Effective board and director evaluations

Board and director evaluations used to be mostly about compliance. Today they’re about making good boards better while improving the credibility of board and director performance management. Here, an expanded recap of emerging trends and tactics
By Beverly Behan

Now that directors have had more than a decade of experience with board evaluations, their objectives for the exercise have begun to shift. Rather than seeking a rote compliance objective, increasingly board chairs and nominating/governance committee chairs want to use the board evaluation in a more meaningful way—an exercise designed to make a good board even better and help a great board remain vibrant. Theirs is an objective of continuous improvement—and a very different type of board evaluation design is required to meet this objective.

Boards that seek to reinforce a culture of accountability in the companies they govern have also begun to view both board and director evaluations as part of this equation.

There is also increasing pressure on boards to raise their game in this arena—regulators, shareholder activists and even management have become more attuned to the issue of board and director evaluations in recent years and are demanding more credible and authentic processes for board and director performance management. UK boards, for example, must now describe their board evaluation process in detail in their annual proxy statements.

I recently authored a white paper for the Conference Board of Canada entitled Board and Director Evaluations in the 21st Century, and am working on a similar publication for the Conference Board of New York. This article will highlight some of the emerging trends and offer some constructive ideas on refreshing the board evaluation process.

Designing an Impactful Board Evaluation: A License to Experiment

There are no regulatory requirements for the way in which a board evaluation is to be conducted. That means Canadian boards have complete freedom to design a process that will best meet their objectives and the liberty to experiment by redesigning their board evaluation process from time to time so as to keep the exercise fresh, engaging and productive. In considering the design of a board evaluation, there are five key issues to consider:

Format: The traditional approach to a board evaluation involved a survey form where directors are asked to enter a score from 1 to 5 on a series of questions relating to the board’s operations, typically with some space for write-in comments. The design nearly always consists of closed-ended questions—such as “Our board composition is appropriate,” or “The pre-reading materials for board meetings are adequate”—a format that readily lent itself to numeric scoring.

If the board’s overarching objective for the evaluation is simply to comply with regulatory requirements, surveys are the best methodology available: they’re fast, cheap and easy to administer. Moreover, by limiting questions to low-threshold tests, such as charter compliance or whether something is “appropriate” or “adequate,” few issues are likely to surface.

However, if the board seeks to use its evaluation process for continuous improvement, surveys have significant drawbacks: closed-ended questions rarely yield insightful or actionable feedback while numeric survey results are equally difficult to translate into meaningful steps.

Many boards that use survey-style board evaluations supplement them with follow-up phone calls to try to get more constructive and useful feedback—and this can be helpful. But if ongoing board improvement is more important than basic compliance, interviews are nearly always a preferable format. They are also far more engaging for participants, who typically enjoy taking the time (generally 45 to 60 minutes) to share their views about the board.

An interview format will only be effective, however, if a protocol of interview questions is developed at the outset and used consistently throughout. Otherwise, nearly every interview might cover different issues, making it difficult to reach consensus on the findings. This requires discipline on the part of the interviewer, who must also probe to ensure that specific, actionable feedback is being generated from these discussions.

Topics: Eight key components of board-building are nearly always covered or should be in a board evaluation: board composition; board information (pre-reading materials and director orientation); board agendas and meetings; board leadership; board dynamics; the working relationship between the board and management; and board processes (namely, how the board engages on strategy, CEO succession, risk oversight, CEO evaluation, etc.). An evaluation of the board’s committees—the eighth component—can either be included in part of the board evaluation or separate evaluations can be conducted for each committee.

In addition to these items, many boards find value in including some or all of the following questions:
• What do you see as the board’s key strengths? What does this board do particularly well?
• What do you see as the board’s most important contribution in overseeing the company over the past year?
• If you could change anything about our board to make it more effective than it is today, what would you change and why?
• If we were going to add just one new director to the board, what skills, experience or background would you prioritize?

