REVIEW OF BOARD PERFORMANCE

Discuss the advantages and disadvantages of companies being required to have the board performance review carried out by someone external to the company.

External Appraisal

Advantages

Clearly an external expert is going to be far more objective (and be seen to be far more objective) in their appraisal than if the board appraises itself. As a result, the board are likely to get far more useful feedback than if they appraise themselves.

Also, an external expert will have the advantage of having appraised other boards, so will have a wider and more varied experience of what makes an effective board. Whilst the board may not be keen to be criticised, they would probably benefit from such an exercise. 

Whilst someone external will lack knowledge of the company’s industry, it could easily be argued that this is irrelevant and actually is an advantage. This relies on the theory that an effective board of directors is all about having the right people and how they are managed, and that a well managed team could run any company, whatever the industry.

Having an external appraisal will be likely to create a good impression to shareholders and other stakeholders. The fact that the board seems willing to put themselves up for criticism is a sign of strength and this is likely to provide increased assurance to shareholders.

Disadvantages

An external expert may lack enough understanding of the company and the industry to be able to appreciate how it affects the operation of the board.

There is also a major confidentiality risk in using an external expert. To appraise a board would surely require someone external to sit in on a sample of board and committee meetings and to have access to board minutes. Whilst the expert will have professional standards to follow, including confidentiality, the very fact of having an outsider listening to discussion about company strategy will add to the risk of sensitive company information being passed, deliberately or by accident, to third parties. 

There is also a risk that when the external expert is present, board members do not act in their normal manner because they know they are being watched and assessed. If shareholders expect this, they may question the value of the external appraisal.