Whether they’re required or not, board self-evaluations are considered best practices for good corporate governance. Nonprofits, charitable boards, and for-profit boards of every size and in every industry have much to gain from a board evaluation report. Board directors are being scrutinized more carefully than ever before due to the fallout of poorly performing boards. In certain circumstances, boards can be held personally accountable for making bad decisions, which can affect their livelihood and finances in major ways.
Board evaluation reports are a critical structural tool for evaluating how effective and efficient boards are. In some parts of the world, boards evaluate individual directors as well as the entire board’s performance. Where individual director assessments aren’t required, many boards conduct them to help improve individual performances.
What Areas of Performance Should Be Included in a Board Evaluation Report?
All boards set goals for the company or organization they serve. Board evaluations provide an opportunity for boards to assess themselves and to measure their performance against the goals and objectives they’ve set during their strategic planning.
We can easily classify the roles of boards of directors into three broad categories:
- Providing direction. Boards should be spending the bulk of their meeting time discussing strategic direction.
- Overseeing all aspects of the company or organization. As primary overseers, boards monitor management and all of the operations, departments, systems and processes that they manage.
- Boards provide guidance, support and advice to senior executives and other managers.
In simplified terms, a board evaluation report shows how effectively the board performs its roles, along with their related duties and responsibilities.
According to a Deloitte report, boards should assess the following seven areas of performance, at a minimum:
- Board structure. This includes board composition, diversity on the board and board committees, competencies of board members, frequency of meetings, procedures, principles, and board and committee charters.
- Dynamics and functioning of the board. This includes how well the board manages its agenda and calendar, board dynamics and interactions, how well they communicate and interact with the senior executives, and how cohesive and engaged they are in meetings.
- Business strategy governance. This assesses the board’s role within the company’s overall strategy. The board should be working with managers to make sure the overall strategic plan is being implemented and is working as they envisioned it.
- Financial reporting process, internal audit and internal controls. Boards should assess how well they manage internal controls to prevent internal and external fraud, assess the quality of their audit process, and evaluate how strong their risk management program is.
- Monitoring role. This portion of a board evaluation looks at how well the board monitors its policies and strategies, and how well the managers implement policies and business strategies.
- Supporting and advisory role. Relationships between board directors and executives can be tenuous. This section evaluates the dynamics between the board and the senior executives, which is necessary for mutual trust and respect, so that boards can support management and provide advice and guidance for them.
- The lead role. The lead role in the evaluation process may be filled by the board chair, an independent director or a third-party facilitator.
Boards may identify additional areas that they want to explore and assess. Corporations are unique because of their size, industry and business development cycle. Board evaluation reports aren’t intended to be cookie-cutter copies of other companies or close replicas of board evaluation reports from previous years.
Board Evaluation Report Basics
As a matter of compliance, boards need to be aware of laws and regulatory authorities that require annual board evaluation reports. In the vast majority of cases, boards conduct board self-evaluations to find ways to strengthen their performance. Board self-evaluations are also a good resource to share with shareholders and other stakeholders to build their confidence and trust in the organization’s leadership.
Role of Independent Directors
Independent board directors bring much-valued objectivity to their boards. Objectivity is a necessary component of quality board self-evaluations. Many corporations assign the title of Lead Independent Director to one of their independent directors. Generally, the independent director will hold at least one board meeting where non-independent directors and managers are not allowed to attend. The independent director will observe the board in action, review the performance of the board chair and write up a board evaluation report.
In the situation where the board is all, or mostly, comprised of independent directors, the whole board needs to evaluate their performance, excluding the director who conducts the evaluation.
International Practices for Board Evaluations
The U.K. Corporate Governance Code Annual recommends that boards evaluate boards, committees and individual directors annually. FTSE 350 companies should have evaluations done by a third party at least every three years on a comply-or-explain basis.
The U.S. National Association of Corporate Directors (NACD) recommends that boards assign the responsibility for board evaluations to their governance committees. NACD recommends full board, committee and individual director evaluations on a regular basis.
The IBGC Code of Best Practices recommends annual evaluations of the board, individual directors and the CEO, and that the board chair conducts the evaluation. Outside facilitators are welcomed and boards should disclose results to shareholders.
CNV recommends annual board evaluations.
Mexico expects boards to do board self-evaluations as a matter of their fiduciary duties.
OECD members recommend boards of listed companies to conduct annual evaluations of the board and individual directors.
Board Management Software Systems Streamline Board Evaluation Reports
While board directors acknowledge the value and importance of completing their board evaluation questions, it’s not a favorite task because it takes time away from other duties. Diligent created a software program that takes the pain out of board assessments. With Diligent Board Evaluations, facilitators can customize assessments with multiple user-tested question types, incorporate glossaries and supplemental reference information, monitor submissions and finalize questionnaires with e-signatures. It couldn’t be easier to get accurate, custom reports. Boards can easily export results and graphs within a few clicks, which takes away the frustration of time-consuming manual processes.
Board assessment is usually an annual process. Diligent Board Evaluations lets boards pull up past questionnaires, making it swift and easy to modify the current year’s questions.
Diligent Board Evaluations is just one of the many governance tools provided in Governance Cloud, a fully integrated board portal system for a total enterprise governance management system.