How to Conduct a Proper Board EvaluationBy: Paul C. Winum
As the year draws to a close, members of board nominating and governance committees are preparing for the annual board evaluation required for publicly traded companies listed on the NYSE, FTSE, and Nasdaq stock exchanges. Here are some suggestions for doing good board assessments that can help your board add even more value in the new year.
With the increasing pressure on boards to deliver on their governance and oversight responsibilities, annual board evaluations have the potential to aid boards in raising the positive impact they can have on the companies they direct. Unfortunately, too often these evaluations are done in a cursory, check-the-box manner that doesn’t result in concrete actions that improve board effectiveness. In fact, 620 directors who responded to a survey that RHR International did in collaboration with the New York Stock Exchange Governance Services indicated that over half of the evaluations their boards conducted were not very effective.
There are many reasons to undertake a proper board evaluation. Do-it-yourself approaches can be compromised by self-justifying confirmation and halo biases. The lack of proper evaluation criteria can be a stumbling block, resulting in an insufficient understanding of issue complexity and nuance. And there can be a fear that full candor could damage relationships among directors.
With that as background, here are eight steps that boards can take to generate constructive, actionable feedback about how they can improve.
1. Use both a survey and interview method. Surveys can generate data that signal areas of strength and areas for improvement. Interviews offer the opportunity to more deeply assess and understand the subtleties and nuances of complex governance and board effectiveness issues.
2. Include input from both directors and members of the management team. Members of the management team who interface with directors and committees of the board are an important stakeholder group with direct experience of how the board is adding value. Including their input in a board evaluation offers a useful perspective to the board that can also strengthen the partnership between the board and management team.
3. Ensure complete anonymity. The validity and utility of any survey or interview data is immeasurably enhanced when directors and management team members can offer their assessment with full confidentiality.
4. Start with an explicit definition of the board’s purpose and value proposition and address the key functions related to the value proposition. A good evaluation process assesses a board’s actual value contribution against its aspired value proposition. The primary board functions of fiduciary oversight, risk management, committee functioning, policy and capital allocation decisions, as well as CEO and mission critical role succession should also be included.
5. Provide feedback to individual directors. Board members are generally high achieving, performance-oriented executives who want to add value and appreciate feedback about how they are doing so if delivered in a constructive manner.
6. Agree upon areas for improvement and an action plan. The evaluation process should result in agreements about how the board’s value can be increased and concrete steps to enhance its effectiveness should be made.
7. Execute the action plan. While doing a board evaluation does check the compliance box, a good nominating and governance committee chair makes sure the plan gets implemented and tracks execution progress.
8. Use an outside assessor. Best practice these days recommends using an objective third-party expert to conduct a board evaluation every two to three years. That can also provide a benchmarking of best governance practice and counter confirmation and halo-bias a board may have.
Following these suggestions will result in higher quality and more useful data that can help your board improve how it operates and contributes to the success of the organization and shareholders you are serving. It will also lead to a more rewarding set of experiences for directors and members of management as they act in partnership to lead the company.