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Oct. 2012

October 2012
From the Colorado Bar Association
Business Law Section

Ed Naylor, Editor
To view pdf of this newsletter, click here.
In this issue...
 
Board Evaluations—Getting it Right
By Tracy E. Houston, M.A., President of Board Resources Services, LLC

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.

Business Law Section Activities
CBA Business Law Section on LinkedIn

Recently, the CBA Business Law Section set up a LinkedIn Group to facilitate discussion of business law and practice-related issues. The LinkedIn Group is a great place to share relevant information with other Colorado business lawyers, to post (or view) job opportunities, and to follow the activities of the Business Law Section. The Group already boasts 136 Members. Please check out and join the Business Law Section LinkedIn Group. We welcome your participation.

Bankruptcy Subsection

Save the Date—Farewell to Brad Bolton—Wednesday, Dec. 12

Please join us for a reception to thank Brad Bolton for over three decades of dedicated service to the bench and bar. The reception will be held from 5 to 7 p.m. at the CBA-CLE offices, 1900 Grant Street, 9th Floor reception area.

Bankruptcy Case Law Update—Thursday, Nov. 8

The Bankruptcy Subsection will host a Case Law Update from 4:30 to 6 p.m. at the CBA offices. This program has been submitted for one general CLE credit. There is no cost to attend; food & drink will be provided. Please RSVP to 303-860-1115 x727, or email lunches@cobar.org.

Financial Institutions Subsection

Lender/Creditor Issues—Tuesday, Nov. 13

On Nov. 13, the Financial Institutions Subsection and CBA-CLE are co-sponsoring a full-day CLE related to lending and creditor issues, including loan documentation, default issues, workouts and receiverships, UCC issues, and the latest on Article 9, to name a few. Click here for complete details and to view the event brochure. The live program will be held at the CBA-CLE offices or attend via webcast.

Lunch and Learn Returns in January

The Financial Institutions Subsection CLE Lunch and Learn Series returns on Wednesday, Jan. 16. The Lunch and Learn Series occurs on the third Wednesday of every month, featuring a different topic at each program; topics are announced approximately one month prior to the program date. Registration is through the CBA-CLE office.

M&A Subsection

Earn-outs as Multipliers: Deal Mechanics and Returns in M&A—Tuesday, Nov. 6
SRS Shareholder Representative Services

Today, many new products are developed and commercialized under M&A agreements involving long-term earn-outs. Deal negotiation and post-closing management can have a powerful impact on investor returns. The presentation will highlight data and analysis from SRS’ recently released 2012 SRS Life Sciences M&A Study. Click here for information on specific topics and to register. This program will be at the CBA-CLE offices; submitted for one general CLE credit.

CBA-CLE Information

Ethics Revue at Lannie’s Clocktower Cabaret 2012—Nov. 12 or 13, Choice of Two Nights!
Starring The Law Club

They’re back! The CBA Ethics Committee and the Law Club will join once again in an unholy alliance to present this year’s hot ethics topics and those all-important rule changes in a fun and musical format! On Nov. 12 and 13, at Lannie’s Clocktower Cabaret, experience the uniquely humorous musical skills of the Law Club. One of the most useful and entertaining ways you can get three Ethics credits. Complimentary hors d’oeuvres during the show. Click here for more information and to register online.

2013 National CLE Conference® in Snowmass—Bankruptcy Track—Jan. 2–5

At the National CLE Conference, the location in a world-class ski resort is just a bonus—education really does come first! Experience live programs with top-notch speakers from across the nation, networking opportunities with your peers, and early morning and late afternoon programs, allowing time to enjoy the mountain setting. Earn 12–16 CLE credits. Click here for program details and to register.

Contributions for future newsletters are welcome –
Contact Ed Naylor at ed.naylor@moyewhite.com or 303-292-2900

This newsletter is for information only and does not provide legal advice.

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