One of the hottest topics in the corporate world today is board evaluations. Fraud and corporate misconduct have motivated institutional investors to take a vested interest in board composition and performance. Shareholders are looking for increased diversity on boards, along with the necessary set of well-rounded skills and experience.
These issues are creating a greater demand for quality and transparency of board assessments. Investors and board directors are skeptical of the fidelity of the processes that yield results. Digital solutions are the answer to the skepticism that board evaluations are not targeted or structured enough to produce constructive and meaningful dialogue about making changes for improvement.
Why Is There So Much Talk About Board Evaluations?
Good corporate governance has always included a component of diversity. In spite of this expectation, many boards have failed to recruit women and diverse populations for their boards.
A push by institutional investors, regulatory authorities and groups like 2020 Women on Boards is placing increasing pressure on boards to add women, members of different ethnicities and independent directors on boards in greater numbers than in the past. In fact, board evaluation was the number-one issue of 2017, according to Brad Smith and T.K. Kerstetter of Inside America’s Boardrooms.
It’s really no surprise since institutional investors have made it known that they want assurance that boards have the right mix of skill sets for today’s complex and ever-changing business environment. Furthermore, they want to ensure that boards have the competence to persevere through whatever challenges the future may bring.
There’s no disagreement that board self-evaluations are the most effective method for assessing the quality of a board’s composition. The questions around the quality and usefulness of board evaluations center around whether the evaluations align appropriately with the company’s long-term strategy and how boards can reap the intended benefits from them.
What Are the Challenges in Performing Board Self-Evaluations?
Many challenges go hand-in-hand with board self-evaluations. Board directors are often just as dissatisfied with the results of board evaluations as institutional investors are. A 2016 survey on board self-evaluations by TMG and the Rock Center for Corporate Governance at Stanford University showed some interesting results. Of the 187 board directors of public and private companies in North America they surveyed, about 89% said that their boards have the necessary skills and experience. The survey also indicated that about 73% felt that their board directors were extremely or very effective, including with respect to board composition, leadership and the evaluation process.
Boards typically gave themselves high marks for financial expertise and low marks for technology and social media expertise.
Most of the respondents said that they were not happy with their board’s process for removing board directors who were underperforming, citing that they felt that the process was too unstructured.
Board members responded that they didn’t feel that the measures for evaluations were clear or objective. Those who answered the survey said that they weren’t convinced that the evaluations were balanced, that board chairs weren’t willing to address conflicts, and that board directors were unwilling to address things they weren’t happy with.
The survey showed that board directors indicated that they trusted other board members, but that the trust wasn’t high enough to be productive relative to the evaluations. Some directors surmised that their fellow board directors weren’t as honest as they should be when offering feedback. About 62% of the board directors stated that the members of their board weren’t open to new points of view. Only about 46% of the board directors said that their boards tolerated dissent.
Boards expressed a desire for improvement of the processes for individual and group evaluations. Overall, board directors responded that they felt board evaluations worked better at the board level than at the individual director level.
Despite the new and recent emphasis on recruiting female board directors, board directors commented that there was still a negative perception and a stigma against having women on the board.
Technology Meets Board Evaluations for Improved Results
When we compare and contrast manual processes with software solutions, we often find that electronic processes are more efficient, structured and cost-effective.
There’s a new movement in corporate governance toward boards implementing the use of board portals. Boards are finding board portals to be a secure and efficient solution to storing board documents, ensuring regulatory compliance and providing high-level security for board activities.
Board portals provide many of the solutions that competent boards need. Diligent Corporation didn’t stop there. In speaking with board directors, they realized that boards needed additional software solutions to make their processes more effective and efficient.
That’s why Diligent Corporation developed the Governance Cloud. The Governance Cloud is a suite of software solutions that were specially designed just for board directors. Diligent Evaluations is an all-in-one board evaluation tool designed to enable board directors and administrators to manage and analyze board performance.
Diligent Evaluations lets boards set up a structured process whereby they can choose from a variety of types of questions, which have been user-tested. Administrators can track completed questionnaires and monitor submissions deadlines automatically.
The system automatically calculates averages and creates custom reports, graphics, Excel reports and visual aids to help boards interpret and analyze the results. Automatic processes eliminate the need to analyze data manually and reduce human error. Once the results are in, boards can easily export them. The results form the basis for short-, intermediate- and long-range planning.
Electronic board evaluations create a customized experience that helps boards with developing individual directors, offering valuable feedback and succession planning.
If we recall that boards generally feel that manual board evaluations are not well-structured, not well-developed for evaluating individual directors, and that evaluation processes weren’t clear or objective, it’s easy to see how software solutions can resolve those issues. Diligent Evaluations is a tool that solicits director opinions on critical topics such as the effectiveness of boards and committees, strength of composition, quality of board structures and processes, effectiveness of agendas and materials, and the strength of the relationship between the board and management. Boards can apply the results to the present time and to the future.
When you combine a structured process with clear and objective results, the outcome produces an environment that opens boards up to constructive and meaningful dialogue, where boards can engage candidly and honestly with the issues. Diligent Evaluations and the other software solutions that make up the Governance Cloud provide the base for shareholders and board directors to have full confidence in board composition and performance.