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Board and Director Assessments that Matter

 


Harvard Law School Forum on Corporate Governance | March 16, 2020


The Harvard Law School Forum on Corporate Governance

The Harvard Law School Forum on Corporate Governance published the article, “Board and Director Assessments that Matter,” written by Russell Reynolds Associates Consultants Rusty O’Kelley, Justus O’Brien and Laura Sanderson, based on their paper of the same name. The article is excerpted below.

Many observers have been vocal in their perception of a decline in director quality in recent years. According to the 2019 PwC Corporate Directors Survey, 49 percent of US directors say one or more fellow board members should be replaced, and 23 percent say two or more should go. [1] These numbers are up from both 2017 and 2018. If that perception is true, then one must question why boards do not do a better job undertaking assessments and acting on their findings.

One issue to begin with is that not enough boards are doing impactful board and individual director assessments. While most companies have a mechanism for collective board assessment, just one in seven Russell 3000 companies, and fewer than one in three S&P 500 companies, have an annual review process for individual directors. The majority of boards are failing to fully implement even a basic approach to evaluating director performance. Unfortunately, among those that do, many use a survey-centric approach, with a director survey being the primary data-gathering effort. Directors often fail to give these surveys the real candor and insights required. The result is that a growing number of institutional investors and governance experts are acknowledging that assessments which rely primarily on electronic surveys are close to worthless.

Globally, Russell Reynolds Associates has conducted over two hundred board assessments over the past several years, each of which focused on multiple facets of board and director performance and drew upon multiple sources of data. In our experience, even well-run assessment processes (those that include director interviews and some level of benchmarking) often fail to connect board performance issues systematically and across multiple years. In too many countries, the board assessment is viewed simply as an annual event and not part of an integrated and on-going approach to enhancing board performance. We believe that boards need to shift away from a one-year-at-a-time “event” approach to a more substantive longer-term board assessment and review “system.” Developing a multiyear board assessment “system” can generate greater insights and impact and increase the opportunity for the board to support value creation.

Defining what good looks like

In building a board and director assessment system, the board needs to clearly define what it means to be a high-performing board as well as a highly effective director. Based on Russell Reynolds’ research into director performance and board culture, we have identified five behaviors that the most effective directors exhibit:

  • Being willing to constructively challenge management, when appropriate

  • Possessing the courage to do the right thing for the right reason

  • Demonstrating sound business judgment

  • Asking the right questions

  • Possessing independent perspectives and avoiding “groupthink”

In the last year, Russell Reynolds conducted research to determine how boards and directors that are focused on long-term value creation are different from other boards. As has become increasingly clear, boards which established a shared focus on taking a long-term orientation to company performance produce above-average results (financial and otherwise). When it comes to individual directors, our research shows that “Long-Termers” are better informed about their company and industry than other directors. They have a higher level of understanding of organizational culture. And they are more likely to work between meetings, to come to discussions informed and prepared and to contribute expertise during board meetings.

From a process to a system

As governance and legal codes have evolved around the world, board assessments have become an increasingly important element of measuring and improving board performance. Performance-focused boards have developed robust processes to evaluate individual director and collective board performance over longer time horizons. Today, many of the best boards are increasingly looking for a broad, independent perspective and are working with outside advisors on these assessments. It is already an expectation of the UK Corporate Governance Code that companies will undergo an externally facilitated effectiveness review once every three years, and this requirement is also widely viewed in other jurisdictions (including Australia, Brazil, France, India and Japan) as an indicator of a board’s focus on continuous improvement. In the United States, externally led board assessments once every two to three years are increasingly common and are recognized as valuable by many institutional investors and governance experts.

Russell Reynolds believes the next step to enhancing board performance and effectiveness is the development of a multiyear, integrated board and individual director assessment system. A systematic approach will telegraph to investors, regulators and other key stakeholders that the board is future-oriented and performance-focused. It will drive board quality and performance by ensuring multiple aspects of collective and individual performance are being evaluated and analyzed—and, ultimately, that all of the “dots” are being connected. While each board will undertake its assessment from a different starting point depending on board custom, country or stock exchange–specific regulatory requirements, below is a foundational model for boards to tailor to their specific situation and regulatory expectations.

To read the full article, click here.

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Board and Director Assessments that Matter