All boards of companies listed on the New York Stock Exchange are required to conduct a board self-evaluation at least once a year. The goal of the evaluation is to assess whether the board has the proper composition and leadership skills to effectively oversee the company, and whether individual directors are fulfilling their obligations effectively. The New York Stock Exchange expects the evaluation to be much more than a rote exercise. Boards that do a thorough job of their annual evaluations will improve the functioning of their boards. Boards that don’t take the process seriously enough will do themselves a disservice.
Recent Study Shows Board Evaluations Lacking
Despite the best intentions, a joint 2016 study by the Harvard Business Review and The Miles Group showed that boards are not doing as well on their evaluations as they should. The study surveyed directors from 187 corporate boards of publicly traded companies and came up with some eye-opening results.
Only about 55% of boards evaluate their directors individually. Of the boards that take the step to evaluate individual directors, most boards don’t feel that they do a good enough job of identifying or correcting poor or marginal performances. Assessments didn’t fare any better for whole boards. Only 36% of directors in the survey said they felt their boards were open to new points of view and only 46% strongly believed their boards tolerated dissent.
Board self-evaluations should start with a review of the board’s structures and processes. In general, questions should focus on how well the board leads, manages and contributes. Most boards find it most productive to have their general counsel or outside legal counsel conduct the evaluations in order to preserve the integrity of the process. There is an additional benefit to having attorneys conduct annual board evaluations. Attorneys can rely on attorney-client privilege to protect the board if the evaluations reveal something that relates to a later lawsuit.
Board evaluations should be unique to each company. They should include a checklist of items that the board is required to review, along with the associated standards. Following are some good, basic questions to ask.
Basic Questions for Board Evaluations
Board Composition and Skills
- How well do you understand the role of the board?
- How well do you understand the role of the committees?
- How well has the board identified the qualifications and experience that are most important to the company’s forward-looking strategy?
- How familiar are the individual directors with the company’s industry?
- Does the board have a strong understanding of the company’s cybersecurity functions?
- Is the board well-informed of emerging risks and trends?
- How aware is the board of activity by institutional investors and activists?
- Does the board have a balance of backgrounds, skills, diversity, experience and expertise?
- How well does the board represent the interests of key stakeholders?
- Does the board spend adequate time on the topics of board composition, director appointment process and succession?
- How robust is the process for assessing potential board candidates based upon their skills, experience and backgrounds as they relate to the company’s strategic goals?
- Do individual board directors have adequate time and resources to accomplish board work?
Strategic and Performance Abilities
- How well does the board understand key performance drivers and significant risks?
- Does the board devote adequate time to discussing strategy and risk?
- How robust are the practices for evaluating worst-case scenario planning?
- Is the board’s crisis management plan adequate?
Governance and Organizational Assessment
- Does the board receive feedback from institutional investors?
- How well does the corporate culture translate from the top down?
- How well does the board evaluate and monitor company culture?
- Does the board need to improve involvement with advisors or experts to fill gaps?
- Do you have a good understanding of the directors’ and officers’ insurance policy?
- Does the board have a strong working relationship with management?
- Does the board provide regular feedback to the CEO?
- Does the CEO receive regular feedback from committees?
- Does the board have a distinct plan for long-term and emergency succession planning?
- Does succession planning coincide adequately with potential shifts in strategy?
- How well does the board understand the company’s talent strategy, risk and human capital challenges?
- Is the board actively developing candidates internally at least two ranks down?
- How well does the board groom senior executives for internal promotions?
- Is the pay differential between the CEO and other executives too high?
Assessment of the Board Chairman
- Rate the effectiveness of the board chair.
- Does the board chair keep all directors engaged with constructively framed questions?
- Does the board chair have an effective leadership style?
- Does the board chair encourage an environment of mutual trust, cooperation and collaboration?
- Does the board chair invite the participation of all directors?
- How well does the board chair ask the right questions so that board directors’ views build on the views of others?
- Does the chair set a good and proper example for the rest of the board?
- Does the chair create an environment in which directors can challenge management constructively?
- How well does the chair manage dissent?
Board Functioning and Team Dynamics
- How effective are board meetings?
- Are executive sessions properly structured to frame discussions and steer the board?
- Does management keep the board informed about important matters in a timely manner?
- How clear and accurate are meeting minutes?
- Are follow-up items being added to future agendas?
- Does the board receive reports from committees in a timely manner?
- Does the agenda allow adequate time for emerging issues?
- Are debates open, effective, honest and constructive?
- Does the board have a sense of camaraderie?
- Are there board members who have a negative impact on the board?
- Does the board need additional training on the business environment, emerging risks, regulation, or other matters?
- Is the process for onboarding and orienting new board members sufficient?
- Does the board perform evaluations at the board, committee and individual director levels?
Concluding Thoughts on Board Evaluations
Truly effective boards take the time to perform individual director evaluations, in addition to overall board evaluations. This is the more difficult, but more valuable, part of board assessment. Individual director evaluations should include questions about interpersonal and group dynamics. In order to maximize the efficiency of the evaluation process, the board administrator should be looking to digital tools to streamline the process. These tools exist and can make it very easy for the admin to create new sets of questions or reuse old questions. Diligent created our Evaluations module to meet these exact needs.
Boards should recognize the issues that brought about the mandate for board annual evaluations. Boards that commit to the integrity of the process of evaluating themselves protect and enhance shareholder value in impactful ways. See how Diligent can help your board achieve success with their evaluations and recognize any spots that might need improvement.