More than 10 years ago, the NYSE took a strong step toward good governance and began to require boards and key committees to conduct annual board evaluations. The NASDAQ soon followed suit. The benefits of board evaluations have proven their worth, as most companies now conduct them as part of regular best practices for their boards, audit committees, compensation committees, and nominating and governance committees.
The regularity of board evaluations causes institutional investors to look for them. Companies now routinely share information about board evaluations in the governance or investor sections of their websites, in the annual proxy statement, or as part of an annual outreach to the investors.
Routine is a good thing when it comes to best practices for good corporate governance. The challenge lately is how to keep board evaluations fresh and productive. Electronic board tools are efficient and cost-effective, so why not employ one for board assessments?
Refresh Board Evaluations by Changing Them Up
Boards have several options for conducting board evaluations, so there’s no need to get stuck in a rut. The nominating and governance committee usually heads up the board evaluations; however, it’s every director’s responsibility to make sure that they’re fulfilling their duties. Any board director can make a request to change up the normal course of action for board evaluations, and should, if they believe it’s necessary.
Annual board evaluations share many of the same problems as any other routine activity. Responders get too familiar with the format and they respond to questions with the same routine answers they’ve given in the past. Board directors may view board evaluations as nothing more than an obligation they need to get through.
Boards that vary their processes for board evaluations bring new insights and perspectives to the board. They learn more about themselves, which enhances their effectiveness and brings more value to the board.
Another reason for varying the protocol for board evaluations is that routine exercises may allow pertinent, current issues to get glossed over with minimal attention. In recent years, governance is focusing more heavily on compliance and cybersecurity. These are new and important issues that demand every board’s attention.
Methods of Conducting Board Evaluations
The governance and nominating committee typically oversees board evaluations. For many boards, questionnaires are the preferred method of evaluations. However, boards don’t have to limit themselves to one method of evaluation. Think outside the box and select the tools your board needs. The three main methods for board evaluations are questionnaires, interviews and group discussions.
Questionnaires are the quickest method for board evaluations, which is one thing that makes them a popular choice. They are anonymous, so board members have the advantage of being candid. They typically cover such oversight issues as risk, compliance, crisis preparedness, succession planning, diversity and cybersecurity.
The interview method for conducting board evaluations is usually productive, although it can be time-consuming, especially for large boards. The board usually sends out questions before interviews, so board members have time to think about the questions in advance. Board evaluation facilitators may conduct interviews by phone or in person.
Finally, group discussions are the third method for conducting evaluations. Facilitators may use a questionnaire as a basis for group discussions. As with the interview method, the group discussion method works best when board directors have the questions ahead of time. Board directors should be given an opportunity to contribute topics for discussion. The board chair, an independent director, an attorney or an outside expert with expertise in governance usually facilitates the discussion. This method doesn’t offer any sense of anonymity, so it tends to work best with boards that share a high degree of trust and a long tradition of candor. Boards that use this method gain the benefit of back-and-forth communication.
There is much benefit to using facilitators with expertise in governance. They usually summarize the information at the end of the process and present it to the board. Using third parties as facilitators can be expensive and time-consuming, so some boards use them occasionally when the board needs a fresh perspective on their performance.
Using the Outcome of Board Evaluations as a Springboard for Improvement
Conducting quality board evaluations is only half the equation. The other important component is to extract outcomes that help the board improve its performance. Here are six ways to gain the maximum benefit from board evaluations:
- Ask each board director to review each question on the questionnaire and evaluate it for relevancy. Ask each director to submit several new questions for consideration to be added to the questionnaire. Make the final selection of questions with the goal of improvement of future performance in mind.
- If you’ve been using questionnaires explicitly, consider changing things up. Switch to group discussions or interviews, or some combination of methods. Use an electronic tool like Diligent Board Assessment software from Diligent Corporation. Knowing that the process will be different may encourage board members to become actively engaged in the process.
- Considering hiring a third-party facilitator or administrator for the board evaluation process. A third party may inspire an atmosphere of candor and objectivity and set a higher benchmark for brainstorming and creativity.
- Consider scheduling an additional board meeting with the sole purpose of discussing the results of the evaluations. Be sure to give all directors an opportunity to hear and to discuss feedback from the evaluation. Keep the discussions meaningful by focusing on how the board can use what they’ve learned to improve their performance.
- Engage in follow-up planning. Quality board evaluations may reveal the need for action items to address key concerns and areas of improvement. Many boards find that this is a good juncture to pull in the expertise of senior management.
- Review proxy disclosures and information on the website for shareholders to be sure that communications are relevant, current and meaningful.
Using Digital Technology for Fast, Meaningful Board Evaluations
What if you could vary your questionnaires every year with little preparation time? Would your board directors be more inclined to take the proper time to complete board evaluations if they could use a mobile device at their convenience?
The Diligent Board Assessment tool solves essentially all of the major problems associated with board evaluations. Administrators can set up various formats for questions, so they can get to the heart of information that will yield the most valuable results.
Because board directors can complete their questionnaires anonymously and in any setting at their leisure, the board will almost assuredly get the most candid feedback possible. Board directors can even use the program to sign their board assessments electronically.
Don’t forget that the other half of the equation relates to analyzing data. The Diligent Board Assessment program collects data from the questionnaires and assembles it into a variety of useful, meaningful results that include a variety of charts, graphs and spreadsheets.
Diligent’s assessment tool saves corporations the hassle and expense of hiring third-party experts or facilitators because the program automates many of the tasks. The program is flexible enough to create customizable questionnaires while keeping a standard against which to measure future assessments.