According to a study by PWC, 94% of public companies regularly conduct an evaluation of their board. Since the NYSE requires all its listed companies to conduct some form of board evaluation (NASDAQ does not, but recommends it as good governance) this number is not a surprise. Unfortunately, both listing agencies are silent as to what an evaluation should be, what form it should take, or how it should be conducted. Small wonder therefore, that an “evaluation” can take almost any form, from an informal discussion about how the group is doing, to a full, detailed, peer-to-peer 360 degree assessment. For some directors, such a fully revealing look can be quite uncomfortable.
I meet with many directors, and have had numerous one-on-one conversations. Always implicit is the expectation of confidentiality about their experiences and expectations. The topic of their peers’ performance in the boardroom is often brought up in discussion. It’s interesting to note (but perhaps not surprising) that where individual directors believe that board evaluations are productive and have “moved the needle” in a positive direction, they are eager to invest in developing and conducting better evaluations.
I’ve seen and heard all sorts of approaches to evaluations. Some board members put on a brave face, go through the motions or adopt a “let’s get it over with” check-off-the-box approach. Those who conduct evaluations on a regular basis rarely change the process, using the same evaluation tool over and over again. Occasionally evaluations are conducted with a moderate level of fresh substance. Few offer thoughtful, pertinent reflection on the questions posed, follow up on findings, and use the results to ignite positive advances.
When the risks associated with doing the bare minimum grow greater than the effort to actually improve, evaluations will take on a more universal importance.
My impression is that most boards consider evaluations uncomfortable and a waste of time. It still amazes me when, to minimize the inconvenience, boards use the same approach and questions year after year. Unfortunately, as the saying goes: if you always do what you’ve always done, you’ll always get what you’ve always gotten. That, of course, may grant you a “pass” while the winds are blowing in your favor, but in times of uncertainty and change, using last year’s (or last decade’s) evaluation tool is neither wise nor helpful.
Why are boards failing so miserably in this area? I suppose it comes down to how much “pain and bother” directors expect to be subjected to during the evaluation. There also may be a risk and reward consideration: how much the personal risks of the evaluation stack up against the anticipated rewards from the effort.
Few directors can argue against being better engaged and more productive in their roles and a greater asset to the CEO, management, and stakeholders. Well-structured and well administered evaluations can help directors improve their effectiveness in all these areas. But frankly, the preferred option is to do almost nothing with regards to evaluations, while creating the perception of actually doing something. These days, with a myriad of complex issues around strategy, technology, financial oversight, risk, compensation, compliance and the potential liability associated with a misstep, how many board members are going to publicly admit what they don’t do or what they don’t know?
Granted, there are many board members who do understand the value of regular evaluations and are more than willing to go through with them for the right reasons. Many will use the process solely to solve a particular problem, such as removing a difficult board member. And, then there are those who see and glibly vocalize about the value of a substantive evaluation, but will only reluctantly get involved with the process, all the while avoiding focus on outcomes, root causes, and improvements. My impression is that this last group is the largest.
So, how can we work to overcome that mindset, and make the world of board governance at least a little better? Perhaps more detail is needed about the requirements of a board evaluation? But there is no push for further clarification of what a “board evaluation” really is. Perhaps directors’ and governance organizations and associations can encourage evaluations and educate boards on their importance? Again, no. Boards see those groups being more motivated by wanting to sell services or to push for conformity (one-size still does not fit all). Education on evaluations and their benefits is better than nothing, but it doesn’t improve individual and board group performance.
The best hope is pressure from shareholders for transparency. Reluctant boards and directors will take notice when shareholders start demanding basic information on board performance from the directors they elect, and pressing for accountability. But again, at what price? When the risks associated with doing the bare minimum grow greater than the effort to actually improve, evaluations will take on a more universal importance. Shareholders (led by institutional and other large investors) need to ask more pointed questions, such as:
• What evaluation method did you use this year?
• What methods changed from last year?
• Did you use outside assistance?
• How were results measured? And, most importantly:
• What governance and performance improvements did you put in place since the last evaluation?
Happily, as I alluded to earlier, some forward-thinking boards are already doing this. However, until shareholders and investors see these answers in proxies and corporate website governance sections, the question of the board performance evaluation will remain far down on the agendas of too many corporate boards.