The General Counsel's Role in Facilitating Board Evaluations

Regulatory pressures and potential liability for directors—not to mention increased shareholder interest in board matters—have greatly expanded the general counsel's role as an adviser to the board over the last few years.

Perhaps nowhere is this more evident than in the general counsel's role in facilitating board evaluations. The sensitive process relies heavily on the general counsel or corporate secretary to aid the board in choosing the format, soliciting outside help if necessary, and acting as a liaison between members of the board and between board and management.

But the process can put general counsels and corporate secretaries in awkward situations if they have potential access to confidential information about how board members view the abilities of and relationships with other directors or members of senior management. Navigating those situations takes diplomacy and interpersonal skills to insure the information is gathered without damage to the inner workings of the board.

Annual board evaluations are required for companies listed on the New York Stock Exchange, although the exchange provides very little direction on the format and how the resulting information is used. (Nasdaq doesn't currently require listed companies to conduct a board evaluation, although many do as a matter of best practice.) The lack of guidance means that approaches and formats for board evaluations vary greatly, giving corporate counsels a larger role in helping boards to select the approach that makes sense for that individual board.

“The involvement of the general counsel and/or corporate secretary will vary based on the format used for the evaluation process,” says Jessica Lochmann, a partner with law firm Foley and Lardner. For example, will questionnaires or a survey format be utilized to assess the board? Will a third party be enlisted to conduct board evaluations, or will it be done in-house? The corporate secretary can aid the board in making these decisions upfront and discuss the benefits and drawbacks of each decision.

A survey format may require the help of a third party, says Lochmann, since directors may be uncomfortable expressing strong views to a member of the company's management. “A third party can get more color and derive more information and feedback than can be generated by a simple questionnaire,” says Lochmann.

Yet some say surveys are not the best tool for conducting an effective board evaluation. “This format seldom yields the kind of constructive information that results in meaningful and positive change in the way the board functions, which should be the real objective of any board evaluation—a vehicle for the board to use in achieving continuous improvement,” says Beverly Behan, founder of consulting firm Board Advisor.

Typically, the general counsel or corporate secretary manages the relationship with the third party during a board evaluation to free directors to focus on the evaluations themselves. In situations where the company has enlisted a third party to conduct the board assessment, the general counsel (or corporate secretary) should be “intimately involved in engaging the adviser, understanding the terms of the engagement, and what is to be provided in terms of deliverable,” says Nicole Sandford, a partner in Deloitte's Center for Corporate Governance.

Because general counsels often work closely with board members, Sandford adds, they are in the best position to provide third parties with the insight they need on the front-end to understand the personality of the board, where the challenges might be, as well as where there may be opportunities for improvement.

“It's extremely useful to gather management's perceptions of where they see the board as making a real contribution to the company, and where they see opportunities to improve the board's effectiveness.”

—Beverly Behan,

Founder,

Board Advisor

When boards don't bother enlisting outside help, general counsels have an even bigger role to play since they are often called on to facilitate dialogue between board members and between the board and senior management, says Lochmann. The general counsel is in the best position in terms of knowing where directors' interest lie, how best they prefer to receive communications, and how much information they want to receive from management. “That is key to the board's functioning, that directors receive the necessary information at the right level,” she says.

It's important to also engage members of senior management, since they regularly interface with the board, as well. “It's extremely useful to gather management's perceptions of where they see the board as making a real contribution to the company, and where they  see opportunities to improve the board's effectiveness,” says Behan.

At times senior members of management can lend valuable insight since they have a perspective from outside the boardroom.  For example, one management team engaged in a board evaluation process recommended a younger board member with social networking experience, says Behan. “The nominating committee realized that the executives had a great point and reacted by recruiting a senior Google executive as a new director,” she recalls.

Evaluation Process

EVALUATION TIPS

Below are “Key Takeaways” from Foley & Lardner's National Directors Institute Checkpoint Web conference on director and CEO reviews:

1. CEO Evaluations and the Relationship to “Say on Pay.” The CEO evaluation process,

including the questions asked and the form that the evaluation takes, should be

reevaluated in light of “say on pay” proxy disclosure and the potential for litigation. If CEO

evaluations become discoverable, then low or mediocre marks for the CEO combined with

increased compensation could bolster plaintiffs' arguments that the CEO was paid without

performing (and that the pay without performance made the CD&A disclosure of the

company's pay-for-performance philosophy materially misleading). Alternatively,

evaluations showing high marks for the CEO's performance could potentially help the

Board's defense in such a lawsuit.

2. Litigation Risks. Information that is gathered during the Board and/or CEO evaluation

process is potentially discoverable in litigation. Therefore, companies must be careful in

the preparation of any report summarizing the results of the evaluation process.

Companies must also exercise care relative to the application of document retention

policies to the raw data generated by the evaluation process. To help minimize these risks,

a Board may consider involving inside or outside counsel in the evaluation process to

maintain the attorney-client privilege.

