Boards Turn to Self Evaluations to Regain Trust

The performance evaluation may be a standard tool in most areas of corporate life—but in the boardroom, collars are still a little stiff to the idea of turning a spotlight on the annual performance of individual directors.

Yet that perception is beginning to change. Boards remain under tremendous pressure to prove their competence, in the wake of governance lapses that were seen as a large contributor to the financial crisis. Now boards are warming to the idea of annual evaluations, making them more meaningful and including individual director assessments in the review process.

According to the National Association of Corporate Directors, the number of publicly traded companies that conduct individual director assessments rose from 70 percent in 2008 to 77 percent in 2009. Still, that figure is down from 81 percent that reported individual assessments in 2007, and in some industries such evaluations are much less common. For example, only 25 percent of companies in the financial services sector assess individual directors, according to a forthcoming report from the Conference Board.

Why so few? For starters, boards aren’t required to assess individual directors. The New York Stock Exchange did amend its listing rules in 2003 to require annual evaluations of board and committee performance overall, but those rules include no requirement to review directors individually.

Sandford

Second, such evaluations can breed mistrust and infighting. Nicole Sandford, a partner at Deloitte’s Center for Corporate Governance, says that when companies first started performing evaluations to comply with the listing requirements, the notion of assessing directors individually was unthinkable. “It was not the collegial way directors had worked together in the past,” she says.

These days, however, boards want to regain the trust of angry shareholders and wary regulators, and they see director evaluations as a useful tool to accomplish that goal. “Companies are trying to shift away from checking the box to say we did it,” Sandford says. “Now boards are asking how can we get better? How can we up the game? Now we’re really seeing a true movement to do something of more value.”

Conducting an effective board evaluation is no easy task, of course. Approaches vary widely, as do opinions about what specific skills should be measured.

“One of the biggest challenges I’ve seen is that there isn’t any accepted framework to evaluate against,” Sandford says. “Every board starts with a clean sheet of paper and asks ‘what do we want to be when we grow up?’”

Tom Wardell, a partner with law firm McKenna Long & Aldridge, says the best evaluation processes involve questionnaires completed by individual board members, with a third-party consultant helping to analyze and digest the results. Anonymity encourages board members to evaluate more candidly, he says.

“Investors are interested in director performance, but they have their own methods for evaluating such performance and do not necessarily rely on the internal assessment process.”

—Matteo Tonello,

Director of Corporate Governance,

The Conference Board

Behan

A good questionnaire will promote dialogue among board members, says Beverly Behan, an independent consultant to boards. (That means questions that can’t be answered with a simple “yes” or “no,” she adds.) Evaluations are also pointless if boards don’t review and act on the results. “Those are the two key pieces: how you are gathering feedback to actually engage directors in meaningful dialogue, and using the feedback in a meaningful way,” Behan says.

For example, Cindie Jamison, a senior partner for consulting firm Tatum, says she recently worked with a board that concluded it wasn’t focused enough on defining and driving corporate strategy—so the board held a daylong retreat to focus solely on that topic. “It isn’t just assessing,” she says. “It’s making changes as a result of the assessment.”

Needs Improvement

Tonello

All that being said, the art of director evaluations is still a young one, with plenty of room for improvement, says Matt Tonello, director of corporate governance for the Conference Board. “Many companies still fail with respect to assessing performance of single board members,” he says. “As boards become more diverse and specialized by recruiting members from a variety of expertise areas, assessment of individual performance is likely to become more critical.”

Jamison, who sits on two corporate boards, agrees that the process can get much harder when assessing individual directors. “I have very mixed feelings,” she says. “The intent is to be constructive. Yet I found myself, in an effort to fill out the form, really trying to come up with things people could do better when these are very competent directors. I felt like I was almost trying to come up with negative things.”

Wardell

Wardell says individual board members should be assessed based on how well they prepare themselves to discuss a company’s issues and how they question management’s plans. “Do they bring intelligence and critical faculties?” he asks. “What kinds of insightful comments do they make? Do they ask questions that promote dialogue, not just for their own education?”

EVALUATION CONSIDERATIONS

The Free Management Library suggests evaluating boards based on a scale of 1 (Poor) to 5 (Very Good) on the following criteria:

Board has full and common understanding of the roles and responsibilities of a board

Board members understand the organization’s mission and its products / programs

Structural pattern (board, officers, committees, executive and staff) is clear

Board has clear goals and actions resulting from relevant and realistic strategic planning

Board attends to policy-related decisions which effectively guide operational activities of staff

Board receives regular reports on finances/budgets, products/program performance and other important matters

Board helps set fundraising goals and is actively involved in fundraising (nonprofit-specific)

Board effectively represents the organization to the community

Board meetings facilitate focus and progress on important organizational matters

Board regularly monitors and evaluates progress toward strategic goals and product/ program performance

Board regularly evaluates and develops the chief executive

Board has approved comprehensive personnel policies which have been reviewed by a qualified professional

Each member of the board feels involved and interested in the board’s work

All necessary skills, stakeholders and diversity are represented on the board

Source

Free Management Library: Board Evaluations

While some governance experts say various companies do make genuine efforts to perform robust evaluations, Tonello says he doesn’t see a great deal of evidence in the data. Companies perform assessments largely to comply with listing requirements, but investors don’t necessarily place a lot of stock in those evaluations, he says.

“Investors are interested in director performance, but they have their own methods for evaluating such performance and don’t necessarily rely on the internal assessment process,” he says. Instead, investors have focused on issues where the board’s performance has been called into question: say-on-pay and other compensation issues, repealing poison pills, and the separation of the chairman and CEO roles, for example.

Jamison

Jamison says a board as a whole should be considered effective if it adequately challenges management’s proposals and makes independent decisions about them. “Management is full of good news, with their pretty Power Points telling you how great things are,” she says. “Board effectiveness comes from pounding into those and pushing back.”

Now that the Securities and Exchange Commission has adopted new proxy rules giving shareholders new potential to nominate and elect directors, boards may well show some new interest in meaningful performance evaluations, says Deloitte’s Sandford. “Some boards will want to do all they can to show investors that they’ve given thought to what the board is doing,” she says.