The board of directors is a versatile group composed of inside and outside representatives with different responsibilities, backgrounds, and management styles. Of course, it requires periodic fine-tuning. A board evaluation is standard practice that companies use to assess and improve the effectiveness of their ultimate trustees.
In this article, you’ll discover:
- What a board evaluation is, and why should you take the time to conduct one?
- Who should be in charge of the assessment?
- How do you plan a board evaluation, and what are its typical steps?
- What are the best evaluation practices you should consider?
So, let’s begin.
What is a board evaluation?
A board of directors has a number of duties and responsibilities, such as ensuring oversight, shaping long-term strategies, and providing guidance for the company’s management. So, the goal of a board evaluation is to assess the members’ group and personal performance in their efforts to achieve the company’s business objectives.
Businesses need to adapt to the changing markets, as well as foresee challenges and re-calibrate their policies and strategies to overcome them successfully. Regular board assessments can help resolve internal issues, prevent stagnation, and guarantee alignment with the stakeholders’ interests — more on this in the next section.
The reasons for a board evaluation
Companies listed on the New York Stock Exchange (NYSE) are legally obligated to conduct board assessments — at least annually. Those included in the NASDAQ listings mostly follow the same practice, even though the association does not mandate it. Let’s look at the reasons why board evaluations are becoming ubiquitous and what corporate businesses can accomplish by performing them routinely.
Evaluate effectiveness from the stakeholders’ perspective
Operational concerns and regulatory compliance often become the main focus of board meetings, overshadowing strategic development and value creation. A timely assessment can provide a bird’s-eye view of the situation and help redistribute the board’s efforts for a more efficient workflow.
Assess the competence and impartiality of the board’s members
As market conditions change and business objectives evolve, there may be a need for new expertise that is not present within the board. Also, hiring directors externally can be a good way to get an objective viewpoint and gain new insights into the company’s operations and management methods.
Adjust the balance of interests
Shareholders can often exert their influence on the board of directors — to the point where the interests of other stakeholders are largely disregarded. By using the right techniques and metrics during an evaluation, such an imbalance can become apparent.
Ensure diversity and inclusion
In a world that celebrates equal rights and opportunities, businesses can only win from a diverse and inclusive board composition. The egalitarian policies enacted among the company’s employees should be applied starting with the top management. Regular board assessments can reveal the lack of diversity and help the company stay up to date on current regulations.
Facilitate effective communication
Another reason for conducting a board evaluation is to get a clearer picture of the internal communication processes. Besides facing interpersonal issues, members often fail to use the latest online communication tools created specifically for modern corporate boards.
Surely there are other, more unique reasons that can drive a board evaluation in a particular organization. The modalities of the process, however, are not so numerous.
Board assessment methods
Let’s quickly review the four main approaches to evaluating a board of directors. Factors that will influence your choice may include company culture, the size of your organization, your allocated budget, and more. All these methods share the desired outcome — a comprehensive outlook on the hidden challenges the board is currently facing.
One of the most common approaches to board evaluation, self-assessment, is also the least intimidating. It allows board members to follow the process at their own pace and in a private setting. With this type of assessment, the surveyed persons fill out a questionnaire to reflect on the achievements and difficulties they’d encountered over the past year.
The forms are then reviewed internally or by a third party bound by an NDA. Although the answers and ratings can offer valuable insights, the main drawback of this approach is the absence of immediate feedback.
Many corporate companies prefer this method to self-assessment, maintaining that it offers more objectivity. According to research, 25% of Fortune 100 companies disclosed the use of peer evaluations in 2019, and the numbers keep growing. In this mode, directors provide their assessment of all other board members.
The success of the method depends largely on the company culture, internal dynamics within the board, and the personal qualities of the members. While some directors will be open to constructive criticism, others may feel uncomfortable and become defensive.
Assessment by lead director
This approach is valuable for companies with a strong chairperson. The executive director can conduct personal interviews with other board members, pinpointing specific issues and receiving feedback on the spot. Even though the information obtained during such interviews is confidential, many respondents may be hesitant to disclose sensitive details.
