Norman Marks on Governance, Risk Management, and Internal Audit

One way that practitioners can both add immense value and reduce the risk of ineffective governance processes is by helping the board (or governing body) perform a self-assessment.

The people at Governance Solutions have a newsletter that is worth subscribing to, and in November they had an issue on “Why Board Assessments Matter, and How To Do Them Right”. (I don’t have a link to share.)

It says:

Directors who see board assessments as a positive, value-added experience understand that they are on a governance journey. Along that path, assessments steer them in the right direction, revealing what they’re doing well and what could be improved.

The benefits have long been clear.

Board assessments boost organizational performance. In our experience, every issue that organizations confront can be traced to a failure in governance — the wrong leadership, ineffective strategy, poor policies or no financial controls.

They enhance board effectiveness. The assessments ensure that each director has the required skills to be the most effective and that, as a whole, the board represents a diverse array of experiences and perspectives.

They concentrate on the often forgotten “G,” of ESG, or environmental, social and governance strategies. Evaluations can reveal if the board has effective control of the organization, including whether it’s acting ethically and independently.

To internal and external stakeholders, board assessments provide assurance organizations are well-governed. At a minimum, the board should disclose that evaluations have taken place. But, in some cases, they will need to share specific details with key stakeholders, including any necessary action steps.

And, finally, whether directors like it or not, board assessments are increasingly required. For listed companies in Canada, boards are expected to disclose the process by which the board, its committees and individual directors are regularly assessed with respect to their effectiveness and contributions. Meanwhile, accrediting bodies in the not-for-profit world, such as the Canadian Centre for Christian Charities, are requiring boards to be evaluated as part of the accreditation process.

They go on to say:

As with any other project, boards must begin an assessment by zeroing in on its purpose. Is it a full governance audit and review? Is it to stay in compliance with a regulatory body? Will it inform board succession or renewal? Is it to strengthen stakeholders’ confidence in their decisions? Or is it to zoom in on the skills that directors bring to the table to determine gaps and assess training needs?

Once a board determines the “why,” members must determine the “how” by answering these questions next:

• Who will lead the process?
• Who will conduct the evaluations, and how will they be conducted?
• Who will take part in the evaluations?
• What will we do with the assessment’s results?

They have a free decision tree tool that I like and believe it may be useful.

The newsletter suggests six tools that can be used in the self-assessment:

1. Documentation review
   A comprehensive audit of an organization’s documents and processes identifies gaps in its governance framework. These lengthy reviews, which should be conducted every three to five years, can cover everything from strategy documents and financial reporting to governance-level policies and the board’s oversight of executive leaders.
2. Surveys
   Questionnaires are a relatively quick and inexpensive way to understand how effective the board, its committees and individual board members perceive themselves to be. Surveys must be comprehensive in scope and should allow for written comments, which can provide a gold mine of data about the hearts and minds of senior directors. Surveys can be completed annually to self-assess and measure progress.
3. Probe
   With the results of a survey, a trained interviewer can take the information and probe individual directors to gain deeper insights into issues raised. If for example, a survey indicates that the board isn’t getting enough information about key matters, an interview can determine why. Is one person causing the problem, or is it a more generalized issue? The results of any probe should identify both the problems and the solutions.
4. External professional observation
   Sometimes third parties are the best at seeing the gaps in practices that might be holding a board back. While observing a board or committee meeting, a trained observer can determine if power imbalances exist, whether the proper rules of order are followed or if deliberations veer too far into operational issues, which should be the purview of the executive team.
5. Cultural analysis
   A healthy board culture embraces diverse thinking and allows board members to discuss complicated issues effectively, so they can make the most strategic decisions. A cultural analysis, usually conducted by an outside professional, will assess that tone at the top to ensure that it’s not negatively influencing organizational culture.
6. Facilitated discussion
   With insights gleaned from the assessment tools, board members must make time for facilitated dialogue to determine what’s next. A trained external facilitator can be invaluable at this stage as well to ensure the deliberations are results-oriented.

They close with:

Any board assessment, however, can’t just end at the talking stage. Boards must act on the assessment’s recommendations and regularly evaluate their efforts over time. To do that, directors must agree on the key findings and develop an action plan, featuring SMART, or specific, measurable, attainable, resourced and time-bound, objectives.

Of course, some of this work will trigger difficult conversations. Individual board members, for example, might bristle at any suggestion they require a personalized education plan, based on skills gaps an assessment identified.

But just as they shouldn’t avoid assessments because of a perception that there’s nothing to improve, boards can’t shy away from those difficult moments. Wading into board assessments and the awkward discussions they inevitably turn up is part of the core commitment directors made to the organization when they accepted the position. And, bottom line, organizational success hinges on these honest conversations and the improvements that tumble out.

Boards don’t have the luxury of staff, except those in the internal audit department! I had a lot of success helping my board consider how effective they were and how they could improve.

We didn’t perform an audit of governance processes per se. Instead we facilitated the audit committee of the board’s self-assessment. This is what we did (I say “we”, but I did the work as CAE):

• Define what we were going to assess and confirm it with the audit committee. We focused on:
  • Whether the members had sufficient bandwidth and time to fulfil their responsibilities
  • Their individual and collective knowledge of the business
  • Their individual and collective understanding of the objectives of and more significant risks to the organization
  • Teamwork, including whether each member was able to speak and be heard
  • The setting of the committee’s agenda
  • The quality and timeliness of the information they received, and whether it was what they needed to receive
  • Access to management at all levels and in all parts of the organization
  • Relationships with and trust of top management
  • The onboarding process for new members
  • Their oversight of the external auditors
  • Their oversight of the internal audit function
  • Reporting by the committee to the full board, including how their reports were received and acted upon
• We met individually with each member of the audit committee and with other select members of the board including the chair to solicit their confidential assessments.
• We met and solicited the confidential assessments of members of the management team and the external auditors.
• We evaluated the timeliness and quality of reporting to the board.
• We provided a report with the consolidated results of the assessments, keeping individual comments confidential.
• We worked with the committee to agree on action items, which included additional training for its members in a variety of areas.

I highly recommend CAEs around the world to consider an exercise like this. I think it’s the best way to assess organizational governance.

Do you agree?