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ICSA publishes its review of the effectiveness of independent board evaluation in the UK listed sector

  • Corporate Governance  Image

24 Jan 2021

The Chartered Governance Institute (ICSA) has published the findings of its review into the effectiveness of independent board evaluation in the UK listed sector. The report has identified a number of ways in which board evaluation might be improved.

The purpose of the review was to assess the quality of independent board evaluation in the UK listed sector and identify ways in which it might be improved. It was carried out at the request of the Department of Business, Energy and Industrial Strategy (BEIS).  In conducting the review, ICSA considered not only the available evidence on the current state of the market for independent board evaluations in the listed sector, but also the potential impact of the actions taken by the Financial Reporting Council (FRC) in 2018 to strengthen the UK Corporate Governance Code.

The report concludes that there is scope for broader adoption of good practice and greater transparency on the part of both board reviewers and companies using their services.  It also concludes that this is best done through a voluntary rather than a regulatory approach.  It makes a number of recommendations:

  • The FRC should consider adopting the terminology ‘board performance review’ instead of ‘board evaluation’ when it next updates the UK Corporate Governance Code and the Guidance on Board Effectiveness.
  • Any set of actions to improve the conduct and accountability of external board performance reviews must be addressed to companies as well as reviewers and must enhance the ability of shareholders and other stakeholders to hold both to account.
  • Any actions expected of board reviewers and listed companies as a result of the report should be voluntary, at least initially.
  • A code of practice should be published to which all organisations conducting external board performance reviews for FTSE 350 companies, and those that aspire to do so, should be encouraged to become signatories. While the Code would be voluntary, signatories would be expected to demonstrate that they adhere to the standards set out in the code on an ‘apply and explain’ basis.  The proposed Code is included in an appendix to the report.
  • BEIS should either issue the Code itself or identify a suitable organisation to become the ‘owner’ of the Code. Ownership should entail maintaining a public register of signatories and checking that applicants have made the disclosures required by the code before their status as signatories is ratified.
  • Details of how board reviewers can register should be announced as soon as practicable, but reviewers should be given a reasonable period to adjust their practices and update their disclosures as necessary before the register ‘goes live’. Depending on how quickly these arrangements can be agreed, the recommendation is that the register would become active by the end of 2021.
  • Listed companies, and other organisations using the services of external board reviewers, should be encouraged voluntarily to adopt principles of good practice covering the selection of the reviewer and how the review is conducted and reported on. The report includes proposed Principles in an appendix. The Institute will promulgate these Principles with its own members and recommends that BEIS and the FRC consider doing so more broadly.
  • The FRC should issue additional voluntary guidance to listed companies on how to report against Provisions 21 and 23 of the 2018 UK Corporate Governance Code (which require companies to make certain disclosures relating to board evaluation), with the aim that companies should be able to draw on the guidance in their annual reports published in 2022. Proposed guidance is included in an appendix to the report.
  • As part of this guidance, listed companies that used an external board reviewer in the period covered by the annual report should disclose whether that reviewer was a signatory to the new Code of Practice. This could provide an incentive for reviewers to become signatories.
  • As a matter of good practice, listed companies should agree with the reviewer any references to the process followed by the reviewer, and any observations attributed to them, and confirm in the annual report that they have done so.
  • The Code of Practice for board reviewers should not define ‘independent board performance review’ in such a way that a reviewer is required to follow prescribed methodologies in order to be accepted as a signatory, nor should it prescribe minimum qualifications. However, it should include a ‘de minimis’ definition that excludes those firms that simply supply companies with software or other tools that the company then uses as part of its internal review.
  • Board reviewers should not be prevented from providing other services to their clients, but both reviewers and companies should explain how any conflicts of interest or threats to the independence of the reviewer are managed in these circumstances, and companies should indicate in the annual report whether the fees paid for the board performance review exceed those paid for other services.
  • Board reviewers should disclose their policies relating to the length of their relationship with clients. Companies should disclose whether the relationship exceeds six years and, if so, explain how any conflicts of interest or threats to the independence of the reviewer are managed. An explanation should also be provided by the company where the reviewer has any other connections with the person leading the appointment process for the company.
  • The FRC should assess board performance review practice and reporting in the listed sector as part of its regular monitoring of the UK Corporate Governance Code, and report on its conclusions.
  • BEIS should conduct or commission a formal review of the impact of these measures three years after the proposed register of board reviewers becomes active. This review should consider whether mandatory measures or enhanced oversight of the Code of Practice for board reviewers are required, as well as whether changes are needed to the content of the Code of Practice, Principles or guidance.

Alongside the report the ICSA has published:

  • Principles of good pracrice for listed companies using external board reviewers; and
  • Reporting on board performance reviews. 

The press release with links to supporting documents are available on the ICSA website.

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