Every year, boards of directors around the world undertake what for most is a lackluster exercise — the annual board assessment. Assessments were largely considered and designed as a compliance vehicle when they were initially mandated by the New York Stock Exchange in the early 2000s. Therein lies the real reason most board assessments are uninspiring: If you view your board assessment as a report card, you just want to get “good marks” and be done with it.
Over the past 20 years, however, many boards have come to realize that a compliance-focused board assessment represents a squandered opportunity and the state of the art has changed substantially. These changes have largely been championed by board chairs or chairs of nominating/governance committees with a genuine desire to create and maintain a board that’s truly outstanding. They came to recognize that a board assessment can become a strategic tool in board-building if it’s redesigned to achieve that objective. To a boardroom champion, the notion of a board assessment as a report card is almost childish; they view assessments as an essential team-building exercise that can take a board from good to great and keep a great board vibrant.
The key to transforming the annual board assessment in this way lies in the format used to collect feedback. Surveys and scoring reflect the report-card paradigm and interviews create greater engagement, alignment and a bias for action, reflective of the team-building approach. Most boardroom champions have gone to great lengths to recruit highly intelligent, accomplished, sophisticated directors. They want to tap into their insights, wisdom and good ideas and the assessment process is used to get everyone on the same page. If that’s your objective, an assessment format largely designed for compliance will ultimately disappoint. It’s like using a five iron when you need a putter.
The idea that directors are too busy to spend an hour discussing the board is nonsense; most can’t wait to share their perspectives and offer terrific ideas. Directors’ newfound comfort with videoconferencing provides an unprecedented opportunity for many boards to shift to an interview format quite easily. However, it’s essential to structure the interviews by creating a board assessment protocol and distributing it in advance. Not only does this ensure consistency, but it also nearly always makes better use directors’ time in the interview, itself.
Switching to an interview format but using a “cookie cutter” template doesn’t achieve much. While all key parameters of board effectiveness should be covered in any board assessment, every board is somewhat unique. The board assessment should be tailored to reflect the board’s unique circumstances and priorities. For example, if a board is two or three years away from the CEO’s retirement, the assessment can and should be used to elicit directors’ views on a range of CEO succession planning issues which are timely and important. If the company has a majority shareholder who appoints a number of the directors, the impact of this structure on the board’s dynamics may be worth exploring. A bespoke approach is what gives a board assessment resonance; directors find this type of exercise genuinely worthwhile, as opposed to “going through the motions” of a compliance drill.
Senior management perspective
It’s become increasingly popular over the past decade to invite those members of senior management who regularly work with the board and its committees to participate in the board assessment. Management feedback nearly always yields important insights. Sometimes, executives highlight ways in which the board adds value for them that directors almost take for granted. Other times, they’ll have a different view on an issue that’s important for the board to understand. Moreover, it sets the right tone at the top by underscoring the board’s commitment to performance. The board’s openness to feedback and continuous improvement nearly always earns kudos from the executive team.
If senior management participates in the board assessment, it can be essential to use a third party to collect their feedback. Few executives will be entirely forthright with the board chair or any other director in expressing their views about the board’s shortcomings. If they think there are significant areas for improvement or if the board has been used as a whipping boy by the CEO for unpopular corporate policies, these issues are unlikely to emerge without a confidential format. They can be extremely important points for the board to understand.
Some boards are reluctant to include new directors in the board assessment until they’ve served for at least a year. But if you view your assessment as a board team-building exercise, it becomes critical to include all directors in the process, regardless of tenure. To incorporate new director feedback in a meaningful way, it’s useful to create a separate interview protocol focused on areas where new board members can provide important perspectives: What are their views on the director recruitment and orientation processes? Could these be improved in any way? Why did they decide to join the board — and what are their initial perceptions? Are there any good practices from other boards they’ve served on or worked with that might be useful for your board to consider?
Individual director feedback
Many boards now incorporate an individual director evaluation component into their board assessment. This can easily be added on to an interview-based board assessment, extending each conversation by about 30 minutes, depending on board size.
Few of us genuinely like getting feedback, but there’s nothing more constructive for professional development. Having conducted my first director evaluation using a scorecard format in 1996, I’ve seen tremendous changes on this front, too. Scoring, in my experience, seldom worked well. Low scores angered recipients without homing in on the real problem; high scores felt good but often failed to underscore and reinforce the director’s strengths and contributions. Write-in comments were often vague — and sometimes downright nasty. Interviews, by contrast, allowed for probing to gain clarity on the key points, along with some illustrative examples and meaningful suggestions.
An effective director evaluation should provide recipients with constructive, actionable and balanced feedback that they find genuinely worthwhile — and act upon. It should not only highlight potential areas for improvement but reinforce the contributions of your boardroom stars, which is equally important when it comes to building your board into a high-performing governance team.
The NYSE mandates annual board assessments for its listed companies which has been adopted by many other boards. However, the board assessment format described in this article is best undertaken every three years, rather than on an annual basis. To do otherwise is simply overkill. Surveys or even follow up phone calls from the board chair or another director can be used in the intervening years, building upon the action plan developed from the more comprehensive process.
What are the typical outcomes for boards that redesign their assessment along these lines? Having conducted nearly 200 of these over the past 25 years, here’s what I found:
- Board composition: Roughly 75% resulted in changes to the board’s composition – typically the recruitment of new directors to fill perceived gaps and increasingly the development of a long-term board succession plan. On the latter point, I now incorporate a Board 2.0 exercise into many board assessments to get director input and alignment on the board’s optimal composition in 3-5 years’ time; I’ve found this approach more useful than a board skills matrix.
- Board materials: Pre-reading materials were cited as an area for improvement in roughly two-thirds of the assessments. While most boards have migrated to portals, many directors continue to be overwhelmed with dense pre-reading materials, often repurposed from slide decks created for a review of the same issue with the executive team. Including management in the board assessment process can be particularly important when it comes to addressing this issue.
- CEO succession planning: In nearly three-quarters of these assessments, CEO succession planning and board engagement on strategy emerged as issues that the board wanted to tackle in a different way. CEO succession was cited more frequently and typically resulted in either a CEO succession planning process getting underway or modifications to an existing plan to create a more comprehensive, transparent and effective process.
Beverly Behan, President of Board Advisor, LLC, is the author of Board & Director Evaluations: Innovations for 21st Century Governance Committees. She can be reached through her website.