Why Aren’t Affiliate Boards Held To The Same Standard?

The corporate board self-assessment has become a standard in most countries. If a company is listed on the New York Stock Exchange (NYSE) or London Stock Exchange (LSE), its board is required to perform a self-assessment. The Organisation for Economic Co-operation and Development (OECD), the U.S. National Association of Corporate Directors, the U.K. Corporate Governance Code, the IBGC Code of Best Practices in Brazil, and many other entities and codes endorse this same practice. Yet, the boards of many independent corporate affiliates, whether partially- or fully-owned, neglect to conduct a self-assessment, despite the role of the board in many of these entities, particularly partially-owned affiliates, often being more complex than the role of the corporate board.

We estimate that less than one in five independent corporate affiliates performs a self-assessment at least once every two years. Yet, when we surveyed executives from partially-owned corporate affiliates or joint ventures, we found that the presence of a regular self-assessment has a notably positive impact on the business’s performance. Of those partially-owned affiliates that have boards which perform a regular self-assessment, 70 percent exceeded their overall targets – defined as an aggregation of their financial, operational and other targets. Of those partially-owned affiliates that have boards which do not perform a regular self-assessment, only 35 percent exceeded their overall targets.

So, why does a self-assessment improve outcomes? In our experience, it surfaces issues that are not naturally raised in other board meetings, with benefits that manifest in a few ways. First, going through this process often generates a greater sense of accountability and engagement among directors. They hold each other accountable for their individual performance and the collective performance of the board.

A key part of the director role is to evaluate the CEO’s performance so it is a natural extension of the role to evaluate their own performance. Second, the self-assessment can foster trust and transparency across the board and the executive team. It creates a more comfortable environment for directors to challenge ideas and offer solutions, even when these challenges and solutions are based only on a fraction of the available data or are not fully baked. Third, it helps directors set more realistic expectations of what can and should be accomplished by the affiliate or joint venture.

In our view, a good board self-assessment requires a survey and often a set of individual interviews to test specific issues, and culminates in a facilitated discussion with the full board. The assessment should ensure every director’s voice is heard, not just the most vocal or senior directors. The assessment should evaluate the collective performance of the board and the contributions of individual directors, provide a read on the board’s desired involvement posture with respect to the management of the affiliate, offer an opportunity for each director to raise any top-of-mind issues, and test levels of alignment or misalignment on key issues.

Conducting a board self-assessment seems like a no-regrets activity for any board that is serving as more than just a legal formality. It is certainly something that is taken seriously by corporate boards. The question is why hasn’t this gained more traction with the board of independent affiliates?

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Gerard Baynham
Gerard Baynham is Partner with Water Street Partners, a consulting firm with a focus on corporate and affiliate board governance. His columns have been published in Chief Executive, The Hill, Mining Weekly, Joint Venture Exchange, and Joint Venture Deal Exchange.