In the intro of this blog series, we discussed the importance of the evaluation process in today’s boardrooms. Yet, we were left to question: Why aren’t boards reaping the intended benefits?
We encounter the same disappointing statistics every year. Namely, one-third of corporate directors (35%) say that someone on their board should be replaced; half of directors (51%) say that their board did not make any changes as a result of their last self-evaluation process (PwC’s Annual Corporate Directors Survey).
With industry-wide agreement that board evaluations underpin nearly every major governance challenge—from board composition and diversity to corporate strategies surrounding technology and innovation—we must understand the obstacles that are robbing the evaluation process of its value. What barriers are boards facing when it comes to conducting their evaluations effectively?
1. Director Time is of the Essence
First, let’s acknowledge the most obvious obstacle to any item on the board agenda, which is time. Today’s corporate directors represent the top talent in their respective industries. With busy schedules and a finite number of board meetings, board evaluations will always seem like a menial task among the pillars of corporate strategy or executive compensation, particularly when the task is required.
The obstacle of time, however, can be somewhat alleviated with a long-term plan. As we’ll discuss, not every year requires an outside facilitator or the same depth of information gathering. Throughout this blog series, we’ll also demonstrate that the quality of a board evaluation depends far more on the insights gained and the actions taken rather than the total time spent.
2. Assessment is Uncomfortable
It’s human nature to avoid things that make us uncomfortable, and board evaluations carry the potential of both discomfort and conflict. As Cohn & Kess so accurately stated in this Harvard Law School article, “Board evaluations go to the heart of directors’ competence.” For the same reasons we may avoid going to the doctor or correcting a bad habit, assessing the value of our contributions and identifying weaknesses (whether at the individual, committee, or board level) is a delicate and vulnerable process.
Rather than rejecting their fiduciary duty outright, boards that fail to conduct their evaluation process effectively would likely believe the opposite to be true—rather, that it’s their fiduciary duty to spend time on the things that matter most. Whether conscious or subconscious, board evaluations can be perceived as a disruption to a busy agenda, a drain on directors’ precious time, and a detriment to the social fabric of the board.
3. Effectiveness Hinges on Board Leadership
While board evaluations require a board-level commitment, their effectiveness ultimately rests on the shoulders of board leadership. It’s the responsibility of the lead director, the non-executive chairman, or the chair of the Nom/Gov committee to plan, execute, and take action on evaluation results—whether that means delivering uncomfortable feedback, overhauling a longstanding board process, or not re-nominating an underperforming director.
While many lead directors and chairmen have been able to strike the right balance between collegiality and performance measurement, there are still too many cases where the process breaks down during the final phase (i.e., taking actions on evaluation results). In Stanford Rock Center’s recent study on board evaluations, only a quarter (23 percent) of board members rated their boards “very effective” at giving direct feedback to fellow directors. Board leadership and their commitment to the evaluation process will be a recurring theme throughout the remainder of this blog series.
4. Lack of Facilitator Independence
It’s a common practice for board evaluations to be facilitated by a sitting board member, corporate secretary, or in-house counsel; however, one must recognize the inherent conflicts when this approach is taken year after year. Using an in-house facilitator (i.e., a close member of the board’s network) has the potential to compromise the candidness and independence of the evaluation responses, particularly if he or she is part of the problem.
In a later post, we’ll discuss best practices for evaluation formats (and the recommended frequency for inside vs. outside facilitators) over a multi-year time horizon. When employed appropriately, a facilitator who’s familiar with the board’s operations and strategies can also present many advantages during the evaluation process, not the least of which is time- and cost-effectiveness.
By identifying the barriers, the road to overcoming them seems significantly more attainable. If the quest for self-improvement and the dangers of complacency don’t motivate today’s boards, then the shareholder pressures and activist campaigns certainly will (more on this later).
Next up, we’ll take a look at the “5 Essential Elements of an Effective Board Evaluation.”