Determinants of the quality of external board evaluation in the UK

• DOI: https://doi.org/10.1108/CG-06-2020-0256
• Published date: 13 July 2021
• Date: 13 July 2021
• Pages: 1362-1392
• Subject Matter: Strategy,Corporate governance
• Author: Abdus Sobhan,Emmanuel Adegbite

Determinants of the quality of external

board evaluation in the UK

Abdus Sobhan and Emmanuel Adegbite

Abstract

Purpose –This study aimsto examine the influence of the following onthe quality of externally facilitated

board evaluation,namely, the timing of adoption of external board evaluation,type of evaluators and the

independenceof external facilitators.

Design/methodology/approach –The statementson board evaluation in annual reports of a sample of

FTSE 350 companies were content analysed to measure the quality of externally facilitated board

evaluation. This paper then used descriptive analysis and inferential statistics to demonstrate the

possible association betweenthe timing of adoption, as well as the type and independence of external

facilitatorsand the quality of externally facilitatedboard evaluation.

Findings –Results reveal some effectsof the timing of adoption, as well as the type and independence

of externalfacilitators on the quality of externallyfacilitated board evaluation.

Practical implications –Shareholdersshould be aware of the timing of adoption, as well as considerthe

types and independenceof external facilitators,given their influence on the quality of externallyfacilitated

board evaluation. Regulatory authorities should provide more specific guidance on what types of

professional organisations can be engaged as external facilitators and on the implementation of

externallyfacilitated board evaluation, to promoteits quality.

Originality/value –Several studieshave provided theoretical accounts on how board evaluationshould

be conducted to ensure its effectiveness. However, there is a dearth of empirical literature, which

examines the qualityof externally facilitated board evaluation.This study develops a quality measurefor

externally facilitated board evaluation and shows the effect of the timing of adoption, types and

independence of external facilitators on its quality. The study forges ahead institutional theorising of

externalboard evaluation.

Keywords United Kingdom, Content analysis, Institutional theory, Board evaluation,

External facilitators

Paper type Research paper

1. Introduction

Board evaluation in the UK has received heightened attention in recent years after the

legitimacy, integrity and accountability of the board directors were seriously questioned,

following the financial malfeasances by many large companies (UK House of Commons

Treasury Committee, 2009). While self-evaluation of the effectiveness of the board of directors

and its committees has long been seen to enhance the accountability of the board of directors

(NYSE, 2009), scholars continue to highlight the risks of self-evaluation being used as a self-

serving exercise (Conger and Lawler, 2003), given its minimalist approach (Long, 2006). To

overcome these limitations, an externally facilitated evaluation of the board of directors has been

recommended (Nordberg and Booth, 2019;Walker, 2009;Kiel and Nicholson, 2005). For

example, the Financial Reporting Council (FRC) incorporated the provision of externally

facilitated board evaluation into the UK corporate governance (CG) Code –2010 based on the

recommendation of Walker Review (FRC, 2010). The FRC has kept this provision unchanged in

subsequent revisions of the codes (FRC, 2018)[1] and many countries promptly embraced

externally facilitated board evaluation into their new CG codes (Nordberg and Booth, 2019).

Abdus Sobhan is based at

the Department of

Accounting and Financial

Management, Newcastle

Business School,

Northumbria University,

Newcastle upon Tyne, UK.

Emmanuel Adegbite is

based at Nottingham

University Business School,

University of Nottingham,

Nottingham, UK, and

Business School, James

Cook University,

Singapore, Singapore.

Received 23 June 2020

Revised 19 January 2021

Accepted 18 April 2021

This paper is developed from a

research project fundedby the UK

Committee of Department of

Accounting and Finance (CDAF)

early-career researchbursary.

We, therefore, highly appreciate

the financial assistance of the

CDAF. An earlier version of this

manuscript was presented at the

British Accounting and Finance

Association Conferencein

London, UK in 2018 and the

Financial Reporting and Business

Communication Conferencein

Bristol,theUKin2016.Wealso

greatly appreciate the helpful

comments of Professor Niamh

Brennan, Professor Christopher

Napier, Professor Emeritus Pauline

Weetman and Professor PhilipJ.

Shrives and other participantsin

the above-mentioned two

academic conferences on

different versions of this paper.

