The why, when and how of director performance appraisals

For a board to be truly effective, it must evaluate not only its collective performance but also the contributions of individual directors.

Well-structured individual performance appraisals provide directors with constructive feedback on their strengths and areas for development, fostering personal growth and enhancing overall board effectiveness.

These evaluations also help identify relevant professional development opportunities and broader board development needs.

This article explores the importance of individual director performance appraisals, when they should be conducted, and best practices for implementation.

Why conduct director appraisals?

Many governance standards mandate regular performance evaluations of both the board as a whole and its individual members. For example:

• ASX Corporate Governance Principles and Recommendations – Recommendation 1.6: A listed entity should have a process for periodically evaluating the performance of the board, its committees, and individual directors. The entity should disclose whether a performance evaluation was undertaken in the relevant reporting period.
• APRA Prudential Standard CPS 510 – Governance (Paragraph 27): The board must have procedures to assess, at least annually, the performance of the board as a whole, individual directors, and board committees.

Directors of APRA-regulated entities must also meet APRA’s fitness and propriety standards, which include ongoing assessment of their suitability and performance.

Even for boards not subject to these regulations, regular performance appraisals are considered good practice, helping directors receive feedback and refine their contributions.

Benefits of individual director performance appraisals include:

1. Improved board effectiveness

• • Ensures that each director is actively contributing to the board’s functions
  • Identifies strengths and areas for development to enhance overall board performance

2. Accountability and transparency

• • Encourages directors to be accountable for their roles and responsibilities
  • Applies the same standard of performance reviews to directors as it does to employees
  • Demonstrates a commitment to governance best practices to stakeholders and regulators

3. Professional development and growth

• • Identifies areas where directors may need additional training or support
  • Provides constructive feedback to directors, helping them to continually improve

4. Succession planning

• • Identifies potential gaps in expertise or leadership that may impact long-term governance
  • Helps plan for director succession

When should a board conduct individual appraisals?

While individual director performance appraisals are commonly included in annual board evaluations, they can also be conducted:

• separately to the overall board evaluation to focus specifically on individual contributions
• at the beginning of the year to encourage directors to set goals for their contributions
• six months after a new director joins the board to provide early feedback and guidance

It is important to distinguish regular appraisals from performance management actions, such as addressing breaches of the directors’ code of conduct, which should be handled immediately by the Chair.

How should director appraisals be conducted?

Self-appraisal

As a minimum, each year the Chair should seek to have a one-on-one discussion with each director regarding matters including their performance, tenure, professional development needs and views on the operation of the board. The Deputy Chair / another nominated director should have a similar discussion with the Chair.

A more structured approach involves directors completing a diagnostic self-assessment before their discussion with the Chair.

For example, Directors Australia’s Directing for Performance™ framework encourages directors to reflect on:

• what skills, knowledge and experience they contribute to the board performing its functions, and
• how their personal attributes and behaviours best enable them to contribute their skills, knowledge and experience.

Self and peer appraisals

A more rigorous approach involves combining self-assessments with peer feedback, using a structured diagnostic tool.

The advantage of this approach is more fulsome feedback for each director. In our experience, this can be particularly useful for boards that are established.

Where boards have only been recently established or have not yet undertaken an externally facilitated board evaluation, it can be more constructive to first conduct a director self appraisal.

What outcomes can you expect?

As with any evaluation process, the key to success lies in effective implementation. To ensure appraisals lead to meaningful improvements, boards should document:

• the key items discussed between the Chair and director in the appraisal discussion
• agreed improvement areas, and
• agreed development activities for the director.

This record should be maintained by the Chair and used as a reference for future appraisals.

By implementing well-structured individual director performance appraisals, boards can foster continuous improvement, accountability, and stronger governance practices.

Directors Australia works with the boards of publicly listed, government, private, APRA-regulated and not-for-profit organisations to achieve real, ‘best fit’ corporate governance appropriate to the organisation’s nature, and thus enhance board and organisational performance. As part of our service offering we facilitate individual director performance appraisals.

To learn more about our board and governance advisory services, contact us here.