The NYSE requires that the board of directors and each of its three required committees conduct an annual self-evaluation to determine whether it and its committees are functioning effectively. While NASDAQ does not have a similar mandate, most NASDAQ-listed companies conduct board evaluations, and more private companies are recognizing that board evaluations lead to better performing boards, better performing companies and, ultimately, enhanced shareholder value. Indeed, in the last ten years, directors have devoted more time to understanding what effective board governance means and how they might modify their management oversight practices and board operating protocols. Directors now embrace the board evaluation process as the logical first step towards ensuring their board is more effective tomorrow than it is today.
While there are several methods of conducting a board evaluation, the following five-step process for preparation and implementation will lead to an effective evaluation outcome, regardless of the tools used.
1. Choose the method and map the structure. The first step is for the Board or Nominating/Governance Committee chair to ask the General Counsel or Corporate Secretary to provide background information about the evaluation process, including the pros and cons of using different tools, e.g. surveys or interviews, and types of facilitators, e.g. in-house or independent, so a recommendation that is best suited to the board’s unique characteristics and dynamics can be discussed and agreed upon. The method and structure should account for any previously identified issues that deserve special attention. While the process is often led by the Nominating/Governance Committee, full board input into the final design is key to a successful process.
2. Prepare the tools. Depending on the method chosen, the General Counsel, Corporate Secretary or independent outside facilitator will prepare the written questionnaires, surveys, scripts and diagnostic check-lists that will be employed to execute the assessment process for the board and each of its committees. Directors’ individual responses should be confidential.
3. Collect and analyze the data. After the information-gathering process is complete, the General Counsel, Corporate Secretary or outside facilitator will analyze the data for common themes or recurring ideas and identify topics for full board and committee discussions.
4. Discuss. An important key to effective evaluations is the board and committee “results” discussion. The General Counsel, Corporate Secretary or outside facilitator will share aggregated ideas discovered in the data gathering process and facilitate a board or committee discussion. Because this discussion is not a “check the box” agenda item, it is important that the results discussion is given adequate time on the board’s and committee’s agenda.
5. Take action. The full board discussion should result in a post-evaluation plan that may include follow-up and to-do items, as well as two to four “board goals” for the ensuing year. Progress on the board’s goals, or committee goals, should be checked periodically as a way to help the board or committee measure its effectiveness during the year and asking about these goals is a good way to begin the next year’s evaluation.
This blog posting focused on the full board and committee performance review. Directors may also choose to utilize director self-evaluations and director peer reviews. When using the board performance or peer review, including senior management input can be valuable.