Corporate Governance, Insights

Board Evaluation: An Effective Tool of Corporate Governance and Sustainability

Effective and proactive Boards play a crucial role in the facilitation of a sustainable business. One essential tool for corporate sustainability is periodic board evaluations. When rightly conducted, board evaluation critically assesses the capacity and capability of members of the Board, identifies their strengths and weaknesses, and areas for improvement. It may also provide the basis for the invigoration of a Board with new members who possess certain relevant skills and fresh perspectives required to advance a company’s business and operations. This article explores the vital role of board evaluation in ensuring the effectiveness of the Board, and its benefits to the success and sustainability of a business. It also highlights the role of the board in balancing the interests of management and the stakeholders.

Agency Costs and Stakeholders’ Protection
Laws and regulatory authorities generally play crucial roles in the protection of investors. The need to protect investors is even more apparent in light of the concept of separation of the ownership and control of companies, which usually results in agency costs. Agency costs in this context, refers to potential conflict of interest or cost that arises from the competing interest between shareholders and directors or management of a company. This may result from situations where directors and managers fail to act in the best interest of a company, leading to financial and non-financial expenses.

Corporate governance seeks to diminish agency costs in organizations, which is more prevalent in public companies. Public companies usually comprise hundreds or even thousands of shareholders whose investments can be compromised by the decisions of the board and senior management. The effectiveness of board evaluations and effective corporate governance mechanisms employed within the Company may help to control the competing interests between the management and shareholders. Companies are expected to create a mechanism that enables non-executive directors to control and monitor the activities of the management team…

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