It’s been over a decade since the New York Stock Exchange decided to require boards of directors and key committees to conduct board evaluations; however, what still remains most important is understanding the board evaluation process and how to best conduct your board assessments. This move set the standard for good governance principles and motivated many NASDAQ companies to follow suit.
Depending on the culture of the board, all board members aren’t necessarily amenable to giving the board evaluation process the due diligence it deserves to yield the most effective outcomes. It’s sometimes difficult to get full buy-in from the board. Some board members just can’t seem to connect the purpose with the benefits of the outcome. That’s often because of past experiences getting mediocre or poor results.
Board evaluations can be a valuable experience when boards use the right tools, including the use of experienced, independent facilitators as necessary, and apply the results toward a process that improves the board’s effectiveness.
Exploring the Board’s Needs for Improvement and Expectations for Evaluations
To make the process purposeful, boards need to perform evaluations for reasons other than those for which they’re required to do them. Annual board evaluations give boards a chance to explore what they hope to gain from doing the evaluations that can help them improve the board’s effectiveness in meaningful ways. The reasons for doing evaluations will surely change over time as the corporation evolves.
Occasionally, it’s good for all boards to conduct evaluations with compliance in mind, and there are specific tools and processes to accomplish this.
Shareholders have a vested interest in good corporate governance. Some boards may decide to focus on auditing the depth, scope and effectiveness of the organization’s governance practices. An overarching approach helps boards identify and address their strengths and weaknesses and highlight the board’s expectations for itself.
Deciding on Tools and Processes for Evaluations
One of the mistakes many boards make is to get out last year’s questionnaires, make a few changes and distribute them without much thought. The best approach to board evaluations is to assess the many tools available in relation to the board’s needs and either rotate them or use them in various combinations. The right tools will help boards gain a comprehensive assessment of their efforts. Change it up to keep evaluations fresh!
Questionnaires are a popular choice for board evaluations because they’re easy, unobtrusive and non-threatening, especially when they’re anonymous. Questionnaires are a good tool for diagnosing minor issues and setting benchmarks, although they’re not as effective for producing actionable solutions. Boards that need a deep-dive into their issues will want to use a different tool or use questionnaires in conjunction with one or more tools.
Diligent’s board evaluation software nicely combines several of the board evaluation processes in a user-friendly online format. Board administrators can opt for various types of questions to move beyond the standard checklist questionnaires and more quickly get to the key issues that cause ineffectiveness.
The software tracks questionnaire submissions automatically, which helps to overcome the objection of time constraints over completing evaluations. Evaluations come in anonymously and are protected by strong security. Administrators can easily create custom reports for in-depth analysis and export them using a few clicks. Diligent’s board evaluation software is a complete evaluation process that can easily be combined with other evaluation tools according to boards’ needs and purposes.
The interview process often begins with a questionnaire that serves as a basis for interview questions. Boards that want to dig deep and get to the heart of key issues will find that the interview process lends itself nicely to honing in on a few key issues, which leads to specific actions for improved board performance.
Documentation Best Practices Review
Boards may consider doing a comparison of best practices for corporate governance with their own practices. Some boards do this internally every year to keep current with regulatory changes and ensure compliance. It’s a good practice for all boards to use an independent external reviewer to evaluate their performance against best practices every three to five years.
The observation process isn’t one of the more popular board evaluation processes, but it’s one that can bring some of the most objective insights for boards who are willing to give it a try. The way that it works is for boards to hire an independent, trusted advisor to observe the board materials, board meetings and committee meetings and provide an objective analysis of board functioning. The analysis may include a review of cultural and behavioral matters. Observation is a viable process for boards who need an objective process.
Boards that share a high level of trust sometimes find that a facilitated dialogue gives them the best information about their effectiveness. A third-party facilitator engages and guides the board in discussions about issues and key opportunities where they can improve. Boards may decide to use facilitated dialogue in conjunction with another evaluation tool to get the best recommendations for improvement.
Understanding the board’s culture is critical to good governance. A cultural analysis helps boards move beyond a checklist of issues to bring out those norms that are neither written nor spoken. Culture serves as a foundation for the interplay between the board’s structure and behavior, and how it impacts governance issues. Culture is the cornerstone that serves as a foundation for understanding drivers that motivate change and the board’s ability to adapt and improve.
Effectively Using Results to Promote Improvement and Support Good Governance
Implementing results and taking action for improvement is often the biggest downfall for board evaluations. This is because boards lack fidelity to the process when analyzing the results of their efforts. They fail to follow through, which defeats the purpose in taking the time to do them.
It’s important for boards to keep the end goal in mind as they approach board evaluations. The close of the process should include taking action, disclosing the results and weighing in on the benefits of the process.
Quality evaluations will reveal such issues as:
- Gaps in skills
- Lack of resources
- Areas for board training and development
- Legal responsibilities
- Compliance with governance practices
- Aid in strategic planning
- Identify priorities
- Allocate resources
- Steer board succession
- Refresh the board
Shareholders have a vested interest in the outcomes of board evaluations. Facilitators should disclose the outcomes and any anticipated changes to the board and managers, who should share the results with shareholders. The chair should take the lead in coaching individual directors about gaps in skills or performance. If required, boards should also disclose their process and results to any regulatory bodies or other stakeholders.
In the end, board evaluations should get board directors thinking about their growth in directorship and open up the lines of communication in the boardroom. Among other things, evaluations should aim to help boards reach a consensus on their priorities and implement positive change.