In a noted move towards corporate transparency, a recent study group of public company directors and a few academics identified seven gaps on their own board room turf: purpose, culture, leadership, information, advice, debate, and self-renewal. The report goes on to state boards should “develop policies and practices to ensure ongoing evaluation and education of current directors, using the services of independent third-party facilitators when needed.” Click here for the report. With this focus in mind, corporate counsel can provide guidance for boards desiring a more robust board evaluation process.
Fundamentally, a board evaluation is an opportunity for boards as a collective body to increase their effectiveness based on feedback the evaluation provides. Continuous improvement and development of board and board committee processes and procedures is key to ensuring board effectiveness. In today’s world, it is vital that a board of directors can measure its strengths and its opportunities for improvement. Board evaluation sets the foundation to purposefully identify and surmount barriers that impede effectiveness. The goal is to receive solid, actionable input.
In addition, it is a NYSE listing requirement that boards, along with their nominating/governance, compensation, and audit committees, perform annual evaluations. NASDAQ highly recommends board evaluation. Annual board evaluations have become the norm for boards in many countries, with nearly all listed companies in Canada, France, and the U.K. conducting some sort of evaluation each year. The practice is also widespread in Italy and Spain, and is gaining attention in many Asia-Pacific markets. Even if a company is not subject to any listing requirements, shareholders and stakeholders are asking questions and evaluating the company as though it is subject to the same requirements. Shareholders, community, and employees are expecting and even presuming the board is using an objective approach to hold themselves and the company to the “best business practices.”
Key Point: The progressive board looks for the time and resources spent on board evaluation to align with their philosophy of continuous improvement and reflective intelligence.
At the very least, a board evaluation will focus on key functions of the board, provide a “gap” analysis that draws weak areas to the surface, provide disbursement of responses, and identify the “tone” of the responses. Board evaluation is most meaningful as a productive activity for the board when it focuses on board development rather than compliance. This requires knowledge not only of board functions, roles, and responsibilities, but also how all this information links to the current business/industry trends and market changes. In addition, a dynamic board evaluation moves the board to a higher level of performance on business issues while enhancing group dynamics. Overall, a board evaluation can transform a group of strong individuals to a collective body of focused board members who become invaluable to the CEO, senior management team, and all stakeholders. A skillful board evaluation can cause directors to say “I’m glad we did that.” This kind of skillful evaluation is produced from:
Clear board objectives;
Reports and feedback from a knowledgeable third-party facilitator where needed;
Facilitated follow-up discussions with the board to identify board development actions;
Integration of the board evaluation into strategic leadership and planning; and
Insights that lead to greater team effectiveness.
Deciding Whether to Use a Third Party Facilitator
As the board embarks on the evaluation process, it is important to decide whether to use a third party facilitator. Employing a third-party consultant usually allows for greater objectivity and credibility, not least as a means of satisfying shareholders that an independent review has been carried out. The board can choose the level and the areas of engagement for any board consultant. At times the third-party facilitator may only help with question development, or simply analyze the data, or the facilitator may be assigned to run all aspects of the board evaluation. The board may want to start with a small project, such as evaluating one of the committees, to become more familiar with the consultant and process. After a trust level is established, the board can increase the engagement level.
A board may not need a consultant for every annual evaluation, or while the board’s agreed-upon action items from previous board evaluations are still in process. The board would probably not use a facilitator when the board chair has only been in the position for a short period of time, or when the board has just recruited, or is in the process of recruiting, a number of new directors.
To choose the right methodology and provide a balanced approach, the board and corporate counsel should also understand the risks and rewards of a board evaluation.
Risks of Engaging in a Board Evaluation
Some examples of risks that I have seen from board evaluations, and ways to alleviate those risks, include:
Risk: Consultant misuse of data.
Remedy: Ask how and where data is stored, and for how long. If answers are unacceptable, consider using the third-party facilitator just to analyze data and provide feedback.
Risk: Loss of collegiality and negativity as a result of candidate feedback.
Remedy: Review the past methods of board evaluation and assess the level of feedback given to the board. Consider a hybrid methodology that includes a questionnaire accompanied by a self-evaluation for each director.
Risk: Directors’ perception of performance is not in line with evidence that suggests otherwise.
Remedy: Consider hiring a third-party facilitator to provide feedback and possible coaching sessions with the board.
Rewards of Engaging in a Board Evaluation
Examples of rewards that I have seen from board evaluations include:
Provides a timely platform for directors to voluntarily resign, and sharpens the discussion of the experience, expertise, diversity, independence, leadership ability, and character needed by the new directors to be recruited;
Identification of new or refined actions for risk reporting to the board, including crisis and reputational management;
Clarity and enhancement of management reporting practices that affect the board; and
Enhanced board effectiveness with identification of board dynamics and facilitation of discussion to ‘clear the air.’
In today’s world, corporations are establishing processes that have an emphasis on collective wisdom for competitive advantage. This concept can be actualized at the board level through the board evaluation process, even though evaluation techniques are still in their infancy. The process can result in high-level thinking in a structured, organized manner, and lay the foundation for continuous improvement.
For more information and/or studies with board evaluation data, see:
Board Evaluation: Creating Strategic Performance and Effectiveness
PWC: Insights from the Boardroom 2012
Deloitte: Directors’ Alert: 12 Issues for 2012
Tracy E. Houston, M.A., is the President of Board Resources Services, LLC. She is a refined specialist in board of directors consulting and executive leadership with a heartfelt passion for rethinking performance, teams, and the boardroom. She is the creator of the only digital series for corporate governance—Board Guru™ eBooks.