3. Recruiting and Retention Tool. Board evaluations have the potential to function as

recruiting and retention tools. In terms of recruiting, Board evaluations should identify

specific skills and experiences necessary to create a higher-functioning Board, which that

skills and experiences may need to be developed through the recruitment of additional

directors. In terms of retention, Boards generally consist of current and past senior

executives who have been successful in business and have served on other boards of

directors. As such, directors typically have their own ideas regarding desired board

composition and function, as well as how best to oversee, and create goals towards the

accomplishment of, the company's strategic plan. The Board evaluation process provides

one mechanism to let each director "be heard" on these and various other issues, which

may in turn result in increased engagement.

4. Forms of Evaluations. While Board evaluations have in the past typically been conducted

by individuals within the company, it is becoming more common for companies to hire

individuals outside their company to develop and/or execute the evaluations. Companies

vary in their approaches with respect to third party involvement, sometimes bringing in

outside evaluators annually, and other times using their services every two to three years.

Practices in this area depend on individual company needs, and the form that evaluations

take should be reassessed annually, and in particular as the company grows or encounters

changes that may merit increased (or decreased) areas for evaluation.

5. Individual vs. Full Board Evaluations. A large number of companies choose to evaluate

individual directors as well as the full Board, utilizing either peer questionnaires or, more

commonly, self-assessment questionnaires. As a part of a peer evaluation process,

directors are asked to evaluate one another by completing questionnaires relating to a

colleague's performance and relevant skills. Anecdotally, it seems that the peer-evaluation

process can be more difficult for directors to accept than the traditional self-evaluation

process for reasons such as a fear of a loss in collegiality. Self-assessments appear to be

on the rise, perhaps in light of the new SEC disclosures relating to diversity and the

qualifications, attributes and skills that make an individual qualified to serve as a director.

6. Implementation. Boards need to take seriously their responsibility to follow through on

the results of evaluations, and implement change where necessary or desirable. It is key

that either the lead director, the chair of the corporate governance committee or someone

playing a similar role introduce the follow through action items on the Board's and

committees' agendas so that they are acknowledged and addressed. Some companies

use the results of full Board evaluations to initiate conversations with each individual

director, underscoring the strengths and weaknesses that exist so that each director is

able to identify opportunities for improvement.

Source: Key Takeaways From Foley & Lardner Panel Discussion.

During the evaluation of the results, most boards do not want the general counsel to have access to sensitive raw data on individual directors' views of the full board, the CEO, and their peers, “It puts the general counsel in a very awkward position,” says Cindie Jamison, a senior partner for consulting firm Tatum.  It means that general counsels and corporate secretaries must devise systems to aggregate the results for meaningful feedback without actually seeing individual results.

At one board where Jamison acts as lead director, for example, the general counsel is helping her design the questionnaire, offering some insight into what questions to ask, without having access to the results. “All the information goes to me as lead director,” she says.

Some external legal counsel have a different perspective. “I think that's a company-specific issue,” says Lochman. It may also vary year to year, depending on where the company is in terms of the operational cycle and the governance environment, she says.

General counsels often help boards make sense of the results and to ensure that the exercise is done in a meaningful way.  “General counsel should remind the nominating and governance committee not to worry so much about stepping on toes, but rather to focus on their real mandate:  to provide the company's shareholders with the best possible governance team to oversee the affairs of the company,” says Behan.

Oftentimes, this involves putting together a matrix, a cross-section of skill-sets, capabilities, and backgrounds that you want represented on the board, fitting the strongest relative names into those boxes. “That is how you decide who to keep and who must go,” says Jamison.

It's important that evaluations focus on the future and not on directors' past performance. “That's a flaw that most of the processes I've seen in practice have,” says Sandford. It is much healthier and helpful for the company to think about what the board should look like two to four years down the road and align the new members against those expectations, she says.

Therefore, if the general counsel is going to facilitate this process, “they really are going to need to develop something that is much more forward looking,” Sandford adds.

Post-Evaluation Process

The follow-up process is “where most board evaluations fall apart,” says Behan. “People collect the feedback and then do nothing with it.” 

If a third party conducted interview-based evaluations, an interview summary report must be created to outline the key themes that resulted from the evaluation, says Behan. For example, where are the board's current strengths and areas for improvement? A third party can also add value by drawing on his experience about what other boards have done to address similar issues, “so that your board can determine which approach is most suitable for them,” says Behan.

Done right, the end result of effective board evaluation should be an action plan of three to five steps that the board  can take over the next year to a year and a half to further enhance the board's effectiveness, Behan adds.

Following that timeframe, says Behan, the company should conduct a follow-up board evaluation survey or minimal interview process—even one conducted in house by the general counsel or the lead director—“to make sure that these steps are having a positive impact on the board's operations.”