This post is a guest-authored commentary piece from Eric Salmon and Partners discussing the findings of  Diligent Institute and Corporate Board Member’s 2023 What Directors Think survey and report. This is the second installment in a series of global commentary pieces analyzing board and governance trends in the US compared to other regions. This commentary piece is the second of two parts discussing board evaluations and disclosure. Read part one.

What do proxy advisors say?

Proxy advisors typically advocate for increased transparency and disclosure in the area of board evaluations. They believe that clear and detailed information about the process, results, and follow-up actions taken by the board in response to the evaluation is important for shareholders to assess the effectiveness of the board and make informed voting decisions. They often recommend companies to publicly disclose their board evaluation processes, methods, and results, as well as their efforts to improve board performance. This includes disclosure of the board’s goals and criteria for evaluation, the process for conducting the evaluation, the extent to which directors participated in it, and the extent to which the results of the evaluation were used to inform changes in the composition and practices of the board.  

Institutional Shareholder Services (ISS) is one of the largest and most influential proxy advisory firms in the world, and they generally support increased disclosure around board evaluation practices. They advocate for companies to provide more transparency about the process used for evaluating the board and its individual members, as well as the results of these evaluations. This information can help investors make informed decisions about director elections, board composition, and company governance practices. Some of the key considerations for ISS when evaluating board evaluation disclosure practices include the independence of the interviewer, the use of objective criteria and metrics, and the level of detail provided about the results of the evaluation.   

International comparisons

 Disclosure practices regarding board director evaluations can vary greatly across different countries and regions. Some countries have specific laws and regulations that require companies to provide certain information about their board evaluations.  

In the United States, the SEC has issued guidance encouraging companies to provide information about their board evaluation processes in their annual proxy statements. However, the level of detail provided can vary widely from company to company.  

In Japan, the corporate governance code encourages companies to conduct regular evaluations of their directors, but there is no requirement to disclose the results.  

In Australia, the ASX Corporate Governance Council’s Principles and Recommendations encourage companies to disclose information about their board evaluation processes but do not yet require it.  

In Italy, there is a legal requirement for companies to conduct regular board evaluations, but the level of disclosure in company reports can vary. Listed companies are required to carry out an annual performance evaluation of their board of directors. This evaluation should assess the board’s performance and effectiveness, as well as that of individual directors. The results of the evaluation should be taken into consideration when determining director remuneration and when making decisions about the composition of the board.  

However, the level of disclosure about these evaluations in company reports is not specifically regulated by Italian law. Some companies may choose to provide detailed information about their evaluation processes and results in their annual reports, while others may only provide brief information.

In general, the level of disclosure about board director evaluations in Italy is lower compared to other countries with more developed corporate governance regimes. While the general practice of disclosures tends to become more widespread, the focus of the disclosure often leans towards the board’s strengths, while its weaknesses are often featured less prominently.  

In Singapore, the level of disclosure about board director evaluations in company reports is relatively high, reflecting the emphasis on good corporate governance practices in that country.  

The Singapore Exchange (SGX) requires listed companies to provide information about their board evaluation processes in their annual reports, as part of the SGX Listing Rules. This information should include a description of the scope and frequency of the evaluations, as well as any changes made to the evaluation process.  

Additionally, the Code of Corporate Governance, issued by the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX), recommends that companies should conduct regular evaluations of their boards, including individual directors, and disclose the results in their annual reports. The Code also states that companies should provide a description of the evaluation process used, including the scope and frequency of the evaluations.  

In Singapore, transparency and accountability in corporate governance are considered to be important for promoting investor confidence and enhancing the reputation of the country’s capital markets. Nonetheless, while the ten largest listed companies in Singapore conduct board evaluations internally once a year, only five (50%) mentioned the usage of an external evaluator – with two doing so annually and three doing so once every three to four years.  

For all companies listed in Malaysia, the Malaysian Code on Corporate Governance issued in 2017 (“MCCG”) states that the board should undertake a formal and objective annual evaluation of its effectiveness. Furthermore, for Large Companies, the board should engage independent experts periodically to facilitate objective and candid board evaluations. The code also requires companies to disclose in their annual reports how the evaluation was conducted, including whether it was done internally or with the support of an external party, and the parameters used, such as the assessment of ‘fit and properness’.  

In the United Kingdom, there is a general expectation that listed companies will conduct regular evaluations of their board and disclose information about these evaluations in their annual reports. The UK Corporate Governance Code, applicable to listed companies, states that they should establish a formal and transparent procedure for evaluating the performance of the board as a whole, its committees, and individual directors. As a general rule, external independent reviewers are preferred.  

The Code also recommends that companies should provide a brief description of the evaluation process used, including the scope and frequency of the evaluations, in their annual reports. This information can help shareholders understand the steps taken by the company to ensure that the board is working effectively and making informed decisions.  

While the UK Corporate Governance Code is not legally binding, companies are expected to comply with its provisions or explain any deviations in their annual reports. The Financial Reporting Council, the UK’s regulator for corporate governance, can take enforcement action against companies that do not comply with the Code or provide inadequate disclosures.  

In summary, in the UK, there is a clear expectation for companies to conduct regular evaluations of their board and to disclose information about these evaluations in their annual reports, as part of a broader commitment to transparency and accountability in corporate governance.  

When comparing UK and Italy, for example, researchers Donatella Busso, Alain Devalle, and Fabio Rizzato from the University of Turin analyzed the largest 40 constituents of both Italy’s MIB index and the UK’s FTSE 100 index. Their view is that UK companies have a stronger “forward-looking” approach when compared to Italian companies, whereas disclosure provided by Italian companies is too often insufficient to enable stakeholder understanding of the process and its outcome.  

Next steps

In conclusion, the level of disclosure about board director evaluations varies widely across the world, reflecting different cultural, legal, and regulatory frameworks. However, in more developed markets, there is a growing link between the quality of Board evaluation, transparency of disclosure, and stakeholder confidence to make better-informed investment decisions.  

Chairs and board members should be courageous – conducting and openly disclosing a thorough board evaluation sends a strong message to a company’s stakeholder landscape. It creates a “tone from the top” that is self-critical, responsible, and accountable. 

Read Part 1