Input from senior management: As most Canadian chief executive officers serve as members of their governing boards, they generally participate in the board evaluation process. Over the past decade, however, it has become increasingly popular to gather feedback from top company executives who are not board members but regularly attend board and committee meetings. While some directors bristle at the thought of management “evaluating” the board, most find it illuminating to include management feedback in the board evaluation.

It also demonstrates to management that the board is open to feedback and improvement. In the past five years, interest in more robust board evaluations and individual director evaluations has increasingly reflected the board’s insistence on improved CEO and senior management performance evaluations—some of which incorporate 360s. Boards understand the importance of “walking the talk” on these issues if they are to be credible themselves.

Whether a survey or interview format is used, the questions need to be tailored slightly for use with management if it is decided to solicit their input. While the “management version” should parallel the “board version” for comparative purposes, certain topics—such as CEO succession planning and executive sessions—are often removed.

Decisions also need to be made as to whether and how the results of the board evaluation will be shared with members of management who participated in the evaluation process. Some boards incorporate no follow-up whatsoever; others invite those executives who participated to attend portions of the board meeting where the evaluation results are discussed. This can be particularly useful where some of the issues surfaced in the board evaluation involve improving the pre-reading materials and/or management presentations in board and committee meetings.

New directors: As most boards are regularly recruiting new directors, the question inevitably arises as to how long a new director should serve on the board before participating in the board evaluation process.

While this is typically a judgment call, based on the number of meetings a new recruit will have attended by the time of the evaluation, some boards create a limited interview protocol or questionnaire designed specifically for new directors. It often focuses on director recruitment and orientation—areas where, of anyone on the board, they have the most recent experience. These questions can be further expanded, if appropriate, to ask about first impressions of the board’s working dynamics, the board-management relationship, best practices from other boards with which they are familiar, and so on.

A robust board evaluation often serves as a good team-building exercise for the board—all the more reason to find a way to engage rather than exclude a new director in the process.

External facilitators: The provisions of the 2014 UK Corporate Governance Code, which now require board evaluations of FTSE 350 companies to be externally facilitated every three years, are clearly the direction in which board evaluations are heading into the 21st century. About 19% of the largest public U.S. companies used an outsider for their board evaluations in 2013. Spencer Stuart predicts that as many as 35% of major U.S. companies will follow suit in the next five years.

Most North American boards that use an external resource for their board evaluations also tend to follow the UK approach of “every three years” instead of annually. After all, a well-executed board evaluation should yield an action plan that may require 18 to 24 months to implement; repeating the process a year later typically delivers only marginal returns. Board evaluations in the intervening years are generally conducted internally—often using a survey format or short phone calls from the board chair or chair of the nominating/governance committee to each director.

Using the Board Evaluation: The Action Plan

While a great deal of thought and discussion typically goes into the feedback collection mechanism for the board evaluation, less attention is often paid to what may be an even more important consideration: how to use the results of the board evaluation constructively.

At least three to five potential opportunities for further board enhancement should emerge from a constructive board evaluation process; boards with highly engaged and thoughtful directors often generate eight to 10. If no issues surface, this generally means that the board evaluation was crafted with many closed-ended questions and failed to stimulate good thinking about potential enhancements. This may not be problematic if the objective of the board evaluation is primarily to meet compliance objectives, but frustrating for those who seek to use the process to positively impact board operations. As noted earlier, interview-based board evaluations typically yield rich and highly specific feedback that readily lends itself to good discussion—and nearly always brings to the surface many more issues than a survey form.

A report summarizing the results of the board evaluation should be developed at the conclusion of the board evaluation and reviewed by board leadership—the board chair, the chair of the nominating/governance committee and the CEO; sometimes the general counsel and/or corporate secretary are also included in this preliminary review.

That group determines which issues are worthy of discussion with the full board and/or the nominating/governance committee and how much time should be allocated on the board agenda for a working session of the board to discuss the evaluation results. Most boards require 60 to 90 minutes for good discussion with some time to make decisions about whether and how best to address the issues surfaced in a way that will enhance the board, overall. At the conclusion, an action plan should be created that the board can use as a roadmap to move forward in implementing those changes over the next
12 to 18 months.

