Board evaluations are widely accepted as part of good governance. There’s plenty of global support for doing them on a regular basis, whether they’re required by regulatory authorities or not.
Despite the pressures that stem from institutional investors, global regulators and governments, it’s common for board directors to support the idea of board evaluations while having some internal conflicts about going through the process. This discrepancy may explain why the level of buy-in doesn’t necessarily match efforts at implementing changes stemming from board evaluations.
In 2016, PricewaterhouseCoopers conducted their Annual Director’s Survey, which revealed that just under half of board directors stated that their board evaluations netted substantive changes.
Across the globe, it’s easy to find reasons for conducting board evaluations and the benefits they provide when board directors follow through with implementing changes.
Global Examples of Board Evaluation Requirements
There’s no shortage of regulatory statements and requirements about the value of conducting board evaluations, as we can see from examples in Japan, India, England, France and the United States. Additionally, institutional investors are also making their voices known about the value that board evaluations bring to corporations and shareholders.
Since the spring of 2017, the Council of Experts Concerning the Follow-Up of Japan’s Corporate Governance Code made their expectations for board evaluations clear. They stated that board evaluations were of primary importance and board members should provide honest evaluations of the board by each member.
Indian companies have been required to conduct board evaluations since 2013. The Securities and Exchange Board of India issued guidance on board evaluations in January 2017.
In England, the United Kingdom’s Governance Code has called for board evaluations every three years since 2010. England requires boards to use third-party facilitators for their evaluations.
England’s neighbors in France approved the AFEP-MEDEF code in 2003, which is similar to England’s requirements for board evaluations.
The New York Stock Exchange requires companies listed on its exchange to conduct annual board evaluations. About 98% of Standard and Poor’s listed corporations comply with completing annual board evaluations.
Global Investors Pressure Corporations to Conduct Board Evaluations
The Investor Stewardship Group is composed of a coalition of over 25 global institutional investors. In 2017, they released Corporate Governance Principles for U.S. Listed Companies, which made recommendations for boards to have regular board evaluations that were robust in nature.
Some of their work built on prior efforts from an earlier group of investors led by Jamie Dimon and Warren Buffett, as detailed in the Common Sense Principles for Corporate Governance in the year prior. This report placed great emphasis on the notion that boards should have a robust process for evaluating themselves and use it on a regular basis.
Two leading proxy advisory firms, ISS and Glass Lewis, helped boards form a definition for a strong board evaluation process. The firms advise boards to use external evaluations and individual director assessments to reflect best practices for corporate governance.
Incorporating Essential Elements for Robust Board Evaluations
Board evaluations should be somewhat customized to the organization’s needs. Certain components should be part of every board evaluation process, including strategic alignment, succession planning, people and processes, benchmarking and individual director assessments.
Often, board directors think they’re aligned with the corporation’s strategies. However, board evaluations sometimes reveal that board directors are not aligned as closely with the corporation’s strategies as they thought they were. This is sometimes due to misinterpretations of the board’s discussions on strategy. Other times, the misalignment is due to board directors not being adequately engaged in board discussions and asking probing questions.
Detecting misalignment on strategy may signal the need for more than one board retreat per year, so the board has the proper time make sure all directors are on the same page.
Board evaluations may reveal how satisfied board directors are with the board’s strategic planning.
Board evaluations usually also reveal issues related to the existence or strength of succession planning. Best practices for governance suggest that boards should participate in succession planning as soon as they appoint a new CEO.
Evaluations may reveal that boards need to begin the process of identifying new candidates for the board and management sooner than in the past so they have sufficient time to vet candidates and make wise decisions.
Evaluations may also highlight the need for boards to change the manner in which they vet board and management candidates. Best practices encourage boards to interact with candidates in formal and informal settings that take place inside and outside of the boardroom.
Board directors who struggle with objectivity will find that third parties may offer substantial assistance in making the most of board evaluations.
People and Processes
Another area where board evaluations can help to improve boards’ performances is in the category of people and processes. Boards sometimes place a heavy focus on the composition of the board without regard to the leadership capabilities of the board. Board evaluations may reveal qualified candidates for positions of the board chair and committee chairs.
Just as investors are continually analyzing the board, the board should be analyzing itself with the goal of improving its composition and its processes.
Some of the best feedback for board directors comes from investors. Boards may not want to interact directly with investors; however, the corporate secretary, General Counsel or investor relations representative should be able to share the investors’ expectations with the board.
Additionally, board directors should regularly compare their board to those of their peers, as well as to boards that are the best in their class.
Individual Director Assessment
Board evaluations should be developmental and positive. They should encourage a collegial atmosphere in which board directors can let go of any hesitancy in evaluating each other.
Third-party evaluators can help to manage the environment and to assess individuals for the proper skills, abilities and level of engagement for each board director.
The Final Wrap-up on the Value of Board Evaluations
Board directors have many choices in conducting board evaluations. It’s less important which process they use to complete board evaluations than it is to make proper disclosures to investors. Investors who believe that boards conduct robust evaluations will give them credit where it’s due. Investors generally believe that evaluations are a better tool for refreshing boards than limits on age or tenure. Board evaluations prove to investors that they’re tackling the issues that investors care most about.