Amid the corporate scandals and subsequent reform initiatives of the past few years, the board of directors has emerged as both a target of blame for corporate misdeeds and the source of hope for better governance in the future.
Today, corporate directors are called to be more engaged, more accountable and more effective than in the past. But what are the characteristics of an effective board and how do boards ensure that they are performing at their highest levels?
Our experience working with corporate boards around the world tells us that an effective board brings a diversity of perspectives and necessary skills, focuses on strategic issues, is well-informed about the internal and external factors that impact the organization, and provides candid and constructive feedback to management. In addition, high-performing boards have committees with well-defined responsibilities, plan for board and management succession, and hold management accountable for performance.
As they strive to achieve these characteristics of a high-performing board, one of the most important tools they can draw upon is the annual evaluation. When done effectively, board evaluations provide a forum for directors to review and reinforce appropriate board and management roles and ensure that issues brewing below the surface are addressed promptly. In short, evaluations give the board an opportunity to identify and remove obstacles to better performance and to highlight what works well. So important are board evaluations that they have become not only a corporate governance best practice, but also are requirements of the New York Stock Exchange and the Combined Code in the UK.
According to one senior independent director of a FTSE 150 company, “The main thing board evaluations achieve is to stop the board mumbling and allow it to surface issues in a very transparent way.”
For some companies, board evaluations are being placed on the agenda for the first time in response to the new requirements. Other companies – often longtime leaders in good governance – have conducted board evaluations for years, finding that thoughtfully planned and executed evaluations benefit them in large and small ways.
Throughout our years of facilitating board evaluations for clients, we have seen the process uncover a variety of issues and obstacles to better board performance. These range from easily addressed operational complaints about meeting length or the composition of the agenda, to larger, thornier issues concerning the board’s role in strategic decision-making, gaps in knowledge and competencies on the board, and executive and director succession planning. The corrective actions range as well – from improving the timeliness of board materials and winnowing overly long agendas, to making changes in the composition and, occasionally, the leadership of the board.
“If everything is going swimmingly, of course, boards are more relaxed and comfortable. If not, boards often want to get in and do something about it. That’s why it’s appropriate to do an evaluation every year,” observes John Rollwagen, chairman of the board of international reinsurance group PartnerRe and an independent director for two other companies.
We recommend that each year boards conduct a broad review of their organization, agendas, meetings, bylaws, committees, communication, board materials and their performance of responsibilities such as managing the CEO relationship, strategic planning, management and board succession, governance and financial oversight.
Through the evaluation process, some boards find that they generally are satisfied with the overall board charters and membership, but express frustration at the quantity or timeliness of information they receive from management.
In our work, for example, we commonly hear from directors that agendas focus too narrowly on financials or are too long for the given meeting time, leaving too little time for the board to engage management in broad-ranging strategic discussions. Other boards reveal a desire to become more involved through, for instance, periodic board strategy days, off-site meetings with line executives and ongoing training.
While the concerns that surface through evaluations often focus on board procedures, they sometimes go to the basic relationship between the board and management, which can vary depending on the size and development stage of the company, the international makeup of the board and the current state of the business, Rollwagen says. In fact, the relationship between the board and the CEO is so central to their performance that the CEO evaluation should be conducted at the same time as the board evaluation, he says.
Board evaluations also can lead to tough discussions about the composition of the board itself and whether, as a whole, its experience and skill-sets are appropriate. Board evaluations may identify a need for additional – or replacement – directors to provide expertise in specific areas.
Whatever the results, the key to a successful board evaluation – one that promotes positive change on the board – is a full discussion of issues that are raised and a commitment to address them.
Going it alone or with help
Whether these issues are best surfaced by an internally driven evaluation or with the aid of an external consultant depends on the specific needs of the board. Some directors believe that an outside consultant’s independence ensures that the process is more transparent and that issues are aired more freely. In addition, when there are problems on a board, the anonymity provided by working with an outsider not only encourages directors to speak more freely, but also ensures that comments by individual directors are shared with the whole board and don’t get lost in the process.
We believe that there are additional benefits to working with an outside consultant that incorporates interviews with individual directors into the evaluation process. While these one-on-one discussions can span the breadth of board responsibilities and operations, they are structured to draw out the particular concerns of individual directors. Flexible, broad in scope and undertaken by senior consultants with significant board-level search experience, our interview process helps to raise real issues that impede board effectiveness, which then can be addressed. The findings are compiled and shared, and used to facilitate board discussion.
One of our clients, the FTSE 150 director, has participated in board evaluations with several international companies, both with and without the assistance of an external consultant. While a well-written questionnaire can elicit frank comments from directors, he has found that internally managed evaluations often lack independence and sometimes are constrained by a desire to avoid ruffling feathers. Strong views, he notes, have a tendency to disappear from the final consolidated report that is shared with the full board. By contrast, external facilitators have helped boards to air difficult issues, enabling them to discuss the concerns fully and come to a consensus on how to address them.
“Working with an external consultant has huge benefits in terms of providing total anonymity and ensuring that there is no editing of issues raised by directors,” he says. “Underlying issues that wouldn’t come up in a written questionnaire rise to the surface only in an interactive process.”
Rollwagen believes that boards generally are up to the task of conducting their own evaluation. He typically begins the process with a well-planned written questionnaire, essentially a comprehensive checklist of the board’s responsibilities designed to stimulate thought on areas of improvement and solicit ideas and comments from directors. Essential to a successful evaluation, he says, is having an independent chair or a lead director to champion the process and also to serve as an independent resource for both the board and management, where each can go with concerns.
Nevertheless, Rollwagen says there are instances when a board should consider looking outside for assistance. “There are two reasons to have a facilitator in the process, in my opinion. One is if the board is dysfunctional in some way – if directors aren’t comfortable with each other for some reason, or the board is new, or hasn’t established itself as a unit and so it could use some help in doing that. The other reason is if the board evaluation itself is a new process and the board needs help getting started,” he says.
Whether going it alone or working with an external facilitator, the board must commit to addressing issues that are raised through the evaluation to achieve the benefits. At PartnerRe, the board uses the results of its evaluation to set board goals for the coming year, Rollwagen says, adding, “There’s no point doing the evaluation if you are not going to improve.”
Conclusion
New governance regulations and shareholder demands are pushing boards to perform at higher levels and accept more accountability and responsibility than in the past. Board evaluations are seen as an important tool for boards to assess whether they are operating efficiently and effectively – as a high-performance board.
Many companies will – and many more will be tempted to – meet these new standards in the most expedient manner. But boards that approach evaluations in this and other compliance-oriented ways likely are to be unsatisfied by the process and will lose the opportunity to gain valuable shared insight into the operation of the board and ways to improve its composition, processes and relationships.
Companies that will benefit the most from the practice will go beyond simply collecting director feedback. They will draw out the concerns of individual directors through one-on-one interviews, promote active, candid conversations about ways to improve the operation of the board and commit to addressing the issues raised through the process.
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