80% of large companies conducting board evaluations, says KPMG report

KUALA LUMPUR: The practice of evaluating board effectiveness has gained recognition in Malaysia.

More than 80% of large companies have conducted externally facilitated board evaluations or have put in place plans to undertake one in the forthcoming years.

In a statement today, KPMG Management & Risk Consulting Sdn Bhd said this situation underscores the importance these companies place in improving boardroom governing processes to help them tap into the accumulated expertise and strategic potential of their boards.

In its latest report, entitled “Board Evaluation – Mutual Admiration or Thoughtful Reflection?”, released today, KPMG explores the thinking, approaches and practices associated with board evaluation in Malaysia.

It was put together using input from 581 listed companies in Malaysia as well as anecdotes and first-hand insights gathered from the marketplace.

The study revealed that the boards of large companies (those with market capitalisation of RM2 billion or above) have a majority of independent directors to foster greater checks and balances in the boardroom, said KPMG.

“It was also noted that 82% of independent directors in the companies have not exceeded the nine-year tenure yardstick. This is aligned with the notion that long tenures of independent directors and familiarity may erode the board’s objectivity,” it said.

KPMG Malaysia managing partner Johan Idris said the board evaluation process has been revitalised over recent years. This is reinforced by the introduction of regulatory enumerations which call for periodic externally-facilitated evaluations.

“Many directors have shared anecdotes with us that after they concluded board evaluations, frictions during meetings were reduced, their boardroom information architecture improved, and they have diffused ambiguities between their jobs and that of management, as well as paid more attention to long-term corporate strategy,” he said.

In the same sense that an effective board evaluation can benefit the company, the opposite can also be inferred when a board evaluation is not properly conducted.

KPMG noted that minute performance problems that are not addressed through a proper approach to evaluation could lead to serious failures in corporate governance over time.

Kasturi Nathan, KPMG’s head of governance & sustainability in Malaysia, said the evaluation process not only opens a window of opportunity for self-reflection, but can also serve as a catalyst for driving positive change in companies.

“In an age where directors are constantly challenged to raise their game, many enlightened companies have come to realise that the board evaluation is an opportunity to understand the pathology of the board and board committees.

“It also helps assess if individual directors are able to discharge their duties,” she said.

Together with the release of their report, KPMG announced that they are currently developing a Board Effectiveness Evaluation Software powered by analytics to automate the manual processes involved in a board evaluation exercise.

The software aims to iron out some of the wrinkles prevalent in a conventional board evaluation exercise such as the need for an extended amount of time in completing the assessment instruments, provision of uniform rating for all questions in the instruments and limited analytics in drawing up the results.

“The idea to develop this software stems from KPMG’s explorations in leveraging technology to improve efficiency in conventional practices.

“I’m confident that the proliferation of technology offers plenty of opportunities for us to enrich the board evaluation process and enhance good corporate governance in Malaysia,” she added.