The Company Secretary

and

The Performance Evaluation of Boards

By Mark Robertson Shaw

 


Volume IV Copyright 2003 ISBN 0-9582416-2-7

First Printed 2000 Reprinted 2003

 

Chartered Secretaries New Zealand Inc.

44 Anzac Avenue, Auckland, New Zealand 

A Division of ICSA International

 

IMPORTANT DISCLAIMER: 

This publication is produced on the understanding that the author and editor are not responsible for the consequence of any actions taken on the basis of information in this work nor for any errors or omissions.  The Institute, the author and editor expressly disclaim all and any liability to any person, whether a purchaser of this publication or not, in respect of anything done and of the consequence of anything done or omitted to be done by any such person in reliance, whether whole or partial, upon the whole or any part of the contents of this publication. 

All rights reserved.  

 No part of this work covered by copyright may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording tape, or information and retrieval systems) without the written permission of the Author. 


CONTENTS 

Foreword

Introduction - The Role of The Company Secretary

Conformance Evaluation Is Only Part of Performance Evaluation

Role Definition of The Board

Getting Started - Board Evaluation Framework

Conclusion

Appendix I:            Directors’ Assessment Form: An evaluation framework

Appendix II:            Directors’ Peer Evaluation Form

Appendix III:            The Institute Code of Professional Ethics and Conduct

 

FOREWORD 

Our members add value to organisations in key roles where there is a requirement for integrity combined with a sound knowledge of business. This ensures an effective operation within legislation, regulations, best practice, and the code of ethics. The depth and breadth of the initial training and the flexibility of the continuing professional development programmes enable members to apply knowledge and expertise in all sectors – companies, local government, not-for-profit organisations, armed forces, universities, schools and hospitals. 

With the strong support of a worldwide institute and the requirement to meet and maintain the highest standards of probity and ethical behaviour, members are true professionals. 

The Institute represents the very best in current practice. It is in the unique position of being able to speak authoritatively on the issues affecting the way organisations operate. In providing this support for members and enforcing a strictly ethical code of conduct, the Institute ensures the continuing independence and highest possible standards of the profession 

This document produced by the Chartered Secretaries New Zealand Inc. is intended to be an authoritative guide to the role that the Company Secretary can play in the evaluation of board and director performance for New Zealand public and private registered companies, and not-for-profit organisations. 

We record our appreciation and thanks to Mark Robertson Shaw of the F.I.R.S.T Foundation who prepared this booklet.

 

INTRODUCTION - THE ROLE OF THE COMPANY SECRETARY 

The successful company seeks to be successful in all areas within the organisation and is responsible for tackling those areas that are not pulling their weight. The boardroom is not exempt from this scrutiny. It has to be as effective as any other area in adding value through performance. The days are long gone when the Mom and Pop investor put their hard-earned savings into a company on the basis of the name of a company director. 

If it is good enough for the rest of the company why should the board be exempt? 

This booklet sets out the basis for the central role that the Company Secretary can and should play in such a boardroom audit and evaluation process in the company’s own interests. 

The role of the Company Secretary varies widely depending upon the size and nature of the company. In many cases the duties of the Company Secretary are an add-on to other executive responsibility and may be seen as a minor part of that executive’s overall position. In the case of large public companies the secretary’s job is a full time one. The role of the Company Secretary, particularly in a large company, carries with it very considerable responsibilities and can be influential in determining the course and success of the company. It is also a position which has inherent in it a potential for significant conflict and therefore demands the exercise of judgement and discretion.1  

The role of the Company Secretary therefore is not always easy, and often requires the exercise of considerable diplomacy and sensitivity in carrying out the duties of good faith and loyalty. The Company Secretary has a special obligation and duty to the board, which is independent of the obligation to the chief executive. The Company Secretary has a very clear duty to report to the Chairman any concerns, which the Secretary may have, about any aspects of the operation of the company.  

