How to evaluate the board’s effectiveness
To effectively evaluate the board, you must have set targets against which you are evaluating the board members.
This calls for an effective governance structure and separation of powers.
At the topmost, there must be the owner of the business. For publicly listed companies, these are shareholders with an equity certificate. The shareholders, at the AGM or annual general meeting, must elect the board members and set clear targets for the board so appointed.
For emphasis, when the owner/ shareholders appoint the board, she/he must give them a score card or targets that are measurable. According to Kaplan and Norton, a balanced scorecard provides a 360˚view of the organisation. It looks are several perspectives which when you achieve all of them, you would say the organization is doing very well. The balanced scorecard looks at four areas – (1) financial performance, (ii) learning & growth, (iii) internal business processes and (iv) customer/ stakeholder engagement – or simply summarised as F.L.I.C or flick.
To succeed, the board must work with management after assessment of the past performance and the operating environment the revenues that must be generated. If the board can grow revenues as indicated in the scorecard, financially it has succeeded, and this is good. Shareholders must set the financial targets especially total turnover, dividends per share to pay out and shareholder value growth. Other key financial indicators to consider include profit margin, return on equity, return on capital employed, amount of debt in the business and jaws – or the rate at which revenue grows relative to costs growth rate.
For listed companies, you are looking at turnover. The company will not grow or make profits if it is not having good turnover. The board has also to critically look at the profit margins. How much of the turnover is retained as profits? The cost structure of the business could be eating up a greater margin of the would-be profits. The company is then wasteful. The organisation could be spending around 60% in administration. This is a red flag. The board is failing at the financial performance.
When financials are published, as a board member clearly understand and compare that period’s performance with the previous one. This gives you a basis to establish the ideal profit range for such an organisation. If it is a listed company, what is the dividend per share? As a shareholder, I am interested in how much is paid onto my bank account. Someone would have 1000 shares but only earn US$50. Does this make you excited that the company made profits?
The biggest failure of corporate governance is that the owners have not deliberately set a scorecard for the board so that during the first Annual General Meeting, the board has clarity of expectations of the shareholders. After one year, the shareholders must be able to know what has been achieved. In absence of the scorecard, any results is good performance.
I always ask leaders: “you say you made Ugx5ob. Given the kind of assets the organization has, is that the best you could have made in the circumstance?” Most of them have no answers. You find a company has assets in trillions. They are getting a net profit of less than Ugx10b. How do you say you have an excellent CEO?
In brief, the owners must know what they want. They must then sit down and write a clear scorecard. Thereafter, they must appoint a board of directors with the requisite skills and experience to deliver the scorecard. In turn, the board must identify and recruit the ideal and experienced chief executive officer, who must be able to deliver the targets set by the board such that the board succeeds.
The CEO must in turn recruit the right executive leadership team competent enough to deliver the set results. That is what great corporate governance entails: having clear bulls eye to align all team effort and skills.