How robust is your peer evaluation process? Are members rated in terms of the standards of performance required to deal with the complex challenges facing boards in today's economic and regulatory environment? Does it rank directors from top to bottom based on their performance? Do members of your board view the process as credible?
One board, dissatisfied with its board and peer evaluation process, decided to put some teeth into a new process — a process that would enable the nominating and governance committee to make tough decisions about who should remain on the board.
The first step in developing the new process was to identify the principal behavioral expectations for a board member at that company (see box). The second step was to ask each board member to rate every other board member on each of the behavioral expectations using a simple and straightforward scale as follows:
1. This board member is one of the best on the board.
2. This board member is on par with other members of the board.
3. This board member needs to improve.
Adding the ratings resulted in an overall ranking of board members and a ranking of each board member on each of the behavioral expectations.
Their ratings rationale
Once the rating process was completed, an external consultant conducted a confidential telephone interview with each director to understand the rationale supporting their peer ratings. In addition, the consultant solicited recommendations on which board members were best equipped to serve as chairs of the various committees of the board, whether or not the board should split the roles of chairman and chief executive officer and, if so, who would be best able to serve as the nonexecutive chairman. The consultant prepared a report for the nominating and governance committee containing the quantitative data as well as a narrative summary of qualities ascribed to each board member. In addition, the consultant prepared a letter to each member of the board summarizing their rating results as well as the narrative summary. Following is an example of feedback to one of the board members who was ranked sixth of the eleven members:
“Earl, your performance as a board member elicits both positive and negative comments. On the one hand, you are seen as smart, sophisticated and willing to express a point of view on key issues facing the board. On the other hand, you can be annoying given your tendency to talk too much and blurt out your ideas in what some describe as an undisciplined manner. Some believe that you often cross the line from being a member of a governance board to that of an operating board as you too often focus on tactical details. Opinions are split on whether you should continue as chair of the scientific affairs committee. Some believe that you are able to be independent of management and lead the review of critical scientific issues facing the company. Others, reflecting your tendency to command too much air time in committee as well as board meetings, believe that rotating another director into that role would improve the functioning of the committee.”
Earl was stunned when he received this feedback, claiming that he had no idea his peers perceived him in this manner. After initially responding in a defensive manner, he decided that he needed to modify aspects of his behavior. Hard hitting? Yes! But the feedback had the desired result.
Clearing the way forward
The process enabled each board member to develop a clear understanding of their overall ranking as well as areas where their performance was viewed as strong and where they would need to improve. Results of the process enabled the committee to move forward in making several difficult personnel decisions. The board as a whole knew that the decisions were based on input from the entire board.
Many boards wrestle with the question of whether they should have age or term limits for board membership. Boards that use a process similar to this find that they do not need to fall back on artificial criteria for making key personnel decisions. Most boards are comprised of talented, high-achieving individuals who want to be seen by their peers as adding value to the board. When a robust process is put in place that makes clear performance differentiations, the issue of age or number of years served on the board becomes a moot point.
Decisions that need to be made by the nominating and governance committee become easier to make. Board members who receive frank feedback from their peers often are able to make their own decisions about what they need to do to improve and whether or not it is time to step down from the board.
Hard hitting? Yes! Board leadership, board members and, yes, even the members whose feelings were bruised with a low ranking commented that the process was valuable. They concluded it was a leading-edge practice that would improve overall governance effectiveness in addressing the current and future challenges facing the company. â
The author can be contacted at bob.muschewske@pdininthhouse.com.