A Special 3-Part Corporate Director Podcast Series on Board Evaluations

The Corporate Director Podcast: TK Kerstetter on Board Evaluations

Listen to Episodes 44-46 on Apple Podcasts

Guest: TK Kerstetter, host of Inside America’s Boardrooms, Inside Europe’s Boardrooms, and Inside Australia’s Boardrooms

Hosts: Dottie Schindlinger, Executive Director of the Diligent Institute, and Meghan Day, Senior Director of Board Member Experience for Diligent Corporation

In this episode:

  1. Start by setting your goals. Is your board evaluation meant to be punitive, for planning purposes, or—as Kerstetter recommends—for making sure the right people are in the room to keep your company competitive?
  2. Pick your process. Should you conduct internal evaluations or enlist a third-party facilitator? Each process has pros and cons, Kerstetter says.
  3. Mind the post-evaluation details. Conversations with at-risk directors can be challenging, Kerstetter says, as can deciding what to include in (and keep out of) the minutes.

Summary

When it comes to board evaluations and how to make them better, Inside America’s Boardrooms host TK Kerstetter is uniquely positioned to weigh in.

Kerstetter has served as a third-party facilitator for over 25 evaluations throughout his career and is, in co-host Dottie Schindlinger’s words, “passionate about the idea of board leadership and board evaluations.”

“An evaluation is something that everyone in business has had in their careers, so it makes perfect sense that is also a function of the board,” Kerstetter says.

Evaluations are essential for getting the right people in the room, and establishing a candid, productive culture on the board should always be a top priority, Kerstetter says. “Don’t take it lightly. Run it like a business.”

In this episode, Kerstetter shares his advice for strengthening board evaluations in 2021.

Start by setting your goals

Boards see evaluations from a range of perspectives. Some perceive them as punitive, while others use them for planning purposes. According to Kerstetter, a board evaluation is ultimately an assessment of talent.

Kerstetter says that he’d rather not use the word “punitive” in this context. “Board evaluations are really more of a positive statement that the board and board leadership recognizes that they’ve got to keep refreshing board composition,” he says. “This makes sure that the board can keep ahead of the curve and subsequently help management stay ahead of the curve so the company can compete and hold its value.”

Particularly in today’s world of digital transformation, a board evaluation asks: “Is this the right person to help us make decisions for the changes we need to be competitive in the future?”

This query is especially important given trends in an annual PWC survey question: “Are there people on your board who you feel should be replaced?”

That percentage has gone up every year  and last year  hit a new high: 49% of directors said that there’s a director on their board that should be replaced and 22% said they were two directors.

“The board evaluation is one of the tools in your tool kit that can help you get to where you need in terms of evaluating your board culture and leadership and making sure you have the right people in the room.”

TK Kerstetter, host of Inside America’s Boardrooms, Inside Europe’s Boardrooms, and Inside Australia’s Boardrooms

Pick your process

“It takes nurturing, communication, and leadership to make people feel comfortable in an evaluation environment,” Kerstetter says. “The sooner you can get a process into place, the better off you’re going to be.”

Something to consider: Board members should understand the distinction between a formal “evaluation,” which is executed by a third party or other directors, and an “assessment,” which is typically a self-reflection where directors look at their own capabilities and areas for improvement.

An evaluation spurs questions:

  • Will the process evaluate the entire board, committees, or directors on an individual basis?
  • Will the evaluation be written (a “check the box kind of thing”), an interview, or a combination of both?
  • Will directors engage in peer reviews, or will the board bring in a third-party consultant or facilitator?

“All companies should get to the point where their board is comfortable enough to do a peer-to-peer evaluation.”

TK Kerstetter, host of Inside America’s Boardrooms, Inside Europe’s Boardrooms, and Inside Australia’s Boardrooms

Who you select to conduct the evaluation matters, and there are pros and cons to external vs. internal. The head of the nominating committee or the general counsel are typically the most popular evaluation candidates and offer the advantage of keeping interview content, discussions, and follow-ups in-house.

On the other hand, a third-party facilitator or anonymous process might engender greater openness, particularly if problems need to be raised. “Directors won’t be as candid with one of their own as they would be anonymously or with a third party,” says Kerstetter.

Mind the post-evaluation details

Timely and thorough follow-up is vital after an evaluation. But boards must be aware of the nuances and risks of recording their action plans. Anything that goes into a report becomes part of the minutes and therefore something the board must follow through on—or risk penalty for being negligent in their duties, Kerstetter notes.

“If the board says they’re going to enhance a committee or bring in a consultant or have a discussion with the director, I wouldn’t recommend you put that into the minutes,” he says.

Whether it means sitting down with a director to discuss an improvement plan or replacing a director outright, taking action after a less-than-positive evaluation is “the hardest part of board leadership,” Kerstetter says. “It’s in some ways harder than replacing the CEO.”

Also in this episode . . .

Schindlinger and Kerstetter discuss the importance of strong board leadership throughout the evaluation process. In the majority of the board evaluations he’s been brought in on, Kerstetter reflects, “these boards were in trouble internally because there was no leadership in the process.”

“There was nobody in the room that was willing to resolve the situation. Because of that, the problems weren’t getting solved, they were just getting worse.”

In situations like this, he advises board members to open up and “be as candid as possible, to talk things through for the betterment of the company and the shareholders.”

Resources in this episode: