That good governance starts with getting the right people in the boardroom is a given. What that means and how to go about making it happen, however, can be tricky, agreed panelists participating in a discussion on director evaluation and succession planning at the Building Better Boards Committee Series in Chicago.
Kapila Anand, a director at Extended Stay America, Omega Healthcare Investors and Elanco Animal Health, reported that each of the boards on which she serves on takes a different approach to evaluating its members. At one, the general counsel conducts evaluations, another relies on assessments done by an outside third party, and the third plans to conduct peer-to-peer evaluations.
While Anand finds the third-party evaluation method most effective, she gives credit to her lead director for following through on the assessment. “I think the most important part is not so much getting the information in, but what you do with it afterward,” she noted. “We have a very active lead director, who spends time one-on-one with each board member talking about their overall sense of the board, as well as observations in terms of effectiveness, both specific to that board member as well as generally to the whole board.”
With institutional investors and shareholders looking more closely than ever at board composition, that level of intensity is becoming more common. “Over the time that I’ve served on boards, the board assessment process has changed significantly,” said Peter Bynoe, a director at Covanta Holding Company and Frontier Communications, who recounted shifting from a peer-to-peer evaluation process to one of bringing in outside counsel. “It’s expensive, but we’ve found it to be money well spent. We get objectivity. More importantly, we get confidentiality. And we’re able to internally work through the issues that have to be resolved without any public exposure.
Outside evaluators also give directors the opportunity to back up and look at the big picture, noted Matt Paese, senior vice president, executive services at DDI. “One of the trends that we’re observing is to not just expose a number of criteria that you would evaluate each other against, such as strategic insight or operational involvement, but to ask why?” he explained. “Why are these the criteria for us? What are we, as a board, trying to do from a strategic standpoint? There are probably three or four big thrusts or big reasons why you’re focused the way you are as a board, and if you talk about those at the same time you talk about how you’re performing, you can have an easier time talking about why someone might be having difficulty in an area or not be what you hoped for.”
Those conversations can also inform board succession. “The process of preparing for succession is about the continual evaluation of what we are trying to do and why, and do we, as a group, have what we need in order to be getting ourselves there?” noted Paese.
Part of that process should entail a conscious effort to develop board members by exposing them to working with the different committees. Bynoe suggested moving directors, including committee chairs, between committees every few years to give them exposure to different challenges and roles. “Just as you develop talent within a company, it’s important for everyone on the board to understand the work of the various committees—and the best way for them to understand that is to experience it,” he said. “Every director should understand everything that’s happening on the board.”