Board Performance Review: Not Just a Check-Up, But a Wake-Up Call for Modern Governance. Are you ready?

In the latest revisions in the UK Corporate Governance Code, it is evident that the Financial Reporting Council (FRC) has ignited a pivotal reformation with the shift from ‘board evaluation’ to ‘Board Performance Review’. A phrase we have always preferred to us at Lumorus. This change, effective from accounting periods beginning on or after January 2025, underscores a crucial reorientation from passive reflection to active, performance-centric analysis. The FRC’s “insistence” on such reviews occurring at least every three years, particularly for FTSE 350 companies, signals a clear intent: complacency is no longer an option in boardrooms.

This renaming by the FRC is far from a cosmetic alteration. It’s a deliberate shift to reframe the role of the board from passive oversight to active performance drivers, indicating a more rigorous, continuous approach to modern corporate governance that mirrors the dynamism of the modern business world.

I endorse this change, as it aligns with our understanding that a board’s performance, becomes a strategic imperative, not just a regulatory hoop to jump through. This I hope will incentivise boards to push beyond compliance to performance, with a clear emphasis on delivering tangible outcomes that resonate with the needs of stakeholders and society at large. For us at Lumorus who conducts board performance reviews, this revision mirrors our conviction that the role of the board must transcend ceremonial oversight, evolving into a dynamic force that propels the organisation forward.

The intent of performance reviews, is to ensure that boards are not just meeting benchmarks but are also generating value, fostering a culture of integrity, and embracing diversity, a triad that, according to the FRC, is fundamental for sustainable success. Board Performance Reviews are poised to bring about a robust assessment of the board’s composition, its approach to risk management, internal controls, and most critically, its ability to steer the company’s long-term strategy. This is well overdue as some boards have just been doing this as a tick box exercise.

The revised code underscores the necessity for boards to undertake a formal and rigorous annual review of their effectiveness and performance, with an externally facilitated review at least every three years, particularly for FTSE 350 companies. This ensures that boards do not become complacent, instead continuously striving for improvement in their governance roles. The review process is designed to be thorough, challenging boards to reflect on their composition, diversity, and how effectively they work together to achieve business objectives.

For instance, the Code explicitly calls for a description of how the board has monitored and reviewed the effectiveness of the risk management and internal control framework, which must include a declaration of effectiveness of the material controls as at the balance sheet date.

To illustrate the impact of this revised approach, consider the case of a leading pharmaceutical company that underwent a Board Performance Review. The review highlighted a lack of expertise in digital innovation, which was subsequently addressed through targeted board appointments. This led to better understanding and implementation of strategic initiatives that capitalised on digital health trends, positioning the company at the forefront of the industry.

Another case study is the transformation observed in a renowned retail conglomerate post – Board Performance Review. The review’s findings led to a strategic overhaul that not only diversified the board but also integrated robust ESG (Environmental, Social, and Governance) criteria into their core strategy. This pivot was not just about reputation management; it was about aligning the company’s trajectory with the imperatives of a rapidly evolving marketplace, a planet in peril and meeting ESG disclosure regulations.

Not surprising, the FRC has placed substantial emphasis on the board’s accountability for effective internal controls. The 2024 Code demands transparency and investor confidence enhancement by mandating a declaration of effectiveness of the company’s internal controls, further cementing the board’s role in safeguarding the company’s integrity. Boards need to begin understanding this and putting in place the infrastructures needed so they can be confident when giving this declaration.

The FRC’s revisions also address the imperative of engagement with a broad range of stakeholders, reflecting a clear expectation that boards must operate within an ecosystem of accountability, not in corporate isolation.

So, what should boards look for in the outcomes of these reviews?

• Tangible change. This includes an alignment of board diversity with company strategy.
• An enhanced risk management framework responsive to emerging risks.
• A leadership that is not only diverse in its makeup but also in thought, challenging the very fabric of traditional governance norms.
•   A clear understanding of the board’s skills, strengths, and areas for development.
  
  
• A clear and robust succession planning process.
  
  
• A deeper alignment of the board’s composition, with the long-term strategic goals of the company.

Boards must now rise to this challenge, as the benefits of performance reviews are clear: enhanced strategic clarity, improved risk management, and a board composition and skill sets that is fit for the future.

At Lumorus, we have always done Board Performance Review or Governance Reviews, as we believe this as a critical step towards fostering a culture of excellence and accountability in modern corporate governance. It is a process that holds the potential to refine the effectiveness of boards, thereby contributing to the sustainable success of businesses in an increasingly complex global market. The question stands – is your board ready to embrace this new era of modern governance?

I believe that this shift will lead to boards that are not only more reflective of our times but also more robust and responsive to the rapid changes that define them. The question remains, are Boards ready to embrace this change and ensure they are not just checking boxes but truly performing at the peak of modern governance?

Board Performance Reviews are set to become a cornerstone of the modern governance movement. It demands of boards not just introspective rigor but a proactive stance on issues that define contemporary business – from climate change, employee well-being and social justice to technological disruption. For businesses and consultancies like Lumorus delivers board performance reviews for organisations, the revised UK Corporate Governance Code is not just a guideline; it’s a manifesto for change, urging boards to step up and be the vanguard of a new, responsible, and resilient business ethos.