Making board evaluation more robust
Ethical Boardroom Magazine published a bylined article titled, "Making board evaluation more robust," co-authored by Anthony Goodman and Jack "Rusty" O'Kelley III. In the piece, they explore five elements of an effective evaluation. The article is excerpted below.
Demonstrating board assessments provides investors with a signal the board is actively listening to its shareholders’ governance concerns.
Board evaluation is a topic that yields mixed sentiments from directors, who often praise the concept but in practice do very little to drive a robust process that would result in meaningful changes.
Accordingly, board evaluations tend to produce only incremental change that fails to keep pace with their companies’ evolving strategies or with changing investor expectations. In survey after survey, directors have expressed their dissatisfaction with board evaluation. For instance, Stanford University’s Rock Center survey found that “satisfaction levels with board evaluations are modest” and PwC’s 2016 Annual Directors Survey found that only about half of directors (49 per cent) say their board actually made changes as a result of their evaluation. Take a few recent examples:
In February 2017, the Council of Experts Concerning the Follow-up of Japan’s Corporate Governance Code issued guidance noting that, beginning this spring, companies will be expected to evaluate their boards with “primary importance…placed on an honest evaluation of the board by each board member”. Earlier, in January, the Securities Making board evaluation more robust and Exchange Board of India issued its long-awaited guidance on board evaluations, which have been mandatory for Indian companies since 2013. By comparison, the UK’s Corporate Governance Code has, since 2010, called for externally facilitated board evaluations every three years, while France’s AFEPMEDEF code began making similar recommendations in 2003.
If a board evaluation is to be a value adding experience, rather than a tick-the-box compliance activity, we believe there are certain elements that need to be present. These are:
An assessment of whether directors feel fully involved in the development of strategy and if there is genuine alignment around the strategy.
A review of whether directors feel comfortable that the board is doing enough to ensure an effective CEO succession in both the short term (emergency succession) and longer term. Do they also have a good grasp of the bench strength beyond the C-suite?
An honest appraisal of the board’s strengths and areas for development when it comes to people (board leadership, composition and culture) as well as process.
Benchmarking of the board against a range of reliable outside indicators, such as peer and best-in-class companies, governance best practices and investor perspectives.
Evaluation of individual director performance and contribution to the board.
Board evaluations (internal or external) sometimes fail to have the desired impact because they are not robust enough, the process doesn’t dive deep enough into the ‘issues behind the issues’ and they fail to consider emerging trends in corporate governance and changing investor expectations.
The following section explores these five elements of an effective evaluation in more detail.
The full article is in the Spring 2017 issue of Ethical Boardroom, which can be found here.