Particular thanks got oMr Jamie

Hurst, who assisted theauthors

with the coding of the data for this

article.

Funding information: The UK

CDAF early-career research

bursary. This bursary has no grant

number.

PAGE 1362 jCORPORATE GOVERNANCE jVOL. 21 NO. 7 2021, pp. 1362-1392, ©EmeraldPublishing Limited, ISSN 1472-0701 DOI 10.1108/CG-06-2020-0256

However, prior studies on external board evaluation have only developed frameworks (Nordberg

and Booth, 2019;Minichilli et al., 2007;Kiel and Nicholson, 2005) or recommended using the

balanced scorecard (Epstein and Roy, 2004a;Epstein and Roy, 2004b) to evaluate the

performance of the board of directors. Few other studies have examined the usefulness of the

balanced scorecard in evaluating board performance and offered mixed evidence (Aly and

Mansour, 2017;Northcott and Smith, 2011;Ling et al., 2009). In addition, very scant empirical

studies in this space have used a limited number of survey or interview responses to understand

the types of board evaluation conducted by companies and their possible consequences

(Booth and Nordberg, 2020;Rasmussen, 2015;Dulewicz and Herbert, 2008). However, there is

a paucity of empirical research that examines the quality of externally facilitated board

performance evaluation and its possible determinants.

Against this gap in the literature, the objectives of this paper are twofold. Firstly, we ascertain

whether the timing of adoption of externally facilitated board evaluation influences its quality.

Secondly, given that the external facilitators are at the centre of externally facilitated board

evaluation, we examine whether the types and independence of external facilitators influence

the quality of board evaluation. Our study is informed by institutional theory, which provides a

useful theoretical lens to explore practice variation in CG mechanisms (Cuomo et al., 2016;

Zattoni and Cuomo, 2008;Adegbite, 2010). For instance, Zattoni and Cuomo (2008) has applied

the institutional theory to explain the differences in the scope and stringency of CG codes

adopted by civil law and common law countries. Institutional theory has also been used to

explain differences in knowledge, expertise and interests of professional firms and how these

lead to variation in their professional work (Muzio et al., 2013;Suddaby et al., 2009).

Our analyses were performed using data from FTSE350 companies between 2009–2013,

given that only the FTSE350 companies are subject to the provision of externally facilitated

board performance evaluation [2]. Based on the year of the first-time adoption of the

externally facilitated board evaluation i.e. during 2009–2013, we classify sample firms into

five-year groups. Similarly, we classify sample firms into seven and three categories based

on the types and independence of external facilitators, respectively. An exploratory

approach was used to determine the types of external facilitators. The difference in the

quality of externally facilitated board evaluation amongst these firm groups was then tested

using inferential statistics. We measure the quality of externally facilitated board evaluation

across three dimensions using content analysis (Krippendorff, 2012;Neuendorf, 2002)of

the statement on board evaluations in annual reports. The findings suggest that there is

variation in the quality of externally facilitated board evaluation depending on the timing of

adoption by firms. Furthermore, the quality differs amongst the group of firms categorised

based on the types and levels of independence of external facilitators. However, this

variation is not always statistically significant. Consistent with institutional theory, our study

concludes that the timing of adoption and the characteristics of external professional firms

create some variation in the quality of externallyfacilitated board evaluation.

Our study contributes to the literature on board performance evaluation in the following ways.

Firstly, we provide evidence on the influence of the timing of adoption of externally facilitated

board evaluation on its quality. Therefore, this study responds to the call of Cuomo et al. (2016),

who invited scholars to explore practice variation in CG mechanisms across firms over time

following institutional theory. Secondly, we contribute to the limited empirical literature on board

evaluation (Booth and Nordberg, 2020) by showing some association between the types and

independence of the external facilitators, and the quality of board evaluation. While many

scholars (Minichilli et al., 2007;Long, 2006;Kiel and Nicholson, 2005) and policy initiatives (FRC,

2010) maintained that the characteristics and independence of external facilitators are critical,

no prior study investigates the effect of types and independence of external facilitators on the

quality of board evaluation. This study forges ahead discussions in this area. Finally, our findings

are relevant to policymakers and stakeholders in the UK and countries that have incorporated

externally facilitated board evaluation. Shareholders should especially be aware that

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