Chief executives evaluate their supervisory boards
Evaluations are used for many reasons, but beyond the formal discussion, it is a great opportunity for boss and subordinate to develop plans and goals for the future and to improve their cooperation and communication (creating the concept of the 360 degree assessment). The practices of evaluation, goal-setting and performance measurement are so common, they are considered a basic for all employees from messenger to chief executive.
However, there is one group of senior executives within a corporation-the supervisory board (the equivalent of non-executive directors in the UK and the U.S.)-where this type of review is conducted less often, if at all. Despite the ongoing efforts to reform corporate governance, this is a practice that is only catching on slowly on the European continent, and is virtually non-existent in new Europe.
It does not have to be this way. Nevertheless, change is a slow process with many hindrances. In Poland for instance, companies on the stock exchange tend to be closely controlled. Owners and other dominant financial investors (whether pension fund or the government) tend to nominate insiders whose vote can be counted on in case of a specific legal issue.
Ray & Berndtson, together with the Polish Institute of Directors recently conducted in-depth research into 40 of the largest companies on the Warsaw Stock Exchange to get their chief executives' assessment of their respective boards. The purpose was to get a benchmark of supervisory board strengths and weaknesses. The CEO is an obvious evaluator: he/she is selected and evaluated by the supervisory board and spends as much as 25 percent of his/her time working with the board. This is an excellent view from which he/she can determine how effective they are in supporting the company in achieving its goals.
The key findings, which have been published in Harvard Business Review, provide important food for thought for boards of directors not to mention their key constituents-shareholders, especially institutional shareholders.
For instance, in Poland 100 percent of the chief executives supported the need for independent directors on their boards. As many as 30 percent of the chief executives did not feel their board supported them enough in running their business, with a number of areas attracting specific concern.
Ray & Berndtson's board of directors practice has conducted similar research throughout Europe, so it was interesting to compare the Polish results from this perspective as well. For instance, elsewhere in Europe there was a smaller but still sizable proportion of 15 to 20 percent who did not feel supported.
Overall, the message from chief executives was clear-most supervisory boards can improve their performance in Poland. It is not up to the chief executive to monitor supervisory board performance, rather, the responsibility lies with investors/shareholders.
The survey and our experience show a number of clear weaknesses in supervisory board practices in Poland. But there are some reasonable steps that foreign and financial investors can keep in mind which will improve their supervisory board performance. The most important include:
- Demand a supervisory board seat and use this seat not only to monitor the company but also to introduce best practices.
- Demand that independent directors fit a strict definition of independence and are selected in a transparent and systematic way.
- Bear in mind that the potential market for suitable (and even experienced) independent directors is much larger than generally considered and therefore the choice can be made (if made carefully) without fear.
- Demand clear criteria for supervisory board consideration, even directly appointed supervisory board members should meet certain qualifications.
- Introduce an independent and professional supervisory board self-assessment process.
However, there is one group of senior executives within a corporation-the supervisory board (the equivalent of non-executive directors in the UK and the U.S.)-where this type of review is conducted less often, if at all. Despite the ongoing efforts to reform corporate governance, this is a practice that is only catching on slowly on the European continent, and is virtually non-existent in new Europe.
It does not have to be this way. Nevertheless, change is a slow process with many hindrances. In Poland for instance, companies on the stock exchange tend to be closely controlled. Owners and other dominant financial investors (whether pension fund or the government) tend to nominate insiders whose vote can be counted on in case of a specific legal issue.
Ray & Berndtson, together with the Polish Institute of Directors recently conducted in-depth research into 40 of the largest companies on the Warsaw Stock Exchange to get their chief executives' assessment of their respective boards. The purpose was to get a benchmark of supervisory board strengths and weaknesses. The CEO is an obvious evaluator: he/she is selected and evaluated by the supervisory board and spends as much as 25 percent of his/her time working with the board. This is an excellent view from which he/she can determine how effective they are in supporting the company in achieving its goals.
The key findings, which have been published in Harvard Business Review, provide important food for thought for boards of directors not to mention their key constituents-shareholders, especially institutional shareholders.
For instance, in Poland 100 percent of the chief executives supported the need for independent directors on their boards. As many as 30 percent of the chief executives did not feel their board supported them enough in running their business, with a number of areas attracting specific concern.
Ray & Berndtson's board of directors practice has conducted similar research throughout Europe, so it was interesting to compare the Polish results from this perspective as well. For instance, elsewhere in Europe there was a smaller but still sizable proportion of 15 to 20 percent who did not feel supported.
Overall, the message from chief executives was clear-most supervisory boards can improve their performance in Poland. It is not up to the chief executive to monitor supervisory board performance, rather, the responsibility lies with investors/shareholders.
The survey and our experience show a number of clear weaknesses in supervisory board practices in Poland. But there are some reasonable steps that foreign and financial investors can keep in mind which will improve their supervisory board performance. The most important include:
- Demand a supervisory board seat and use this seat not only to monitor the company but also to introduce best practices.
- Demand that independent directors fit a strict definition of independence and are selected in a transparent and systematic way.
- Bear in mind that the potential market for suitable (and even experienced) independent directors is much larger than generally considered and therefore the choice can be made (if made carefully) without fear.
- Demand clear criteria for supervisory board consideration, even directly appointed supervisory board members should meet certain qualifications.
- Introduce an independent and professional supervisory board self-assessment process.