Obviously this is a duty to be exercised with discretion. The Company Secretary is not the spy for the board and the duty would not require the reporting of trivial matters. However, as the Secretary is in a unique position to be aware of what is going on in the company, failure to report a situation of which the Secretary knew, or ought to have known, can place the Secretary in a position of personal liability. 

For the Company Secretary, who although no longer specifically mentioned in the Companies Act 1993, the deemed director provisions are a cause for concern for the simple reason that while not an appointed director the Company Secretary may be exposed to statutory disclosure obligations, and to liabilities as if he or she were an appointed director.  

Where a genuine desire to encourage superior performance by boards exists, then a Company Secretary can play an immensely useful role in helping to establish appropriate systems, attitudes and behaviours. As an example, the content and structure of board presentations and papers can have a considerable impact on the way in which the board operates. It is not unknown for board papers to be written in a way that allows for only one conclusion (i.e. managements’ preferred position) to be reached. The content of papers can also have other effects. Every board paper should include a section in which management outline how the proposed action or policy relates to the company’s values and principles. This not only helps shape the thinking of management, but also helps to focus the minds of directors on key issues of concern to the company. 

In handling all the legal complexities which affect companies, the board secretary is the chairman’s and the company’s first line of defence…In deciding on the board agenda, the board secretary and the chairman also agree what information board members should receive in support of the items on it.2 

Beyond this there is the benefit of the Company Secretary playing a more proactive and creative role in the process. Rather than sitting back and merely reporting on the relative success or failure of the board, a Company Secretary, in consultation with the Chairman and CEO should be in a position to assist in the process of continuous improvement by the board. The Company Secretary can work back from the board into management in a way that creates a supportive environment for superior board performance in which management shares in the responsibility for how a board performs. It is management that has the capacity to bring out the best performance of the board and directors. Many managers are skilled at giving directors what they want and not what they need and are happy to allow directors to look at the world through a distorted lens keeping them benignly subdued. 

It is the Company Secretary’s function to brief managers on the character of directors. This will allow managers to operate more comfortably when presenting to the board and allow them to ensure that individual concerns are met, while at the same time covering issues of particular importance. 

Through the assembling of reports, preparation of material for meetings and the provision of reports to the board, along with their attendance at board meetings, the Company Secretary will have as complete a knowledge as any director, or other executive of the company, through their access to this confidential and sensitive information. 

There is thus a crucial role to be played by the Company Secretary in the evaluation of board and director performance by acting as a clearing-house for the evaluation process, for what is likely to be remarkably sensitive information.  It is essential that the Company Secretary enjoys the complete trust and confidence of directors and those who supply information as part of the review of board and director performance. There is no simple technique for building this kind of trust. It is, in large part, a function of the quality of inter-personal relationships and the general competence of the company secretary. The question of trust is crucial. 

No other person within the company is likely to hold a position that so well equips them to participate in the performance evaluation of directors individually and of the board as a whole. Any lack of trust and discretion, will however, rule out any proper board evaluation, unless it is carried out by a totally independent person. 

As to the use of an independent ‘facilitator’ it would be doubtful that they would be in a position to pass judgement on what they did not know and it would be doubtful that anyone who had not been present for all of each board meeting would be able to assist in answering questions usefully. It is unreasonable to ask any consultant who has not seen the board in action over a reasonable period to express a view on its performance.

CONFORMANCE EVALUATION IS ONLY PART OF PERFORMANCE EVALUATION 

If an increase in personal liability resulting from the Companies Act 1993 and other recent legislation was meant to concentrate the minds of directors on their duties then it has succeeded. A resultant downside however is that boards may focus on conformance at the expense of performance, as directors may consider that their first duty is to protect their own position and only after that will they look to improving the performance of the company. 

High quality performance needs to be borne in mind by those evaluating boards. It is not sufficient for a board to consider that it has been a good year if they have kept out of trouble. Such an approach places excessive focus on whether board members have satisfied the limited formal requirements for ‘good’ corporate governance by reducing such requirements to a check-list, which may include: 

This list of items should not be dismissed.  Items such as these need to be evaluated, to ensure conformance. 

If the performance of boards are to be addressed, then a far wider range of issues and competencies need to be considered. In identifying these, as a rule of thumb, the question is –

What should directors be doing in order to add value to the operations of the organisation?

The answer to this question will help to identify issues for assessment that cannot and should not be reduced to a simple template or checklist. Performance issues to be assessed may include

The assessment of boards is so context-specific that the above generic list of core competencies is only of use as a starting point. These issues listed above are significantly different from those of conformance questions where they related specifically to the impersonal structure and performance of the board, rather than focussing on the individual and collective performance of directors. 

The kind of issues listed under the conformance questions lend themselves to a fairly objective kind of assessment that is more easily able to be reported on. There is no trick in determining if there is an audit committee – there either is or there is not.  

The Company Secretary should have a conformance checklist as part of the routine reporting exercise and it should also be a part of the Company Secretary’s own annual review process. 

The items listed in the performance area require a somewhat more subjective assessment to be made. For example the quality of a director’s contribution cannot be measured merely by the frequency with which he or she speaks

 

ROLE DEFINITION OF THE BOARD 

The role definition of the board is the basis of the framework against which the board and each director’s individual performance and contribution should be assessed.  The criteria that each director is evaluated against should be developed from the description of board functions. Effective and meaningful evaluation of the board and its directors can only be carried out once the board has determined its own functions.   

There are three principal questions that boards should ask themselves 

When considering what it should be doing, the board may well review the list of matters reserved for the board, the statements of delegations and its annual agenda. Once these matters are settled there is unlikely to be much change in succeeding years 

Did the board allocate appropriate time to the right things throughout the year 

This covers such matters as whether the information the board receives is too detailed or not detailed enough, the timing and length of board meetings, the form and distribution of board papers, the minutes etc. 

Any attempt to understand the role of the Company Secretary in this process therefore requires an understanding of two fundamentally related questions: 

The Company Secretary role should not be restricted merely to conformance evaluation, the Company Secretary should also work actively to generate continuous improvement in board performance. 

The board’s key role is to ensure that corporate management is continuously and effectively striving for above-average performance, taking account of risk. This is not to deny the board’s additional role with respect to shareholder protection 3

 

GETTING STARTED - BOARD EVALUATION FRAMEWORK 

When boards have defined their role, responsibilities and requirements, the criteria for measuring performance are in place. In support of the evaluation process consider the following steps:

1.                  Meet with the Governance/Executive Committee to discuss specific needs

2.                  Meet with the full board to explain processes, purpose, framework and instruments, time line and feedback

3.                  Distribute instruments with date for return

4.                  Instruments are returned confidentially to the Company Secretary for summary and evaluation. Those completing any developed questionnaire should not sign or place their name on the forms.

5.                  Summarised results are reported to the Governance/Executive Committee

6.                  The results are reviewed and development processes are put in place by the board

7.                  The completed process should be reviewed with the Governance/Executive Committee for revision and improvement for future evaluations

8.                  Board disclosure of process to shareholders 

The framework4 used in this section can be used to as a starting point to gain an insight into how well a board meets its objectives. It is not intended to be an exhaustive list of evaluation criteria, but rather to be a guideline for the development of appropriate evaluation for the organisation, modified to reflect the unique functions and roles of each particular board.  

Board Functions

·        Board members should devote significant time and serious thought to the company’s longer-term objectives and to the strategic options available to achieve them. These too should be put in writing.

·        The board has defined and communicated to management the scope, powers, roles and division of responsibilities to be adhered to by management and by the board, in meeting both routine and exceptional circumstances

Board Meetings

Induction, Development, Succession, and Dismissal

Board Structure

Communication

Developmental criteria can be added from research on best practice of other boards of directors. With the implementation of an ongoing process, boards will be able to create objectives for improvement, add those to the process, and be able to evaluate how well those are achieved. 