When well designed and effectively implemented, board evaluations can have a significant and positive impact on how a board functions and even on the quality of decisions it makes.

Boards that have upgraded their evaluation process would do well to describe the new approach to shareholders in their annual proxy circular. It is always unwise to publish the results of the board evaluation; this typically inhibits candour and creates “made for TV” board evaluation results that fail to surface important issues. However, where the board evaluation action plan has led to the adoption of a new practice, the creation of a new committee, the recruitment of a new director with a specific skill set or other positive changes, this underscores to shareholders that the board evaluation process is having real impact.

Individual Director Evaluations

The board of directors of Bank of Montreal has the distinction of being the first board of a major North American company to implement an individual director peer evaluation in 1997. Since that time, director evaluations have evolved both in terms of their methodologies and prevalence. (Separate chair evaluations are also growing trend. See sidebar at bottom of article.)

Directors typically find the most value in feedback that is specific and constructive. Director evaluations conducted using a survey with some space for write-in comments generally lack the level of specificity to be actionable. If the primary objective of the director evaluation process is simply to determine if a board member should be renominated, this can be fine. However, if professional development is an equally or more important objective, this format will probably disappoint.

Where interviews are used to collect individual director feedback, two questions the board must consider are: (i) Who will conduct the interviews? and (ii) Who will deliver the feedback? They need not be the same person; sometimes an external resource is used to conduct the interviews and summarize the feedback while the board chair delivers the feedback in a series of meetings with each director. An important part of the interviewer’s job is to probe deeper where general responses are given so as to surface tangible examples and specifics that the recipient can readily understand and, if appropriate, act upon. This is equally important whether the interview is conducted by an external facilitator or a board member, such as the board chair or chair of the nominating/governance committee.

Refreshing both board and director evaluations with new approaches can help many boards derive far more value from these exercises while serving to reinforce their commitment to accountability and governance excellence. Canadian boards have a license to experiment in this realm and would do well to use it.

Beverly Behan is a New York-based board consultant who has worked with more than 140 boards of directors in the U.S., Canada and internationally in the past 19 years. E-mail: beverly.behan@boardadvisor.net. A copy of the white paper, Board and Director Evaluations in the 21st Century, can be obtained from the Conference Board of Canada at www.conferenceboard.ca.

Sidebar:

Chair evaluation: a critical component to consider

With board evaluations now the norm, companies are increasingly taking the measure of board chairs as well

Spencer Stuart’s 2014 Canadian Board Index of the largest Canadian companies found that 100% conduct board evaluations but only 55% conduct an evaluation of their board chair—a surprising statistic in view of the critical role that a chair plays in the overall effectiveness of any board of directors. Boards that haven’t yet implemented a chair evaluation would do well to incorporate at some questions about the chair’s effectiveness—in leading board meetings, communicating to fellow directors outside of meetings and forming a constructive working relationship with the chief executive officer—into their board evaluation.

One of the challenges with chair evaluation involves the question of who will do it. If the board conducts its individual director evaluations using an external facilitator, the answer is obvious. However, if the format is a peer review involving interviews by the chair, this becomes more of an issue.

British boards take an approach that has yet to catch on in Canada: like Canada, Britain typically separates the roles of chairman and chief executive officer; nearly all British boards are led by a non-executive chair. Roughly 15 years ago, the UK first developed the concept of appointing another non-executive board member to the role of senior independent director—in addition to the non-executive chair. One of the key responsibilities of the senior independent director on UK boards is to lead an annual evaluation of the chair’s performance. In Canada, the chair of the nominating and governance committee sometimes plays this role.

Chair evaluation is particularly important for those boards that seek to reinforce a corporate culture of accountability. In organizations where the annual performance evaluation of the chief executive and other corporate officers is rigorous, structured and multi-faceted (such as those which incorporate 360 feedback or similar) a similarly well-designed process for evaluating the board and its leadership readily demonstrates that accountability is the “tone at the top”—the very top being the chair of the board.

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