ICSA report and recommendations on independent board evaluation

ICSA: The Chartered Governance Institute has published its Final Report on the effectiveness of independent board evaluation. It has concluded that there is scope for broader adoption of existing good practice in the way some external reviews are conducted and greater transparency about the process that was followed.

The Government asked ICSA to assess the quality of independent board evaluation in the UK listed sector in its Insolvency and Corporate Governance response paper with a view to improving the quality and effectiveness of external board evaluations. ICSA published a consultation paper on the subject in May 2019.

ICSA has published a series of documents to accompany its Final Report, as well as a summary of the responses to the consultation:

• Principles of good practice for listed companies using external board reviewers – The principles of good practice include guidance on the selection of board reviewer, scope and process of the review and disclosures following the review. It says that the decision on the appointment of a board reviewer should be ratified by the full board or the nomination committee. The company should state in its annual report whether it has followed these principles, and whether the reviewer is a signatory to the code of practice for reviewers (see below). The company should also agree with the reviewer the description of the process followed and any opinions attributed to the reviewer in the annual report or other disclosures.

• Reporting on board performance reviews – The guidance discusses reporting in accordance with each of the elements of provision 23 of the UK Corporate Governance Code (which requires the annual report to describe how the board evaluation has been conducted, the nature and extent of an external evaluator’s contact with the board and individual directors, the outcomes and actions taken, and how it has or will influence board composition). The guidance also discusses the disclosures required in connection with provision 21 of the Governance Code, which states that the annual report should include a statement about any connection the external evaluator has with the company or individual directors. In particular, the guidance says that the company should disclose for how long the reviewer has been undertaking board performance reviews for the company and, if for more than six years, explain how independence and objectivity are safeguarded. It also says that the annual report should explain why the company believes the reviewer is qualified to carry out the review.

• A code of practice for board reviewers – The code of practice sets out principles, accompanied by guidance, to which providers of independent board performance reviews to FTSE 350 companies must commit in order to become a signatory to the code of practice. The principles discuss competence and capacity; independence and integrity; client engagements; and client disclosures. Board reviewers are expected to apply these principles and describe how they have done so on their website.

ICSA recommends that, initially, adoption of its new principles and code should be voluntary. The Government has said it will consider the recommendations carefully and set out more details on next steps at a later date.