Friday, May 14, 2021

Executive Education

Board Evaluations Are Good for Business – When Done Right

In this volatile, uncertain, complex and ambiguous economy, boards and corporate leaders have to be on their “A” games in order for the company, its investors and its shareholders to thrive. Board evaluations are a valuable tool for assessing the effectiveness of directors and identifying areas that need to be addressed. Unfortunately, while many companies conduct board evaluations, inherent challenges with the process mean that there is often little gained from them. However, when the evaluation process is facilitated properly, it can strengthen the board and ultimately lead to better company performance.

Board Evaluations Are Critical to Strong Board Composition 

Board evaluations are vital for a number of reasons. The board’s quality impacts the company’s ability to attract and retain top executive leadership. Meanwhile, the data shows that many directors believe there are board performance issues requiring action.  According to PwC’s 2016 Annual Corporate Directors Survey, 35 percent of directors report that at least one board member should be removed, yet 51% said their company made no changes based on their last board evaluation. This disconnect may mean companies aren’t leveraging the evaluation process in a way that would produce effective change, and missing out on an opportunity to further develop their boards.

Board evaluations should help reduce stagnancy and ensure growth. Currently, the average tenure of directors is at 8.7 years, and the vast majority of directors get re-elected with 97% of the vote. Institutional investors and corporate community members surveyed by Institutional Shareholder Services Inc. (ISS) said that having a large number of directors with long tenure is “cause for concern.” ISS noted that lengthy tenures are believed to prevent boards from introducing new skills, such as product management, marketing and conflict resolution. However, evaluations enable the company to make improvements based on the organization’s needs, and if necessary, refresh board seats.

Board evaluations can also play a role in helping boards create a succession plan.  Should a C-suite executive or director make a sudden and unexpected departure, companies that aren’t prepared have to scramble to find a replacement and may not have a clear picture of the board’s needs. Evaluations can help companies create a “profile” of the current board’s skills and industry expertise, and identify any gaps that incoming candidates might fill. Many experts, including search firm Russell Reynolds Associates, recommend that boards create a plan outlining emergency succession procedures, and review it twice a year.

Board Evaluations Can Fuel Company Success

Assessing the board’s strengths and areas for improvement is an important practice for the overall success of a company. Unfortunately, many organizations face challenges with evaluation effectiveness, for several reasons:

  1. A Small Window to See Through

Not all organizations are required to conduct board assessments, but those that are most commonly use only a single questionnaire rating the board’s performance.  The results of these assessments tend to skew high and provide limited visibility into individual director performance. Meanwhile, there is almost no agreement on what questions should be included on board self-assessment questionnaires – which limits the opportunity for industry benchmarking.    

  1. Issues Being Ignored

In PwC’s survey, 35% of directors believe a member of their board should be replaced – a finding that has been relatively consistent over the past five years.  Directors cited reasons such as “unpreparedness,” “lack of expertise,” or “age” for why they believe a peer should be removed from the board.  Yet, more than half also reported that no changes were made following their last board assessment. This means there could be issues impacting board performance with little being done to address them.

  1. Holding Back Feedback

A study by The Miles Group found that fewer than half of companies conduct self-assessments on the individual level, and when they do, directors are asked to rate their own performance, rather than that of others. With directors being asked to self-evaluate, the odds are low that the results are accurate enough to be actionable.

Additionally, when companies do ask for peer evaluations, directors admit they’re uncomfortable giving candid feedback on fellow board members. The same Miles Group report found that fewer than half said they strongly believe their board tolerates dissent, which likely discourages directors from sharing concerns about their colleagues. These processes prevent potentially damaging practices from being addressed or necessary board refreshes from taking place.

  1. Evaluations Aren’t Thorough

Most board evaluations focus on directors’ opinions about board performance, rather than measuring director behavior.  A case in point – a recent survey from NYSE Governance Services and Diligent focused on understanding board communication practices and cyber risk.  In that study, 92 percent of directors acknowledged using personal email accounts—notorious for being unsecured and hack-prone—to communicate board business with fellow directors.  When asked whether they receive cybersecurity training by their companies, 62% said “no.”  With the high frequency of cyber attacks, directors’ lack of preparedness could cost the company millions, and annual board evaluations should provide companies the opportunity to identify gaps in director development.  But rarely do board evaluations explore specific director behaviors and competencies, and therefore don’t provide a clear picture of the needs.

  1. Outdated Processes

Most companies still distribute and collect board evaluations manually on paper, or via email, by corporate secretaries. This not only limits the volume of questions and the degree of thoughtful responses that can be collected, but also contributes to the challenge of obtaining candid feedback since it reduces the potential for true anonymity.  Since few regulators provide guidance on the questions the evaluations should include, companies typically keep the questionnaires brief and view the entire exercise as a “check the box” undertaking – meaning the results are surface-level rather than in-depth.

An Opportunity, Not a Checkbox

To address these challenges, companies need to evolve their board evaluation processes. Secure board governance software tools exist that enable corporate secretaries to customize questions and response types, and automate the distribution and collection of evaluations, which allow companies to get deeper, more insightful data on board health. Some providers also offer templates that include both full-board review questions, as well as questions for gathering feedback on individual performance. These tools allow directors to respond anonymously, securely and conveniently – often from mobile devices – giving them the confidence to submit candid feedback, and thus share areas of concern that need to be addressed.

As business risks and economic volatility continue to increase, every organization with a board should be conducting annual evaluations – whether it’s required or not. However, when evaluations are seen as a “check the box” activity, it can lead to the persistence of performance issues. Companies that view board assessment as an opportunity can use the results as a springboard for growth. By embracing technologies that improve the evaluation process, board leaders and CEOs can obtain better insights, take action, and ensure optimum board and company performance.

Dottie Schindlinger
Dottie Schindlinger is Diligent Corporation’s Governance Technology Evangelist and VP, and promotes the intersection of board governance and technology as a recognized expert in the field.