supervisory Board Chairman, although he of course gets to see the results as a basis for discussions with the individual commissioners.
The added advantage of bringing in an experienced external party is that they can provide a good indication of the performance of the Supervisory Board compared to Boards in comparable companies, for example when it comes to issues such as size, committees, diversity or the spread of skills and experience. It is also valuable that the quantitative results of such an assessment process can thus be compared with the average score of other SBs, which can provide clues to areas for improvement. 

Three-year cycle
Taking the outside in is important not only in the context of benchmarking. Self-evaluations that merely reflect the internal view of the Supervisory Board have limited value. Just as every Board of directors draws up a long-term strategy for the company, every Supervisory Board should have a strategy for self-evaluation. In practice, in our experience, a three-year cycle works well. In the first year, it makes sense to bring in an external facilitator in order to create the necessary depth and ensure that no topic is left undiscussed. Let's say three to five crucial areas for improvement emerge from that. A Supervisory Board should work on these in the following year, and at the latest at the end of that year it should use a lighter touch evaluation to see where progress has been made, what issues require additional attention and what remains to be addressed.
If some difficult issues remain relevant after working on them for a year, they may be persistent and complex. If so, the review in the third year may be the time to bring in an outside expert with deep Board experience who can suggest alternative approaches based on insights about how other boards are addressing similar issues. Then the cycle begins again. In this way, the self-evaluation becomes a real development process with a purpose rather than an annual routine exercise. The role of the Supervisory Board Chair is crucial here. He or she must steer the collective process in the right direction, keep a finger on the pulse and prevent the Supervisory Board from superficially running through the course of events once a year and then simply continue as before.

Continue to develop
Even SBs who consider self-evaluations important often devote too little time to making this process robust and valuable because other items on the agenda seem more urgent. The fact is, however, that self-evaluations - however conducted - always take time from busy Supervisory Board members. It makes sense to make the best use of that time. Even a good Board needs to be held up to an external mirror from time to time. On the one hand, to confirm that it is doing the right things and is sufficiently open to change. On the other hand, to protect itself from the risk of not doing the right things at all, even though the Board has every confidence in itself. It is a sign of maturity and professionalism to keep asking questions and to keep developing as a Supervisory Board. Companies do competitive analysis for a reason: To gain insight into their strengths and weaknesses relative to competitors. Boards still do not do this sufficiently, while it is just as relevant for these bodies to know where they stand and how the outside world perceives them.
20 years ago, Boards were ceremonial. Then we saw the rise of the liberated Board, when Supervisory Board members became keenly aware of their own responsibilities and accountability. In the last decade, SBs increasingly feel a shared responsibility for what happens in the company and their advisory role has increased significantly. Moreover, now that the world is changing rapidly - think of the financial crisis, COVID, the war in Ukraine, the energy crisis, the climate crisis and the explosion of ESG considerations - there are other big questions: how do you stay current as a Board, and how do you ensure you have the right skills and get the right information? Continuing education, development and a good perspective on the world around us are crucial in this regard. Therefore, when next evaluating effectiveness, ask the Board the right questions.

This article was published in Management Scope 02 2023.