HOW TO EVALUATE A BOARD OF DIRECTORS

Evaluating the performance of a board of directors is a crucial aspect of corporate governance. Board evaluations help identify strengths and weaknesses, promote accountability, and drive continuous improvement. Remember that, what cannot be measured, cannot be improved.

Without regular evaluations, there may be a lack of accountability among board members. This can result in complacency and a decreased commitment to fulfilling their fiduciary duties and responsibilities. Boards that do not evaluate performance may become stagnant and inefficient. They may continue with outdated practices and fail to adapt to changing circumstances, which can hinder the organization’s progress.

The lack of independent oversight could lead to board dysfunction that goes unaddressed, leading to unresolved conflicts, power struggles, and poor decision-making. This can erode board cohesion and negatively impact the organization’s effectiveness. On the other hand, all stakeholders – including shareholders, investors, employees, and the public – may lose confidence in the organization’s leadership if they perceive that the board is not held accountable for its actions or decisions. This can harm the organization’s reputation in the long term.

Another risk is that boards that are not evaluated may lose sight of the organization’s strategic goals. This can result in a misalignment between the board’s actions and the long-term interests of the company. Failure to conduct board evaluations can be viewed as lack of transparency and accountability, which can negatively impact investor relations and the organization’s ability to attract top talent.

Some best practices for performing Board evaluations are the following:

• Consider hiring an external facilitator or consultant with expertise in board governance to lead the evaluation process. An external party can provide an objective perspective and ensure confidentiality.
• All board members should actively participate in the evaluation. This includes executive and non-executive directors, independent directors, and the chairperson.
• If applicable, committees within the board, such as the governance or nominating committee, may be responsible for organizing and overseeing the evaluation process. That will give it the proper level of formality and authority.
• Clearly define the objectives and scope of the evaluation. Determine whether it will be a comprehensive evaluation or whether it will focus on specific areas like board performance, individual director assessments, or committee effectiveness.
• Choose the evaluation tools and methodology that align with your objectives. Common methods include surveys, interviews, self-assessments, and peer reviews. A combination of these methods may provide a more holistic view.
• Develop clear and relevant evaluation criteria that align with the board’s responsibilities, including areas such as strategic oversight, financial stewardship, risk management, and corporate culture.
• Collect feedback from board members using pre-selected evaluation methods. This may involve surveys, one-on-one interviews, or a combination of both.
• Analyze the collected data to identify trends, strengths, weaknesses, and areas for improvement. Summarize the findings in a clear and concise manner.
• Share the evaluation results with the board members in a structured discussion. Encourage open dialogue and ensure that all members have an opportunity to express their views.
• Develop an action plan based on the evaluation results. Identify specific areas that require improvement and set clear, actionable recommendations.
• Implement the recommended changes and improvements, keeping board members informed of progress. Assessments that do not lead to actionable results and visible changes have a negative effect in the organization.
• Regularly follow-up on the action plan’s progress and evaluate whether the changes are having the desired impact. Follow-up is as critical as the evaluation process itself.
• Board evaluations should be conducted periodically, typically annually, to ensure continuous improvement and ongoing accountability.
• Maintain records of the evaluation process, including the survey or interview responses, summary reports, and action plans. This documentation helps track progress over time.
  

In the United States, listed companies are required to conduct an annual performance evaluation of the board under the NYSE listing rules which state that the “board should conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively.”

In 2015, 98% of boards of S&P 500 companies disclosed annual performance evaluation results regarding the full board. Full boards, including committees, were evaluated in 52% of cases. Only 33% of S&P 500 companies assessed the full board, its committees, as well as the individual directors. Yet, the trend to evaluate individual directors is increasing.

In general, the board evaluation process should be a constructive exercise focused on improving board effectiveness rather than a punitive or judgmental process. It should foster an environment of continuous learning and development among board members, ultimately benefiting the organization and its stakeholders.