Not all boards are the same. If you don’t conduct regular board evaluations, in fact, annual board evaluations, you risk having in place a window dressing board. To the outsiders, you have a board in place. Your board is inadequate as it lacks the requisite diversity, skills, experience and minimums required to create and sustain value for your business. One of the good governance practices is undertaking regular board evaluations. An effective board evaluation helps identify the board’s skills gaps, and training gaps to inform a board training plan provides feedback to individual board members and committee chairs on their leadership effectiveness as well as helps assess the adequacy of the board processes. An evaluation helps identify gaps and how to close them proactively.
Take the case of Imperial Bank
Imperial Bank Kenya was a commercial bank based in Kenya that was established at the start of 1990. The Bank grew to become one of the largest banks in Kenya. Imperial Bank boasted of a nationwide network of branches and a large customer base, estimated at over 2m customers, some of the largest in the industry.
In 2015, Imperial Bank was placed under receivership due to governance and operational challenges uncovered by the regulator. The bank’s board of directors failed to adequately oversee the activities of the bank, leading to significant financial losses. There were also allegations of mismanagement, with senior executives accused of misusing funds and engaging in insider lending.
The bank’s failure was attributed to inadequate governance, including the dangers of the absence of board evaluation. Poor oversight by the board including weak risk management processes, and high-cost structure resulted in significant financial losses and ultimately led to the bank’s collapse.
Mismanagement, insider dealing, and large exposures made the bank’s financial position worse with questions about the accuracy of the bank’s financial statements which further eroded public trust.
A case for regular board evaluation
Board evaluation helps to assess the performance and effectiveness of the board of directors. A well-conducted board evaluation helps to improve governance, and board effectiveness identifies training needs and accountability. Specifically, a well-conducted board evaluation helps to identify areas of weakness in the company’s risk management processes to inform a comprehensive risk management strategy, reducing the company’s overall risk exposure. Most critical, an evaluation process helps to build deeper and more meaningful relationships between board members, for a more collaborative and effective decision-making process at the board level including identifying areas for improvement in meeting procedures, leading to more efficient and productive meetings.
Most critical, a board evaluation helps establish clear performance metrics for individual board members, thereby promoting accountability and ensuring that each member fulfils their responsibilities to the best of their ability.
Take the case of American International Group.
AIG was brought to the brink of collapse in 2008 due to significant losses in its financial products division. In Uganda, AIG rebranded to Chartis, but could not break even. It then closed operations in Uganda indefinitely.
AIG’s board of directors failed to adequately oversee the activities of its financial products division, leading to the build-up of significant financial risk. This coupled with poor risk management at the board level led to an unstainable claims ratio. It was also reported that executive compensation practices at AIG were too focused on short-term gains, which encouraged executives to take on excessive risk.
It is not enough to establish a board of directors since in most cases this is a regulatory requirement. Regular board assessments go a long way in identifying board skills gaps, dynamics and performance scorecards to assess and monitor value addition. Winning organisations invest a lot in independent board evaluations.
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