13 Jun. 2017 | Comments (0)
By John Morrow
Most major U.S. public companies have an annual assessment process. For many, the process is pretty basic and routine with a checklist that never changes. It has become a necessary evil – a mindless process – that directors know they have to live through every year. For some, it doesn’t mean anything. It’s just a compliance process. Unfortunately, boards that look at assessment in this way are doing themselves and their shareholders a big disservice. Directors need to be committed to the process, and not just along for the ride. A board can draw a lot of value from a robust board assessment, and assessment could be an early warning to problems that may be festering.
The value includes:
- Board effectiveness – The annual assessment is an opportunity to stop and think about whether the board is providing value to management, fulfilling its charge, acting in compliance with its charter, giving due consideration to corporate issues, overseeing the CEO, motivating the CEO, and complying with its other responsibilities.
- Director effectiveness – When assessing directors individually –
- a practice that is still widely used, but is being considered by more boards and recommended by shareholders—directors can focus on what their peers bring to the table. How does each director uniquely add value to the board? Is the company still in a phase where an individual director’s skills are needed?
- Director competence – One elephant in the boardroom is competence. Let’s face it: as we age our skills and acuity might not be as sharp as they once were. And we’ve all seen colleagues and mentors decline over the years. Yes, they are still great people that we respect, but at some point, it may be time for them to move over to make room at the table for someone whose skills are sharp and current. I’m not suggesting that all older directors need to leave the board; I am suggesting that an effective assessment process could help identify a problem at its beginning when it may be easier to address.
- Board refreshment / term limits – Reflecting on its performance is also a time to consider if the right people are around the board table, or should continue on the board. Should the board consider term limits? If so, how long? Alternatively, should they consider bringing people onto the board for a specific purpose, or specific time, and when the time period is up, or the purpose is completed, rotate the director off the board and bring on someone new? Each of these are ways to keep the board refreshed and bring in new perspectives.
There are a variety of ways to conduct an annual assessment, and boards have considerable flexibility in doing so. Many boards use a survey as the assessment tool, but another approach might be more effective. Consider these:
- Offline conversations between the chair (or lead director) and directors individually. The advantage to this approach is the opportunity for private discussion and follow-up questions. Also, the chair can elicit improvement suggestions from the directors.
- Facilitated session – Engaging a facilitator that is not on the board might be more comfortable for directors because their comments could be disguised in anonymity. Many engage an attorney, whether from the general counsel’s office or from outside the company, believing the process and results would be protected under attorney-client confidentiality. However, because a board assessment does not involve legal advice, confidentiality does not apply.
- Surveys – I opened this blog talking about checklists. Too often we’ve seen boards use the same survey year after year, and I’d like to propose an alternative to that. Having several surveys and using a different one every year will keep the process from going stale. Each survey might focus on a different aspect of the board: effectiveness, relationship with management, director effectiveness, committees, approach to risk, relations with shareholders, and performance measures, for example. Using one or two of these each year, and rotating them regularly, can keep the process fresh and still allow for observing trends. Also, a developing problem might surface when the board observes a big swing over a few years, rather than incremental movement year-to-year.
Assessment doesn’t end with completing the process. As the secretary, chair, lead director, or facilitator assembles the data, it’s important to review the results with the board and discuss any actions that may be taken. Policies and practices may need to change based on the input from directors, with the expectation of a higher functioning board.
The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.