Evaluations are an invaluable component of any board’s self-improvement toolbox. They bring directors valuable insights from successes and failures, stimulate discussion about how the board can collaborate and lead more effectively and show constituencies from management to shareholders that the board is continuing to improve. Each year, the NYSE mandate for board self-evaluations provides companies with an opportunity for reflection and growth—but what a board makes of this chance is entirely up to it.
Before 2009, self-evaluations weren’t mandatory—or even widely practiced. After the NYSE instituted a requirement for these efforts, many boards sought to comply by distributing brief surveys to board members and tabulating the results. This approach, of course, overlooked the spirit of the policy and brought limited insights into the board’s performance. Over the years, however, industry perspectives about self-evaluation have come to acknowledge the benefits of board review; today, some NASDAQ-affiliated businesses—none of which are formally required by NASDAQ to submit reviews—voluntarily conduct board evaluations.
There are many ways to conduct an effective board self-evaluation. They are generally are done for both the board as a whole and its committees which typically encompass audit, compensation, and governance. Annual evaluations should assess whether the contributions of these groups align with agreed-upon performance expectations. They should also garner constructive feedback from individual directors about the board’s operations, structure, composition, and dynamics, and further assess how the group can address the issues they discover.
The way a board approaches that process is almost entirely up to it. The NYSE does not currently have any requirements on how a board should conduct an evaluation and does not require reporting of the process or results. In fact, self-evaluations do not need to be written. The process does not matter so long it meets the board’s needs — and even then, the method might change over the years as the board’s preferences evolve.
According to an NYSE Governance Services and RHR International survey published in 2016, the vast majority (81%) of companies choose to conduct their assessment via peer- or self-evaluation. Typically, this method relies on submitted questionnaires to identify concerns and garner insights. The minority of the respondents choose to invite outside counsel (14%) or a third party firm (11%) to perform interviews and build an assessment of the board. Boards tend to opt for one of the two latter options if they know those parties particularly well and trust them to do their job thoroughly, effectively, and with discretion. However, the board’s final choice will ultimately depend on the situation at hand, the collaborative chemistry of the directors, and the group’s confidence in a completing an evaluation in a way that it believes is most appropriate.
The majority of directors believe in the value and efficacy of board evaluations. Researchers from the above-mentioned NYSE/RHR report found that a full 90% of respondents saw the assessments as “somewhat” or “very” effective. However, a study conducted by the Stanford Business School in 2016 found that a significant number of board members would like to tailor evaluations further. These researchers also reported that 90% of surveyed directors indicated that they would like to have feedback about their performance. Given that the vast majority of directors are driven professionals, it follows that they would want to contribute as much value as possible and receive feedback.
Yet, the same study also found that only 55% of companies that conduct board evaluations assess directors individually, and only 36% of those believe that their company does an effective job of assessing individual performance. Only a quarter of surveyed board members rated their boards as being “very effective” at giving direct feedback to its member directors.
The reasons behind this shortfall are many. Fear of disclosure may prevent some directors from speaking up; others might be concerned that their criticisms will be taken personally and negatively impact the boardroom’s collegial culture. A poorly-run evaluation can shut down lines of communication and damage interpersonal relationships within the board, making it considerably more difficult to solve problems and address concerns promptly.
An effective self-assessment requires tact, transparency, and engagement from all members of the board. The productivity and ease of the process will hinge on having a method of evaluation that will engage directors, committees, and the board as a whole in productive and honest conversation. Directors should also have every opportunity to meet — or even surpass — company expectations the following year, so the board should establish clear guidelines for what the group and its members are expected to contribute.
The tone of the assessment is essential; ideally, it should be framed in a way that centers more on what can be done better in the future, as opposed to what was done poorly in the past. That said, while a board should address all issues tactfully, it should not avoid addressing potentially awkward intra-board performance concerns.
Given that one of the board’s most important jobs is evaluating management, it seems only fair that it too receives feedback and clear insights on its performance. These assessments are vital to ensuring that a company has the most engaged and effective board that it can have. Development is a long-term process, and thorough evaluations are a necessary aspect of keeping a company’s board on-track and moving forward.