An effective board operates in the best long-term interests of a company and offers a wealth of experience to the CEO and management team. This is what builds a strong case for an effective board evaluation. And for companies embarking on an evaluation process for the first time, the questions are many. What is critical is setting the right objectives and ensuring that the process ensures that they are met.
The right approach
There are at least two approaches to performing the annual board evaluation:
• Doing the bare minimum required to fulfil the requirement, such as having directors fill out a brief questionnaire.
• Planning and executing a process that will truly add value to the board, and consequently to shareholders.
The second approach is always preferred since a well thought out and executed board evaluation process needs to be beneficial even to already well-run boards. The exercise should reinforce appropriate roles and responsibilities and give directors a regular opportunity to reassess their own resources and how they may need to be augmented.
(Illustration: Malay Karmakar / Mint)
Context is a critical consideration when approaching a board evaluation. One goal might be to improve the board overall, such as its alignment with the corporate strategy. Another could be how the board can better serve and support the CEO. Recruiting more and better board members or adding credibility in the eyes of shareholders could also be a critical need to achieve. To be effective, the board must also commit to addressing issues that are raised through the evaluation to achieve the benefits. Without this, the exercise loses its purpose.
For a board that is tackling an evaluation for the first time, it is better to start small and gradually build on the effort. Initial discussions can take place between the key people, including the chairman and the CEO, and also the lead or presiding director, if such a position exists. To be effective, the creation of a board evaluation committee, which includes independent directors, is advisable since it brings together a committed group of people with a single-minded focus.
A board evaluation is not a one-size-fits-all proposition and must be tailored to the culture and goals of a particular board and company in order to be effective. Relying on a ready-made evaluation form that directors fill out does not serve the objectives; the key to success is for the board to be actively engaged in the assessment process.
Determining what to assess is critical to designing an appropriate evaluation and will work only if the evaluation is in relation to the criteria that are set by the organization and agreed on by the board. An important area to probe initially could be to analyse how the board spends its meeting time and on what sort of issues it places the most focus. Directors sometimes find through the evaluation process that they are spending too much time on interesting but less vital issues and neglecting thornier, more complex and more strategic issues.
Once the goal is identified, then decide the best way to achieve it. There are a few different approaches which can be mixed and matched in undertaking board evaluations, depending upon the board’s needs, prior experience, chemistry and appetite for the process. They include:
• Survey: Any survey should be carefully tailored and designed for a specific company and its board and be constructed by drawing from the corporation’s bylaws, committee charters, the roles and responsibilities of directors and corporate governance guidelines. A specialist extracts the criteria against which the performance can be judged and will be legally defensible. Feedback is presented in the context of a goal-setting process with the board intended to improve performance and educate the board.
• Interviews: Interviews of the board are often used prior to a board assessment—particularly where boards have not previously done an evaluation—to gain an understanding of the issues on directors’ minds. Based on the results of the interviews, the governance committee provides anonymous feedback to the board, often in the form of a narrative report that is organized thematically according to key areas for board improvement.
• Group evaluation: During a group evaluation, a trained consultant engages the board and the CEO in an interactive dialogue. Working against a backdrop of the general best governance practices and the specific bylaws and guidelines for the company, the discussion focuses on how a board can improve its performance. This works best with an “evolved” board in which directors are able to talk candidly and openly and have a limited amount of time to devote to the process.
Ultimately, the real value of the assessment exercise is derived through the final session, when the board evaluates the findings and discusses what measures, if any, to act upon. Boards should consider whether the evaluation process is best handled internally or whether it should be facilitated by an outside party.
Boards generally are up to the task of conducting their own evaluation. However, essential to a successful evaluation is having an independent chair or a lead director to champion the process and also serve as an independent resource for both the board and management, where each can go with concerns.
At the same time, there are instances when a board should consider looking outside for assistance. One is if the board is dysfunctional in some way—if the directors are not comfortable with each other for some reason or the board is new or has not established itself as a unit and so could use some help in doing that. The other reason is if the board evaluation itself is a new process and the board needs help getting started.
A well-planned and well- executed board evaluation that focuses on the unique culture, bylaws and needs of the board can show up issues that hinder optimal board performance. Identifying and addressing these issues and reinforcing the appropriate board roles and responsibilities can yield significant benefits to the board, the company and shareholders. To derive the most value from the process, boards should define clear goals for the evaluation, choose the approach most suited to the experience and needs of the board and conduct the appropriate follow-through.
|This set of questions may serve as a framework for exploring issues related to board performance:|
|• How does the board’s size compare with best practice and is the board diverse?|
|• How does the ratio of inside to outside directors compare with best practice?|
|• Does the board possess the skills needed to manage its fiduciary responsibilities and serve as a resource to management?|
|• Do directors provide input to agendas?|
|• Does the agenda provide the appropriate balance of compliance and other governance issues, and strategic versus tactical issues?|
|• Does the board meet often enough or too often? Is material received in advance?|
|• Do board executive sessions allow for candid discussions with and without the CEO?|
|• If the board has an annual strategic retreat, is the content meaningful?|
|• Are by-laws adhered to? Are they reviewed and updated on a timely basis?|
|• Does the board have a calendar of agenda items to meet its fiduciary responsibilities?|
|• Has the board set annual objectives for governance work to support the corporation’s strategic plan?|
|• Do the standing committees reflect the needs of the organization?|
|• Do committee chairs understand what is required of them and are they effective?|
|• Do committee chairs report to the board in a way that encourages discussion of issues?|
|• Do board members promote frank and open discussion with the management?|
|• Does the board provide the CEO with a meaningful and candid annual performance review?|
|• Is the board satisfied that management keeps it informed about significant events that occur between board meetings?|
|Primary board responsibilities|
|How would you rate the board on fulfilling the following key accountabilities?|
|• Compliance with new regulations|
|• CEO relationship|
|• Management succession|
|• Strategic planning|
|• Financial oversight|
|• Board succession and governance|
|• Preparedness to act cohesively in a crisis|
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Anjali Bansal heads the India practice of Spencer Stuart, an executive search consulting firm, and is based in the firm’s Mumbai office. The article contains inputs from an in-house Spencer Stuart white paper.
This is the second in a three-part series on the board evaluation process. To read the first part, Board review: an effective tool (Click here)
The next article will explore strategies for effective board succession.