Code of Corporate Governance in Nigeria 2011 and International Best Practices on Corporate Governance: Board evaluation

Board performance evaluation is one board activity which has attracted much attention and for which there exist some widely accepted practices. The issue is therefore worthy of some consideration. We shall review what the existing best practice on board performance evaluation is and evaluate the degree to which the Code of Corporate Governance in Nigeria 2011 (2011 SEC Code) is consistent with such standard.

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Best practice of board performance evaluation

It is now common practice for boards to undertake a formal and rigorous evaluation of their performance on an annual basis. This is usually provided for in contemporary corporate governance codes. Essentially, the benefit of such assessment is to enhance board effectiveness, for example, through improved individual director’s performance. This will contribute to the success of the company which will ultimately lead to the enhancement of shareholder value. It is therefore not surprising that board performance evaluation is a major feature of contemporary corporate governance codes.

The scope of the board performance evaluation covers the board itself, its committees and individual directors, including the chairman of the board.

It is not uncommon to involve external third party professionals in the evaluation process for objectivity, professionalism and reliability. What is not uniform is the frequency of the use of the external professional in the board evaluation process.

Finally, the result of board performance evaluation is required to be communicated to the shareholders. In some cases, the board performance evaluation result has formed the basis for re-election (or otherwise) decisions of directors of companies.

Board performance evaluation under 2011 SEC Code

The 2011 SEC Code is commendable in compliance with best practice on board performance evaluation. In the first place, by virtue of section 15.1 of the 2011 SEC Code, the evaluation for the board as a whole, its committees, and individual directors, including the chairman of the board, is to be undertaken annually. This position is further fortified by the 2011 SEC Code by requiring the Governance/Remuneration Committee to ensure that “the Board conducts a Board evaluation on an annual basis”.

Secondly, the use of external consultants to facilitate the performance evaluation process is authorised under section 15.6. As already note, the use of external professionals in the process could engender objectivity, professionalism, and reliability of the outcome of the process.

Thirdly, section 15.4 requires that the result of performance evaluation of directors should be discussed by the board and with the individual directors concerned. This feedback is important as it affords the opportunity of communicating next line of action to the directors concerned.

Fourthly, the 2011 SEC Code provides that the evaluation process and summary of the evaluation results for the board as a whole, its committees and each individual director should be disclosed in the company’s corporate governance report which forms part of the annual reports to be sent to company’s shareholders.

Finally, it is noteworthy that 2011 SEC Code makes poor performance evaluation in respect of a director to be the basis for the director losing his membership of the board.

Concluding remarks

The above review of the provisions of the 2011 SEC Code indicates that the regulatory framework for an objective and professional board performance evaluation is in existence. In fact, board performance evaluation is a sterling example in support of the contention in some quarters that the problem with corporate governance in Nigeria is not the absence of adequate regulatory framework, but the will power to enforce such regulations.

This will power must be found because the benefits derivable from undertaking annual performance evaluation of the board, its committees and individual directors are enormous and far-reaching. It ensures that the board, its committees and individual directors are target-driven, performance conscious and alive to their responsibilities. It ensures that there is an objective basis for determining the directors to exit the board. Thus, exiting from the board would be less likely to be marred by unnecessary ill-feeling or be viewed as a personal vendetta. It enables the board too to constantly refresh itself by bringing in new members with the requisite drive, skills, knowledge, experience and commitment. In the long run, the shareholders too will benefit because of the enhanced performance of the company that would result from such practice over time.

Next week, we shall appraise the extent to which the 2011 SEC Code is compliant with international best practice on another critical corporate governance issue. Meanwhile, should you have any comments on the issues raised concerning board performance evaluation discussed above, kindly share them using the comments area of this post below. If you are already a registered user, you will be required to log in to comment on this post; otherwise, you will have to register before posting your comment. Registration is simple and FREE.

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