Best Practices for Board Evaluations
In response to the uncertain economic climate, the expectations for the culture of boards has changed. Shareholders know that the composition of the board of directors forms the cornerstone for strategic planning and strong performance. Investors have seen their fair share of governance failures in recent decades and they are starting to look at board compositions with a critical eye.
Investors have influenced board composition by pressing them to rely more on independent outsiders and less on management directors and those who influence them. Among their concerns are the rising age limits, extraordinarily long terms, and automatic re-nominations. Shareholders have strong concerns about static boards with aging members failing to keep up with current trends and creating gaps of knowledge.
Shareholders are voicing their expectations that boards be transparent about the evaluation processes, especially where boards have been faltering in their performance, or where boards have been resistant to bringing in new talent.
Changing the Ethos Behind Board Member Evaluations
The PwC 2014 Annual Corporate Directors Survey showed that 63% of board directors merely checked the boxes on their self-evaluations without giving the questions much thought. About 70% of director respondents said they found it hard to be frank and objective in evaluating their board. With that mindset, how do boards make the evaluation process productive?
Let’s take a look at some best practices that make doing board evaluations meaningful.
5 Best Practices for Board Evaluation
Every board member should understand, accept, and support the need for doing annual board evaluations.
Moving in a new direction is always difficult in the beginning. For board members that have not experienced the benefits of the board member evaluation process, they may not cast a yes vote to begin doing them. Before the vote is taken, it pays to have a discussion about the benefits of board evaluations so that the full board supports the process.
Each board member should share the commitment to evaluating themselves and their peers
As the PwC 2014 Annual Corporate Directors Survey demonstrated, most board members are uncomfortable with evaluating themselves. They feel an equal level of discomfort when evaluating their peers.
For the process to be effective, all board members need to check their egos at the door and agree to be as honest and objective as they possibly can. The mindset going in should be to identify individual strengths and weaknesses to benefit the good of the whole organization.
Board members will have a greater comfort level in knowing that only the board evaluation committee chair will read the results of the peer evaluations. Give board members a chance to provide feedback and give them the opportunity to take action to correct any perceived problems.
The board should agree on a well-planned, systematic process for conducting evaluations.
Board evaluation time should be planned to occur on the annual board calendar at about the same time of year. Some boards find it helpful to establish a board evaluation committee and delegate the legwork for completing evaluations. The committee serves as a steering mechanism and follows up to make sure the process is completed.
Select evaluation tools that will help you reach your objectives in evaluating the board.
Review different evaluation tools and select one that will yield the most accurate answers. Use simple self-assessment questionnaires that will bring valid, efficient, and accurate information. Aim for the type of information that the board needs to focus on.
Perform follow-up tasks to ensure that the board will address any areas of concern that the evaluations brought to the surface.
Form a plan for documenting the results and sharing them with management, shareholders, and other interested parties. The board evaluation committee should prepare a report for the chairman, lead director, or governance and nominating committees. Significant outliers and issues should be placed on the agenda for full board discussion.
Areas to Evaluate
The board evaluation committee needs to form some goals and objectives. Each organization’s evaluation tools should be customized to the unique needs of their business. Here are some areas to consider including:
- Identify areas that need improvement
- Determine whether the board member’s contribution is in keeping with the needs of the board and organization
- Identify issues or areas that need more attention in board meetings
- Evaluate the diversity and composition of the board
- Inquire whether nominations are merely a rote exercise
- Assess the strength of each individual board member and if they need further development
Here are some board evaluation templates for individual members, peers, and the whole board.
Assessing the Results
Once all of the evaluations have been completed and turned in, the board evaluation committee will need to spend some time assessing the results. Discussions should focus on the strengths and weaknesses of the individual members as they relate to the needs of the organization. There is no set of right or wrong questions, so individualize your set of questions. Here’s a list of questions to get your brainstorming about your list.
- Was this evaluation tool appropriate?
- Do we have the information we need to make informed decisions in a timely manner?
- Is the board culture healthy?
- Is the board focused on the most important issues facing the company?
- Do we need to make changes in the talent on the board?
- Do there need to be age limits for board members?
- Should we add term limits?
- Does the board culture place the company’s interests above the interests of the individual directors?
- What is the quality of board relationship with shareholder, management, key advisors and each other?
Putting it All Together
With the stacks of evaluations sitting in front of you, it might seem that the difficult part is over. That is only partly true. When making final assessments and recommendations, give the results a broad scope. Narrow in on whether the evaluation process met your objectives and take a critical look at the culture of the board. Allow plenty of time to analyze and discuss the results. Finally, commit to taking any action that the board deems necessary to improve the quality of the board.