According to a 2011 PWC 2011 study, 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 one should be conducted. Small wonder therefore, that an “evaluation” can take almost any form, from an informal discussion about how the group is doing, through to a full, detailed, peer-to-peer or 360 assessment. For some directors, such “under-the-kimono” looks 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 what an individual director thinks about how productive self-evaluations are, or how much the needle has actually moved (and what’s involved in developing and conducting a productive evaluation).
I’ve seen and heard all sorts of approaches. Many 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 do it regularly conduct it the same way over and over again. Occasionally one finds some conducting reviews with moderate substance or thought. Some few bring solid thought to the questions posed, follow up on findings, and use the results to ignite positive advances.
My impression is that most boards consider evaluations uncomfortable and a waste of time. It still amazes me when others, to minimize their “pain,” prefer to 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 get you a pass while the winds are blowing in your favor.
Why does this go on? I suppose it comes down to how much pain is perceived or expected from the effort, and how much personal risks stack up against anticipated rewards. Few directors can argue against being better engaged and more productive in their roles and a greater asset to the CEO, management, and stakeholders. Frankly, wanting to do almost nothing with regards to evaluations, while creating the perception of actually doing something (some call it “pure theater”), is the preferred option. 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 know?
Granted, there are many board members who do understand the value of the effort and are more than willing to go through with it 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 trying to avoid focusing 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 detailed listing requirements? Hasn’t worked well so far, as there is no push for further clarification of what a “board evaluation” really is. Directors’ and governance organizations and associations? Again, no. Boards see those groups being more motivated by wanted to sell more services or to push for conformity (one-size still does not fit all). Education on evaluations and their benefits is better than nothing, but does it really drive improving individual and board group performance?
Based on many recent governance “evolutions,” the best hope is pressure from shareholders for reporting 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 grows greater than the pain of the effort to actually improve, evaluations will take on a more universal importance. Shareholders (led of course, 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 websites’ governance sections, the question of the board performance evaluation will remain far down on the agendas of too many corporate boards.