Board performance is enhanced by the implementation of the evaluation process and by improving cohesiveness among board members. The corporate governance best practices of conducting periodic evaluations and board retreats have recently been adopted by many boards. Board evaluations and retreats are most effectively designed and administered by external corporate governance experts.
Director evaluations perform the same function as internal individual employee evaluations and are similar to comprehensive employee evaluation processes. The desired result is to strengthen the board’s performance. A robust evaluation process will facilitate the removal of a director if his or her performance if improvement is not achieved within a reasonable period of time following the delivery of evaluation results by the chair of the board or the chair of the nominating & governance committee. Director evaluations will identify lack of director independence, lack of desired competencies or failure to exhibit appropriate or desired director attributes or behaviors
Annual board evaluations demonstrate a board’s commitment to accountability and continuous improvement. Institutional shareholders of public companies typically desire disclosure of a public company’s evaluation process, results of annual evaluations and the board’s intended remediation plan to address issues that surface as a result of the evaluations. Private company, as well as not-for-profit corporation boards that are focused on implementing best corporate governance practices, are increasingly implementing annual board evaluation processes.
A company’s corporate secretary is typically charged with administering board evaluations. The chair of the board should clearly convey to the corporate secretary the goals and objectives of board evaluations. These goals typically include an assessment of director skills and competencies, including business and financial acumen, industry knowledge, and fundamental legal knowledge and understanding, which will typically vary by a particular company’s type and its board’s organizational maturity.
Board Evaluations Vary by Board Type
Early-stage company board evaluations will typically focus on core corporate governance issues while later-stage private company board evaluations will usually focus on board dynamics related to the company’s emergence from a family-controlled and closely-held status to an independently controlled and widely held private company status. Pre-Initial public offering company board evaluations will customarily focus on enhancing a company’s corporate governance structure and its eventual need to comply with securities law and stock exchange listing requirements.
Large, publicly-traded company board evaluations will focus on the performance of critical board duties, financial monitoring, risk management, strategy development, succession planning/leadership transition, compliance with applicable corporate legal and regulatory requirements, and implementation of corporate governance practices advocated by the Society for Corporate Governance, the National Association of Corporate Directors, the Private Directors Association, the Association of Governing Boards and similar organizations.
Utilizing a Third-Party Provider
The design and administration of periodic assessments of board performance by third-party board assessment experts are considered a best corporate governance practice. These experts will design an evaluation process that will include thoughtful questions regarding board dynamics, priorities and performance measures. The evaluation tool that is designed should capture open-ended board comments and critical thoughts and ideas on board performance that result in a robust improvement plan.
Board evaluations will typically consist of a combination of yes/no and scalable agree/disagree questions and provide directors with an opportunity to provide enhanced insights. The board assessment expert’s report should contain a narrative portion coupled with scoring data and a visual representation of the quantitative results for ease of use by the board to develop appropriate remedial action plans. The report should also provide objective and independent observations and insights that might not otherwise be apparent to the board and executive management team.
Board Retreats for Future Planning
After board evaluations take place, members should plan a board retreat to better help understand and digest the information accrued from the evaluation. Board retreats are often the perfect time to discuss the results and effectively plan for the future of the organization and the board.
A board retreat is an effective tool to build cohesiveness among directors and between the board and executive management. A board retreat usually takes place in a relaxed environment in order to improve focus on discussion, reach conclusions and build productive working dynamics.
Retreats are intended to provide the opportunity for discussion, debate, and reflection among board members and allow for thoughtful and uninhibited discussions of long term strategy and a range of issues that do not fit into regular, more structured board meetings. In addition, board retreats facilitate the development and strengthening of healthy board dynamics and provide an opportunity for directors to get to know one another and develop strong working relationships. For board retreats to be successful, retreat objectives need to be carefully and thoughtfully developed and articulated well in advance.
Board Evaluations and Board Retreats as a Governance Best Practice
It has generally been recognized in the corporate governance community that board evaluations can strengthen board effectiveness, efficiency, and productivity. As a result, strong boards are increasingly evaluating their performance on a regular basis.
Board evaluations help boards to fine-tune their effectiveness and enhance the contributions of each director. They provide a significant benefit in return for a relatively small investment of time and money in terms of improvements in board composition, policy, process, leadership, dynamics, and individual director contribution and development.
Board evaluations result in the development of tools and processes designed to improve the board’s performance. Board’s should use their evaluation results to identify issues and behaviors to address, develop action plans to address and resolve the identified issues and monitor progress toward the achievement of desired results in order to improve the board’s effectiveness. In addition, board retreats have been shown to improve the effectiveness of boards of all types of corporations.
About Paul Marcela, President and Managing Director of Governance Partners Group, LLC
Paul Marcela is an experienced and committed corporate leader with unique diplomacy, advocacy, ambassadorship and international skills and a dedicated professional with a demonstrated ability to accomplish objectives in a corporate environment. His 32-year legal career includes 24 years in the Dow Corning Corporation Law Department where he led the Department’s Business & Finance Section. As Assistant Secretary, Paul led the Company’s Office of the Corporate Secretary. He also served as Vice President, General Counsel & Secretary of two portfolio companies of Cerberus Capital Management.
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