25 Jul. 2019 | Comments (0)
On Governance is a series of guest blog posts from corporate governance thought leaders. The series, which is curated by the ESG Center research team, is meant to serve to spark discussion on some of the most important corporate governance issues.
(This is the second part of a two-part series on the board evaluation process. The first part appeared on July 19.)
The following FAQ is based on common questions directors ask about board evaluations. The answers share a helpful review of the steps and provide tips for evolving your annual board development process.
1. What are the basic types of board evaluations?
Most board evaluations are self-assessments of the board’s performance. Some boards also ask directors to self-evaluate their individual performance. The chair may distribute a list of questions for directors to review either on their own or during a meeting followed by discussion.
B. Individual director evaluations/peer-to-peer evaluations
There are several methods of determining if each director is effectively contributing to board performance. For example, the chair might consider each director’s participation, then have one-on-one conversations; or directors might be invited to rate their fellow director’s involvement by completing a survey that identifies important attributes such as attendance and preparedness.
C. Committee performance evaluations
Just as important as reviewing the board’s performance, each committee’s performance must also be reviewed to ensure charter requirements are completed in an effective manner.
2. What’s the “so what” that follows the board evaluation?
Following the gathering of data, the input is analyzed, looking for common themes among directors. Directors then discuss these results and list the board's goals/action items for the ensuing year. Outcomes from an evaluation are unique to each company, but, for example, a to-do could include the board overseeing a deeper dive into talent management, a board table-top exercise around a security breach, or a review of the responsibilities of board committees. These board goals are periodically reviewed throughout the year to ascertain progress.
3. Do you include persons other than the directors in the board evaluation process?
Typically, the board evaluation process includes soliciting information from each director, including the CEO, and oftentimes from the corporate secretary, the general counsel and the CFO. Consider including another level of executives, for example, the COO, the CHRO, the CTO, and business unit leaders. A few boards have begun seeking input from outside counsel, the independent auditor, and key shareholders.
4. How do you engage your directors in the process?
This question is asked a lot and the answer usually begins with engaging your directors early. Tips include:
A. Before the assessment process begins, discuss with the full board past processes, why it’s important and ask for input on what would make the assessment more helpful.
B. Diversify the method of evaluation, i.e. if you've always used a long survey; try asking only four open-ended questions, e.g.
1. What is the board good at?
2. What does the board struggle with?
3. What are the three most important matters the board needs to consider this year?
4. What one or two ideas do you have that would make the board more effective?
C. Try one-on-one interviews.
D. If you haven't done so, consider including management in the process.
5. How do we introduce peer-to-peer reviews?
The key to conducting helpful peer-to-peer reviews is first to abandon the notion that it’s about looking for what’s wrong. This is an initiative that looks for positives and development opportunities. Here are two methods of beginning the peer-to-peer review.
A. The chair has one-on-one conversations with each director (normally as part of a full board performance review) and asks for input on the participation of fellow board members. The chair does some analysis gives feedback to each director.
B. A survey is distributed. Anonymity is important. Director names might be in the top row across the sheet; and attributes such as attends every meeting, is fully prepared, contributes, doesn’t continually check email during meetings, are shown down the left-hand column. An open-ended question could follow, such as, “Do you have any development thoughts for the named director? Directors are asked to first score themselves, then others. The results are tallied, and each director receives feedback.
6. What should we disclose about our board evaluation process?
There is much talk from investors on disclosure. Minimally, it’s important to share the board’s evaluation process. Some boards discuss high level outcomes, for example, “as a result of last year’s board evaluation the board decided to create a board recruitment and succession plan.”
7. How do you differentiate the board re-nomination process from the board evaluation process?
Purpose. These are two separate board responsibilities that are often confused. The board evaluation process is about learning how the board can do its work better (or how an individual can be a better director); the annual re-nomination process is about recommending a slate of candidates to be re-elected to the board of directors. Yes, performance is considered, but it is also about asking, is our board the right size, do we have the right skills, the right tenure mix, the right attributes when looking at the board as a whole?
Timing. The re-nominating process is most often begun at the end of the company’s fiscal year, when proxy preparations get into full swing. The board evaluation process might be completed at the end of the year, the beginning of the year or prior to a board retreat.
8. What other board evaluation elements should the board consider?
Talking about how the board works should always be confidential – shared only within the boardroom.
B. Director anonymity
I often hear, “our directors have no problem speaking up, director anonymity isn’t a concern on our board.” Ideally, every director will share concerns with the full board, or privately with the chair. Sometimes, however, those directors need a “push” to come forward and having that one-on-one conversation gives those directors the opportunity to pose questions that might otherwise upset the boardroom culture or simply be embarrassing to ask in front of fellow board members.
C. Third-party facilitators
Third-party facilitators can be helpful in the board evaluation process, and often bring a new perspective, but are seldom needed every year. An advantage is the facilitator can bring best practice ideas and benchmarks; a disadvantage is the facilitator does not know your directors or company as well as you do. One caution when using an outside facilitator, use someone independent (not the company’s outside counsel, auditor or search firm); and ensure the facilitator is a governance expert.
D. Board evaluation reports
The most important pieces of the board evaluation process are the full board “results” discussion and approval of the board goals. Some boards want facilitators (chair or independent) to simply lead a discussion, the only written report is the notation in the minutes that the board evaluation took place and a list of the two or three approved goals. Other boards prefer a one-page summary.
E. Attorney-client privilege
Some boards are concerned about this, some are not. If your board is, and it engages an independent facilitator, it would be wise to ensure the facilitator is an attorney. Will the board evaluation be protected by “attorney-client” privilege? This has not been decided by a court of law.
9. What’s next for board evaluations – What’s happening across the pond?
The UK’s Corporate Governance Code requires that FTSE 350 companies conduct an externally facilitated evaluation every three years and disclose the identity of the external evaluator, the process used, and the outcomes and actions. Proposed amendments to this regulation include a voluntary practice code for service providers and possible certification and a requirement that companies address the facilitator selection process and board evaluation scope and process in disclosures. US companies may want to consider adopting some of the UK’s requirements so, as a whole, we can fend off additional US regulations in this area.
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