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The value of measuring biotech Board performance

Published on 04/10/18 at 12:06pm

Nick Stephens of The RSA Group discusses the importance of stopping to quantify the effectiveness of board members within life sciences, and offers guidance on how to manage this effectively.

Who guards the guards?                                                                              

This isn’t a new question; it’s been asked by every civilisation. The Greeks wanted to hold people in power to account and the Romans were worried about marital fidelity. More recently it was brought up to date by Professor Bob Garratt in his book Stop the rot: Reframing governance for directors and politicians, in which he explains why it’s critical to monitor, assess, and adjust senior leadership, including non-executive Board members to ensure the best future for the company.

Succession planning is critical

At the BIA UK CEO and Investor Forum, my colleagues and I led a discussion panel on succession planning and maximising the value of your business through talent management. In particular, the question of proactively monitoring and measuring Board performance provoked a lively and fascinating discussion.

To many people, the question and the answer seem obvious: “is it important to evaluate Board performance? Of course! Does your company monitor Board performance? Absolutely”.

When you dig a little deeper though, as the debate in the room revealed, Board evaluation is all too frequently done on a reactive basis revealing a weakness in approach that many, if not most, life science companies share. At our panel discussion, a leading investment banker and a VC agreed that if there’s a problem with the Board they fix it only when problems arise – that’s standard practice – they both agreed that it was also sub-optimal.

Risk reduction and opportunity enhancement

Before discussing how Board evaluation could be achieved, it should first be noted that the role of the Board applies at two opposing ends of strategy; risk reduction and opportunity enhancement. This holds true for both executive and non-executive directors’ roles and duties.

The role of the Board in relation to risk reduction should not be viewed as risk management, but more risk oversight, advising on appropriate risk management policies and procedures, and ensuring these are aligned with the company’s strategy and risk appetite. However, executive directors will also be tasked with the implementation of these policies, and therefore can be seen as having both risk oversight and management responsibilities. All Board members must ensure compliance, reducing risk to all shareholders and, in turn, to themselves as stakeholders in the Company.

At the other end of the spectrum, the Board must work towards opportunity enhancement for the Company. This function applies to both execs and non-execs, and relates to considerations ranging from increased profit, through employee health and wellbeing, to company reputation.

Short and long term assessment – a traditional approach

Board assessment may differ based on the subject of scrutiny (exec vs non-exec), complicating the creation of a standard assessment process for Board members. Also, the need for variation in assessment timeframe is not a new concept, as President Eisenhower noted in 1954 when he commented that ‘day to day life contains both the urgent and important’.

Company management, and to some extent the executive directors, must pay attention to the urgent, to facilitate the functioning of the business, which will likely be measured in the short term – ensuring codes are being applied correctly, that the AGM has taken place, and even that the company is not being sued.

It’s the job of all Board members to pay attention to “the important”, which is measured over longer timeframes. By measuring a director’s productivity over the longer term, progress can be measured on such criteria as succession planning, diversity and inclusion, environmental responsibility and sustainability.

“Opportunity enhancement” can be a harder one to measure, especially in the short term. Once metrics such as increase in share price, clinical trial progression, or simply ‘money in the bank’ (in pre-revenue life sciences organisations replace with “spend to time and budget”) have been exhausted, more creative measurements may need to be employed. There are also more long term factors, less closely linked to traditional company performance measures, that should be assessed. Because non-executive Board tenure is usually longer than employment tenure and the shorter time they spend “on the business” means that their performance must be measured in longer cycles – which again points to measurables like as employee retention, succession planning, training, diversity and inclusion being useful. Development of this nature can be encouraged, for example, by introducing gender quotas for board positions, as seen in Norway, and as implemented by us at The RSA Group. This supports both risk reduction and opportunity enhancement.

An alternative approach

Should we develop a more strategic process for Board evaluation and how can we do it?

Yes we should!

To simplify, we can consider that the Board exists primarily to look after the interests of the company. Crucially, it’s important to think of the company as a “person” (which, in law it is) rather than an organisation. This concept helps to focus the mind and recognises that a company has a single set of interests. Compare this to the other stakeholders who the Board also represents. Investors for example, the interests of whom may not always be the same as each other or even as the interests of the company itself. In Sweden, this kind of thinking is front and centre of every Director’s mind and this is reinforced when at the start of Board meetings the Directors’ charter is usually read out to remind all members of their purpose and obligations.

In recognising the Board’s obligations to the company, it becomes more straightforward to develop and agree ways to evaluate the performance of each of the members of the Board.

Independent members of Boards are very good at evaluating the performance of their executives but they are very often less good at reflecting on their own performance and, on the face of it, seem to have little incentive to turn the mirror on themselves. It is formally expected that every Company should have a formal process to evaluate the performance of its Board members at regular intervals, for example every three years on a public company Board, and this should be reassuring for its investors. A process like this also enables succession planning to be aligned with the changing needs of the company. We all know, for example, that a biotech company founder is often not the right person to be CEO five years later and we believe this kind of thinking must apply to non-execs too!

The long arm of the law

Although not widely talked about, there are seven equitable duties of directors included in the (UK) Companies Act 2006. These focus on corporate social responsibility and seem an obvious place to start when setting down concrete assessment for Directors. They are as follows:

  1. To act within their powers
  2. To promote the success of the company
  3. Duty to exercise independent judgment
  4. Duty to exercise reasonable care, skill and diligence
  5. Duty to avoid conflicts of interest
  6. Duty not to accept benefits from third parties
  7. Duty to declare interest in proposed transaction or arrangement

These duties are clearly written into the contract that all Board members must sign. Therefore, as well as conducting board assessment during their term, there may be value in making changes during the hiring and training process to ensure these laws are present in the forefront of Directors’ minds and remain there throughout their term.

How do you assess value in a Board?

CEOs and other executives’ performance is fairly easily measured by direct markers but it’s more difficult for non-execs to be assessed in the same way, especially as Board meetings can be infrequent and interactions with individual Board members relatively short. It is important to be thoughtful and to consider the particular needs of each company to put the right measures of success in place but there are some universal options to consider, including share price for public companies and exit/deal values for private companies. Everyone present was supportive of this and thought it important to take the discussion forward.

Not only does the company benefit from having in place the best Board possible, one dedicated to the company’s success, but Board appraisals can also improve the working relationship between a company’s Board and its management by increasing candor and creating a healthy balance of power/and scrutiny between the Board and the Chief Executive. It can also work as a motivating factor to other stakeholders in the company to perform, by demonstrating equality of assessment and unity of approach throughout the company from top to bottom ensuring that everyone is held accountable to the same standards and is working towards the same goals.

There was complete agreement at the BIA UK CEO and Investor Forum that reviewing Boards, asking if the Board is “fit for purpose” or whether it’s time to change, are vital questions.

There was also a lot of interest in how different rules in the UK, Europe and USA affect investment in companies and their valuations as well as how Boards differ internationally.

This felt like the beginning of an important discussion and we’ll be working with the BIA to take the debate forward and to help drive value for shareholders, employees and patients in our sector.

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