What Outcomes Can The Board Expect From This Process

·        All directors “own” the evaluation process

Appendix I contains similar frameworks which should be implemented at the same time as this process.  The frameworks deal specifically with individual board members. Using them will give insight into the abilities of each director. They cover the issues of: 

·        Competence

·        Independence

·        Preparedness

·        Practice 

Appendix II is a Directors’ Peer Evaluation Form which will provide helpful developmental feedback for the director being evaluated and/or help the chairperson understand the true contribution made to the success of the board by the individual by: 

·        Effort/Participation

·        Leading and Task Accomplishment

·        Intellectual/Creative Contribution

·        Team Skills

·        And any comments the Director would like to add concerning other areas of group performance or an individual’s overall contribution to the group

 

CONCLUSION 

Maximum performance will only be achieved by those companies that are able to trust their people to make sound decisions within a condensed time-frame. Such people will need to exercise considerable autonomy whilst at the same time ensuring that risks are minimised. There was a time when business practice considered that risks could be controlled through the application of detailed rules, regulations and compliance regimes. This approach can be highly unstable and relatively costly. Things move too fast and are too ambiguous for the old command and control model to work. Instead, prudent boards and managers need to evolve a corporate culture in which decisions are based on the application of general values and principles rather than prescriptive rules and regulations. 

Therefore the challenge for companies is to create an environment in which its people feel that the values and principles at work within the company are real. Proper concern with the ethical environment of a company is essential to long-term business success. 

Visionary companies pursue a cluster of objectives, of which making money is only one – and not necessarily the primary one. Yes, they seek profits, but they are equally guided by a core ideology – core values and a sense of purpose beyond just making money. Yet, paradoxically, the visionary companies make more money than the purely profit-driven comparison companies.5 

Any organisation capable of managing the complexities of paying proper attention to the way in which values are expressed in practice will be well equipped to cope with the complexity that defines the business world that they operate in. 

Working at the Chairman’s right hand, the Company Secretary will be more than just an amanuensis, he or she will be a trusted professional advisor, possessed of sound, independent judgement, part of the management team and yet, somewhat apart. 

Every Chairman needs a confidante who can act as a sounding board when tough decisions must be made and executed. This will mean that there are occasions when the Company Secretary may need to adopt a position of disinterested advice that goes beyond that of setting out the formal requirements of the law.  

Chartered Company Secretaries are bound to adopt this role because of their chosen status as professionals. Belonging to the profession of Chartered Secretaries means that members must always act according to the Code of Ethics [refer Appendix III] and there is a significant and sometimes overriding duty to act in a spirit of public service. The determination to act in this spirit is the key defining characteristic of a professional. Company Secretaries must not suspend their judgement in deference to those who hold or exercise power or influence. The critical assessment by a Company Secretary should bolster a more general tradition in which professionals provide impartial advice and service, consistent with the more general professional obligation of discerning between a clients interests and wants. This is best practice. Not concentrating on quasi-technical frameworks in which measurable standards are defined.  

Company Secretaries play a vital and creative role in assisting their organisation. The world is becoming a more complicated place for companies to operate in, and when directors feel uncomfortable with emerging paradigms of corporate governance, where else, in the company, is professional assistance to be found but from the Company Secretary.

 

 

APPENDIX I:           DIRECTORS’ ASSESSMENT FORM:

                                                An Evaluation Framework 

 

An evaluation framework*6*

Director being evaluated:______________________________ 

This framework can be used to gain an insight into the ability of each director on the board. It is not intended as an exhaustive list of evaluation criteria, but rather a guideline for the development of appropriate evaluation of the organisation.  

These questions can be answered by considering both the absolute standard of the defined role and functions of the board, and the relative standard of other available talent. 

Those completing any developed questionnaire should not sign or place their name on the form. 

Competence

Independence

Preparedness

 Practice

 

 

APPENDIX II: DIRECTORS’ PEER EVALUATION FORM 

Director being evaluated_______________________ 
Comments that will provide helpful developmental feedback for the director being evaluated and/or help the chairperson understand the true contribution made to the success of the board by the individual.

