Regulatory bodies exist for the protection of shareholders and society at large. Laws and regulations are designed to make sure that corporate boards are functioning effectively in their role of overseeing the business. Shareholders want assurance that boards have proper staffing and can provide the proper leadership to manage the company successfully.
In addition to scrutinizing the board’s composition, shareholders are concerned with the qualifications and capabilities of individual directors.
According to a study of 187 boards by The Miles Group, most board evaluations don’t adequately address poor performance by individual directors. When boards conduct evaluations with fidelity, they should answer specific questions and expose areas where boards can make improvements.
Parts of the Board Evaluation Process
Fidelity requires knowing how to define criteria, evaluating frameworks and systems, evaluating individual director performances and analyzing results. Boards need clear definitions in order to produce clear results. The board evaluation process is worthwhile, although it is a bit time-consuming. It’s important to include all components of the process and to conduct the evaluations with fidelity to produce the best results for boards to get the maximum benefit from their annual evaluations.
In designing questionnaires, boards need to decide on their criteria for measuring results. Most questionnaires include a mix of open-ended questions and multiple-choice questions. Boards may need to modify the questions from time to time. Consistency of questioning allows the board to track its performance over time.
The analyzers should also have clear standards by which they measure results. This means that they should have clear expectations for committee work and reporting. The board should define clear objectives and competencies that they want to assess.
To begin with, board evaluations should include all items that regulators require for disclosure.
Before evaluations begin, boards should determine who will conduct the evaluation. The lead person can be an independent board member, committee leader, General Counsel or external third party. This definition should entail who will be responsible for summarizing the results, evaluating the responses and developing a plan for implementing changes based on the evaluations.
Definitions should include who participates in the evaluation, including the board, individual directors, board leaders, committee leaders and the CEO, and how often they will conduct evaluations on each individual or entity.
The facilitator is an important component of conducting quality board evaluations. The General Counsel or legal team often has input on the choice of facilitator. The facilitator can be a board member, but most boards find the results are more objective when the facilitator is either an independent board director or a third party.
Boards must agree on the structures they want to assess. Structures encompass a review of leadership talent, including the board chair or independent chairperson. Other leaders who should be evaluated include committee chairs and management.
This part of the evaluation looks at such things as the leadership style, experiences, skills and temperament of individuals who serve in a leadership capacity. The idea behind this part of the evaluation is that boards shouldn’t appoint leaders by default — they should choose those who have the best skills for the job.
Questions that inquire about how leaders engage others and how they give personal and constructive feedback to their peers and subordinates provide clues to leadership skills.
Questions should also provide answers that reveal how well the board goes beyond their prescribed duties to choose board directors with elements of diversity, independence, experience, skills and industry knowledge.
Evacuating systems should explore the quality of the board’s processes, including board meetings, committee meetings and use of executive session. Evaluation questions should get at the heart of whether board meetings are organized for maximum productivity. They should also explore whether meetings encourage an honest exchange of ideas and encourage the full participation of members. Facilitators may be able to detect that some board members are hesitant to speak in front of managers, preferring to wait for executive sessions to voice their concerns.
Evaluate Individual Director Performance
All evaluations should be customized according to the needs of the organization, especially questionnaires designed for individual director performance. The following questions are basic indications about whether a director is fulfilling their individual responsibilities:
- What contributions have they made?
- Do they tend to have good interpersonal dynamics with peers?
- Do they ask the right questions?
- Are they able to build off others’ points of view?
- Do they frame content constructively?
- Are they typically active and attentive and engaged in board discussions?
- Do they frame content for board discussions constructively?
- Do they need continued board development or leadership coaching?
An important step in conducting board evaluations is for the facilitator to collect the results and survey all board directors confidentially about how they anticipate the results will correlate to the initial objectives that they set and the tools they used.
To protect the fidelity of the process, facilitators prepare a summary of the findings and comments from the questionnaires after removing directors’ names, paying particular attention to the tone of the summary. Because evaluations will indicate strengths, as well as areas needing improvement, summaries should present the results in a balanced fashion. The summaries should also point out areas where ratings or viewpoints differ greatly.
The summary should include responses that are nearly verbatim and that answer whether the board is meeting its objectives. The final report should also indicate specific areas where the board can improve its performance.
Assessing Evaluations and Implementing Changes for Improvement
After completion of the final report, the board should designate adequate time to discuss the results of the evaluations. It can’t be emphasized enough that the board chair should strive to create a collegial environment for discussions of evaluation results where board directors feel a level of trust among peers to honestly and openly discuss weaknesses and other hard issues.
The final step in the board evaluation process is for board directors to identify areas for improvement and to create appropriate action plans. Since many boards fail to implement their action plans, they should identify a board director to follow up on making sure that recommendations translate into actions.