Board Evaluation and It's Effect on Board Composition and Board Work

Abstract

In this paper, the effect board evaluation has on the board’s composition and work is studied. Board evaluation is considered vital for the development of the board’s work, which in turn is essential for the development of the company. The study is performed on companies listed on the NASDAQ OMX Nordic list and the Oslo Stock Exchange as a questionnaire study, where the chairperson was asked to grade (on a scale from 1 to 5) how satisfied she/he was with the different aspects of the board’s composition and work. Of the 157 responding chairmen, 120 (76%) were chairing companies that employ a board evaluation process. The chairperson was often the key person in these evaluation and most of the evaluations are delivered verbally to the nomination committee. Of the 120 companies with board evaluation, 20 companies use only informal discussions as the evaluation method. The remaining 100 use at least one of the methods: individual open/anonymous questionnaire or interviews. Furthermore, the responses were tested with ordered probit model for the effect of board evaluation on the board’s composition and work. The results show that board evaluation affect positively, according to the chairperson perception in all asked aspect (with one exception) of board’s composition and work, with significant results in four aspects: first, better decision-making; two, better discussion of short-term development; three, more actively discussion of business strategy; and four, better understanding of non-financial objectives. Last, the results of the study do not show that board evaluation affect the company’s financial performance (proxy with Tobin’s Q, ROA or ROE).

Keywords: board evaluation, board effectiveness, corporate governance, nominee committee, chairman

JEL Classification: G34, L20