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19 Jul. 2019 | Comments (1)
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 first part of a two-part series on the board evaluation process. The second part is a FAQ on board evaluations.)
I guest-lectured at an MBA class on board governance earlier this year and a student asked, “if we have all these rules and best practices, why do we continue to see examples of bad board oversight?”
Great question. My answer was, while we do read too often in the news about instances where directors appear to have been “asleep at the wheel,” this does not reflect the good work that is performed by the vast majority of directors – and that work doesn’t often make the cut for front page news. My answer is true, but not complete.
Sometimes, the best directors get caught up in the “busyness” of board work (reviewing, analyzing, travel) and, when reading about another front-page scandal, utter to themselves, “that couldn’t have happened at my company because we have 12 really smart people sitting around our boardroom table, we spend a lot of time in meetings, we challenge management and we focus on going-forward strategy.” Yet, notwithstanding the “busyness,” how does your board know it is effective and is continuing to develop? We are all familiar with Will Rogers’ famous quote, “even if you’re on the right track, you’ll get runover if you just sit there.”
Directors don’t let management “just sit there.” The answer to knowing if your board is effective is having a meaningful board assessment process. The NYSE requires directors to perform an annual board performance evaluation. And, for many boards, this has become a rote “check-the-box” exercise with little director engagement and no meaningful output. Healthier boards have evolved to using a continuing development process where directors use various methods to ensure board usefulness.
Such a continuing development process might encompass the following components:
Using “mini evaluations” during the executive session at the end of each meeting helps to catch potential issues early on. The board chair poses such questions as: (1) did we accomplish what we needed to accomplish; (2) did we have the right materials, in advance; (3) did we need to dive deeper on a subject discussed; (4) what could we have done better; and, (5) what should be on our next meeting agenda?
Board culture reviews
Focusing on periodic board culture reviews is a tool used by progressive board chairs. It takes a bit of time, but it is better to correct breakdowns early rather than let bad behavior drag on. Questions the chair might consider include the following.
- How's our board "chemistry?"
- Are directors getting to the meeting on time, "checking out" during meetings, leaving early?
- Is everyone prepared?
- Is everyone participating? Is anyone over-participating?
After considering his/her own views, the chair often shares thoughts with the governance committee chair and the CEO to gain additional perspectives and determine if any action would help the board perform better.
Multiple-year board performance assessment structures
While the annual board evaluation is a best practice, mapping out a multi-year structure is more likely to strengthen board effectiveness than distributing the same tedious survey every year. Establishing this structure starts with setting clear objectives and asking, “what is our focus?” An example of a multiple-year format follows.
- Year one – discuss board logistics, materials, communications, committee structure and purpose. A survey might be a good tool to elicit this information.
- Year two – focus on one or two governance "hot-topics," e.g. the board's role in risk management, board composition, your CEO performance review process or succession. One-on-one discussions with the board chair might be the right tool.
- Year three – emphasize the board’s meeting agendas, e.g. are the right topics addressed, what’s missing, are there any “elephants” in the room; or consider if a recent board action could have been handled better. One-on-one discussions facilitated by an independent governance expert might be helpful.
Board chair reviews
It’s useful to ask board members, “how is the chair doing?” Most chairs welcome the feedback and suggestions to help the board work better. If using an outside facilitator, these questions are often combined with one-on-one board conversations.
Every board’s evaluation practice will be different because it must match the company’s and the board’s uniqueness and culture. Regardless of style used, the board evaluation is not only about the board – it is about accountability to shareholders and the end-product should help optimize company performance. Thoughtful director input is necessary, but the full board discussion, the board goals, and the follow-through is what makes the board evaluation a valuable tool used to create a more effective board.
The views presented on the ESG Blog are not the official views of The Conference Board or the ESG Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, others associated with The Conference Board or the ESG Center.