By CHONG KIAN SOON

Most Board chairmen would say that they do indeed track the
performance of directors and of course the ultimate performance
appraisal is done by the shareholders when they re-elect or
reject a director.  The time for such subjective measures,
however, is passing fast.  A more rigorous and transparent
appraisal process is being demanded by investors around the
world. Unfortunately, directors seem reticent to go down the
formal appraisal track.
 
From the directors' point of view, there are some valid
difficulties in initiating director performance appraisals.  The
main obstacle remains the sensitivity of the issue.  As with any
appraisal, there are bound to be some hard facts to face,
directions to change and redundant practices to be removed.  So,
how will directors interpret the results of the appraisal and
what would be the impact on their credibility?  These are the
real questions that directors have to face and there is natural
apprehension that it may lead to negative or counter productive
reactions.  In addition, if not handled diligently, formal
appraisals may create friction in the boardroom or friction
between executive and non-executive directors.

The questions of relevant measures and objectivity of the
appraisal process are also very real issues.  As it is, there is
very little market and industrial benchmarking information on
directors, although many directors are not short of
self-assessment checklists.  In addition, unavoidably directors
may tend to "go-easy" in appraising their peers in anticipation
that they will be appraised by other directors.  This defeats
the purpose of the appraisal.

In the case of family owned and led public-listed companies, the
challenge for pushing through an appraisal is even harder.
There is strong bonding between these family members in the
course of building their business empire with a strong mutual
trust among themselves.  Such experience is already a de facto
appraisal of performance and trust.  Therefore, any form of
formal appraisal could be viewed as unnecessary.  Negative
appraisal feedback could be interpreted as distrust and taken
quite personally.  So, to prevent disharmony, these directors
would rather avoid any form of discussion on director appraisal.

Based on the above scenario, does it mean that directors are not
favouring any form of appraisal?  If this is the case, should
directors stick to the flat increment policy based on the
company bottom line?  The answers are no as some executive
directors who are the main subject of appraisal think otherwise.
They also think that too simplistic a remuneration approach will
not create desirable results for them.

Most of the executive directors are open to criticism.  They
hope that their peers can share their frank comments with them.
So, if the non-executive directors avoid providing the
appraisal, the executive director can only turn to his
subordinate for feedback.  Such upward appraisal is not very
effective as usually subordinates will withhold some negative
truths about their directors to avoid retribution.

On the other hand, top performing directors want appraisals to
be carried on them as this is the opportunity to bring their
compensation into line with their contributions and performance.
They view the bottom line appraisal approach as insufficient.
Their leadership in social contribution, market share, business
innovation, break-through and foresight is too significant to be
ignored.  It is important to evaluate these aspects, in order to
reflect the full worth and "market value" of a director.

Most family-run companies realize that with the increase in
governance responsibilities and accountabilities, there is a
compelling reason for them to install the necessary director
appraisal mechanism.  This would help to attract new talent to
join their corporation and bring greater professionalism into
their organization.
  
The wind of change in directors' performance, appraisal and
remuneration is apparent around the world.  The Enron disaster,
the Parmalat debacle and the shareholder activism in Walt Disney
and Royal Dutch/Shell Group that led to the removal of unpopular
chairmen were just some of the changes that point to a need for
better corporate governance.

It is apparent that directorships can no longer be viewed as a
prerogative or a privilege, but they should be treated as a
professional appointment.  A natural result of a professional
appointment is appropriate remuneration and performance
appraisal.  So, as the questions about performance are getting
asked, we can expect similar questions about remuneration.
Boardroom appraisal and remuneration is expected to be the
latest "wave" of corporate governance reform.

One of the recent changes was the liberalization of Bursa
Malaysia Securities Berhad's ESOS rule whereby non-executive
directors may now participate in these.  Such change is timely,
as there were frequent complaints by non-executive directors
that the current fee based remuneration is not commensurate with
their responsibilities.  Hopefully, the new ESOS rule will
attract more qualified non-executives.  However, companies that
plan to implement this new option rule have to be cautious of
the pitfalls that this incentive opens up.  Participation in
ESOS may lead to short-term self-motivated decisions, which are
not in line with the long-term interest of the shareholders.  To
guard against this, the Exchange has set a minimum period of
moratorium during which the non-executives may not dispose of
their shares.

We can expect more changes in appraisal mechanisms and these
will lead to further change in remuneration structures for
directors.  In this respect the roles of nomination and
remuneration committees are critical and the three main points
that these committees need to agree in advance with their board
are the approach for appraisal, the measurements for appraisal
and the reward for directors' achievement.

On the other hand, the timing and frequency of such appraisal
and revision of rewards need to be addressed too.  The best
practices of the Malaysian Code on Corporate Governance
suggested that board appraisal should be conducted annually.
This practice is in line with the usual annual director
retirement by rotation and re-election requirement.  However,
one of the least publicized board appraisal issues is the audit
committee appraisal.  According to the Listing Requirement of
Bursa Malaysia Securities Berhad, boards should appraise the
performance of their audit committee at least once every three
years.  Since these revamped listing rules were introduced three
years ago, the audit committee appraisal requirement has become
one of the key agenda items for most of the listed companies in
2004.

Chong Kian Soon is the Managing Director of IA Capital, a
specialized internal audit consulting firm.  For more details,
please call MIM Customer Service at Tel: 603-21654611, e-mail
enquiries@mim.edu or visit www.mim.edu.