7.2.5.4 Evaluation

The UK Corporate Governance Code addresses the evaluation of the board in chapter B.6. ‘The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors’ is the main principle of this chapter. According to the supporting principles, the chairman has an important role in this evaluation process. He should act on the results and identify the strengths and weaknesses of the board. These strengths and weaknesses should be used to propose new additions to the board or ask resignations of other members. The evaluation is therefore intended to have consequences for the composition of the board.

The second supporting principle of chapter B.6 focuses on individual evaluation. This individual evaluation should show whether the director still contributes effectively to the board and whether he has commitment for his role. Although it is not explicitly mentioned, the individual evaluation also concerns the independence of a NED. This can be derived from the supporting principle stating that the director must ‘contribute effectively’ to the board. Preconditions for discharging responsibilities ‘effectively’ are given in the main principle of chapter B.1 about the composition of the board. It requires that ‘the board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company…’. This phrase emphasises that independence is also required in order to perform duties effectively. Therefore, when ‘effectively’ is used in chapter B.6 of the UKCGC about individual evaluations, it is probably intended that independence is also assessed. A new proposed amendment of the UKCGC that will become effective as from 1 October 2012 confirms this belief. An added supporting principle of chapter B.6 states: ‘Evaluation of the board should consider the balance of skills, experience, independence and knowledge of the company on the board, its diversity, including gender, how the board works together as a unit, and other factors relevant to its effectiveness’ (Financial Reporting Council 2011: 11). Independence is now explicitly mentioned as being a part of the evaluation process.

The code provisions accompanying the principles of evaluations require that the board should state in its annual report how the performance of the entire board and its committees and members is evaluated (code provision B.6.1). Furthermore, the evaluation should be performed by an external evaluator every three years. Information about ties with the company other than the position of external evaluator should be disclosed (B.6.2). The chairman has an important function in the evaluation process. Therefore the NEDs – without the chairman – should evaluate the performance of the chairman and take into account the opinions of the executive directors (B.6.3). If a director is proposed for reelection, the chairman should state whether the director’s performance ‘continues to be effective and to demonstrate commitment to the role’, based on the individual evaluation of that director (B.7.2). Further consequences of the evaluation are not given in the UKCGC.