 Those completing any questionnaire should not sign or place their name on the form.

 

 Comments on Effort/Participation

Here you should address issues such as whether or not you consider he/she was an active and enthusiastic participant in board activities; exceeded or fell short of expectations in completing assigned tasks; appeared to be well prepared for board or committee meeting; etc.

(sufficient space should be allowed under each heading for the director to give a full account)

 

Comments on Organising/Leading Task Accomplishment

Here you should consider issues such as whether or not he/she tended to clear up, or add to, confusion; got meetings back on track, or further derailed them; proposed goals; defined problems and suggested procedures; pulled together related items and offered conclusions for the meeting to consider; worked to get board and committee tasks organised; etc. 

Comments on Intellectual/Creative Contribution

Here you should consider issues such as whether or not he/she contributed intellectually sound thinking; failed to accept good thinking of others; offered creative solutions and ideas; developed own and others’ ideas into a logical framework; coached and helped others in his/her areas of special competence; etc.

 

Comments on Team Skills

Here you should consider areas such as whether or not he/she became defensive or withdrawn if his/her ideas were challenged or not accepted; encouraged, acknowledged and supported others’ contributions; listened carefully to others and considered their ideas; excessively dominated discussion so as to prevent potentially fruitful contributions by others; reconciled disagreements; encouraged colleagues to explore their differences; etc. 

Any comments you would like to add concerning other areas of group performance or the individual’s overall contribution to the group. 


 

APPENDIX III:

THE INSTITUTE CODE OF PROFESSIONAL ETHICS AND CONDUCT

 Values

The Institute requires its members to observe the highest standard of professional conduct and the ethical behaviour in all activities. By maintaining this standard, members enhance their own standing as corporate managers and increase public confidence in the management and administration of companies or organisations. 

As the conduct of an individual member can reflect on the wider profession of corporate management and upon the Institute’s membership as a whole, the code sets out what are deemed to be appropriate standards of professional conduct. 

Conduct

Members shall:

Adherence to The Code 

Members acknowledge that this code is to be adhered to both in spirit and to the letter, so that members’ conduct is governed by the highest standards of professionalism and ethical behaviour. 

This code was adopted by the New Zealand board of the Institute at their meeting on 15 July 1996. 

 

1 For a fuller account of the powers and duties of the company secretary refer to Chartered Secretaries New Zealand Inc. booklet Powers And Duties Of The Company Secretary , 2003 

2 Sir Adrian Cadbury,  The Company Chairman 

3 Hilmer, F. (1994) Strictly Boardroom, Sydney, The Sydney Institute p.33 

4 First developed from the NACD Blue Ribbon Commission Report, Performance Evaluation of CEO’s, Boards, and Directors, NACD, Washington, 1994, Parker, H. Letters to a New Chairman, 1979. From Demb, A. and Neubauer, F. The Corporate Board: Confronting the Paradoxes, Oxford University Press, 1992 and Salmon, W.J. 'Crisis Prevention: How to gear up your Board', Harvard Business Review. Jan-Feb 1993 by Bowes, G in Board Performance And Evaluation presented at The Tenth Annual Company Secretaries & Corporate Managers Conference March 1995. 

5 Collins, J. & Porris, J. (1994), Built to last: Successful Habits of Visionary Companies, Stanford, University of Stanford Press p.8 

*6* First developed from the NACD Blue Ribbon Commission Report, Performance Evaluation of CEO’s, Boards, and Directors, NACD, Washington, 1994, Parker, H. Letters to a New Chairman, 1979. From Demb, A. and Neubauer, F. The Corporate Board: Confronting the Paradoxes, Oxford University Press, 1992 and Salmon, W.J. Crisis Prevention: How to gear up your Board, Harvard Business Review. Jan-Feb 1993 by Bowes, G in Board performance And Evaluation presented at The Tenth Annual Company Secretaries & Corporate Managers Conference March 1995.