Assessment by an external consultant
Involving qualified third-party consultants to carry out board evaluations is becoming increasingly popular. The same report states that 27% of Fortune 100 filers were already using third-party services in 2019. This form of assessment is especially advantageous for larger companies that need to evaluate individual directors thoroughly.
The appraisal usually comes in the form of confidential questionnaires and interviews, facilitating candid answers and opinions from the board members. Using proprietary techniques, independent evaluators can provide an extensive analysis of the results.
Most of the methods mentioned require face-to-face interaction with an interviewer — a format that is rarely available offline in the new post-pandemic normal. Using a board portal can be the answer. Companies are already adopting board rooms in their workflow for online communication, so executives are familiar with the technology. In fact, as researchers from Harvard state, 94% of directors are confident that working in this new format does not interfere with the board’s performance.
Regardless of the chosen method, a board assessment requires rigorous planning. Let’s go through the steps one by one.
Planning for a board evaluation
When preparing for a board assessment, it’s important to consider the interests of the company and its directors. Making the process as smooth as possible will result in better engagement of the board members and set the mood for future evaluations. Here’s what you should do.
Find a convenient time
Your board members will certainly appreciate the respect you’ll show by adjusting to their schedules. Choosing the busiest months may not be the best strategy to incentivize your directors. Performing the evaluation during the slow business season is a great practice. It allows ample time for preparation and gives the board a chance to digest the assessment’s results and implement changes.
Define the scope of the assessment
Instead of trying to kill all birds with one stone, choose a few areas most critical to your board’s effective functioning. Are you going to focus on financial reporting, advisory roles, or business strategy? Should you assess every director individually or also evaluate group dynamics? Are changes to the board structure and composition a pressing matter? By answering these and other relevant questions, you can narrow the circle of problems a board evaluation is designed to resolve.
Set evaluation objectives and define actions
Defining quantifiable parameters and transforming outcomes into actionable items are classic characteristics of a successful audit. Of course, any corrective actions should be discussed with the board, and the progress should be recorded and monitored. You’ll be able to refer to these progress reports in the future as proof that evaluations are indeed practical tools when it comes to corporate governance.
Review results and plan the next steps
Your board of directors should go over the evaluation results carefully, with a sharp focus on improvement instead of assigning blame. Learning from one’s mistakes is far more productive than criticizing others. Start by formulating a concrete and realistic plan to counter the existing inefficiencies.
And now — to the proven best practices of a board assessment.
6 best practices for board evaluations
The planning phase is complete, and it’s time to proceed to the execution of the assessment. Do tread lightly and watch out for bumps in the road. Below are the six things you should concentrate on to avoid typical pitfalls:
- Customize according to your needs. Instead of using generic questions during the assessment, look for specific topics pertinent to your situation and your challenges. Circumstances change, and building your evaluation on the same parameters every year may be a waste of time and resources.
- Go beyond questionnaires — conduct interviews. Don’t settle for quick “tick the box” forms or nearly meaningless ratings. Interviews provide a more detailed view, involve non-verbal communication, and allow for quick feedback.
- Employ an outside expert. It’s difficult to achieve objectivity when all participants are emotionally invested. Your directors are likely to be more candid when talking to an outsider than they would be with their colleagues. Hiring an experienced evaluator also has the benefit of bringing their professional expertise that might be lacking within your company.
- Include management in the process. Although the board of directors is the object of the assessment, don’t disregard the insights and opinions of senior managers. After all, many flaws and inefficiencies in the board’s operation are seen with more clarity from the management’s perspective.
- Ensure privacy and privilege. Board members need to know they are legally protected when disclosing sensitive or valuable information. Consider consulting with the legal department to make sure client-attorney privileges apply.
- Use digital tools for an online assessment. Until recently, secure communication and data sharing for board meetings were impossible. However, with the advent of board portals, directors can safely communicate — even when in different time zones. Choosing the right software vendor is the only decision you’ll need to make.
When done right, routine board evaluations help solve existing problems and nip new ones in the bud. By adopting the latest digital technology like board portals and their byproducts, a corporate organization can conduct these assessments with the highest level of security and confidentiality.
Many business owners are considering this opportunity for achieving better board efficiency, for those who want to be on top of their game, the time for thumb-twiddling is over.