By Taylor Griffin and Courtney Hamilton
Although the New York Stock Exchange requires every listed company board to “conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively,” the NYSE provides no guidance as to what such an evaluation should encompass.
Evaluations are commonly conducted by the company’s own general counsel or, at best, outside legal counsel. They tend to focus on the board’s constitution, processes, and compliance with corporate governance best practices. An evaluation conducted on this limited basis is likely to overlook essential aspects of board leadership and effectiveness, such as the contribution of individual directors, overall group dynamics, and most importantly, whether the experience and skillsets of board members are well aligned with the current and future strategic needs of the business.
Our research reveals that many board members recognize the shortcomings of their own companies in terms of evaluating and improving boardroom performance. A recent study by Stanford University’s Rock Center for Corporate Governance and The Miles Group yielded significant findings:
● Only one-third (36%) of board members surveyed believe their company does a very good job of accurately assessing the performance of individual directors.
● Almost half (46%) believe their board tolerates dissent.
● Nearly three quarters of directors (74%) agree that board members allow personal or past experience to dominate their perspective.
● And, perhaps most significant, the typical director believes that at least one fellow director should be removed from the board because this individual is not effective.
The reasons for a board member’s ineffectiveness can range from the professional (experience that has become less relevant to the company’s business over time) to the behavioral (either an overly aggressive attitude or, conversely, a lack of active participation in board discussions). To address these and other board performance issues, a robust evaluation should enable a company to assess—and rectify—the behavior and practices of the full board and individual directors.
Rather than a purely legal review, a board should conduct its evaluation with a focus on leadership development and board governance. It’s important for the board leadership to truly lead this process, signaling a high-level commitment by having the chair, lead director or chair of the nominating/governance committee spearhead the evaluation and endorse the remedies.
The board should be asking tough questions that go beyond governance processes and delve into individual director effectiveness and the group’s effectiveness as a whole. Questions should include: How could the board as a whole be more effective? Are all members contributing at the same level? How could the board’s interface be improved? Does the board have a solid sense of its role, such that they probe management at the right level, but don’t micro-manage?
The company also should determine if the board’s composition is aligned with the emerging needs of the business. One approach would be to develop a matrix of the experience, skills, and industry or market perspective needed for the company to successfully execute its go-forward strategy and then compare that to the competencies of the current board members.
The evaluation should contain a detailed report on the findings, including recommended actions, areas that require feedback, and potential intervention. Each director’s specific feedback should be structured the same way—with individual calls to action that will collectively raise the performance of the overall board.
Attempting to remedy ineffective behavior of an individual director (perhaps one who monopolizes boardroom discussions or one who never sufficiently contributes) is a highly sensitive undertaking. Boards can make this process less contentious by soliciting individual feedback for each director so no single director appears “singled out” for criticism.
Periodic sessions could be held to expand the entire board’s understanding of industry, marketplace, macroeconomic, or overall leadership issues. Objectively setting policies, such as rotating committee membership and establishing a process for removing ineffective board members, can create a better framework for improving director performance.
If ever companies needed the guidance of experienced, engaged, and effective directors to cope with dramatic changes in their business, that time is now. The board’s willingness and ability to examine its effectiveness in an uncompromising manner, and to accept constructive feedback about both group and individual behaviors, is a true test of its leadership.
Taylor Griffin is chief operating officer and Courtney Hamilton is managing director for The Miles Group.