This is Part 6 in our blog series on Board Evaluations. To access the first five posts, see below:
Throughout this six-part blog series, we've covered several aspects of the board evaluation process: Not only are investors placing a greater focus on evaluations, but many boards are still struggling to leverage the results in ways that drive real change (Part 1). We examined several challenges and inherent barriers to board evaluations today (Part 2), then outlined the critical elements of an effective assessment process (Part 3). We also suggested that boards take a multi-year approach when mapping evaluation methodologies (Part 4), and we outlined key considerations for boards as they attempt to identify the best person to facilitate (Part 5). Now we arrive at our pi?'ce de r?'sistance, Part 6 of the blog series! Too often, we find that the break-down in an otherwise successful evaluation process occurs on the home stretch'when the results are in and it's time for boards to take action. According to PwC's Annual Corporate Directors Survey, over half of corporate directors (51%) say that their board did not make any changes as a result of their last self-evaluation. While we understand that not every board will identify the kinds of issues that necessitate momentous changes, we do believe that this high number suggests that many boards (a) still treat evaluations as a check-the-box exercise, (b) don't have the leadership to take action, or (c) don't want to upset the applecart. And while some boards can continue to take this approach, we can almost always guarantee that a poor evaluation process will catch up to you'whether in the form of underperforming directors, poor time management at meetings, pressure from activist investors, or a disconnect between board skill sets and company strategy.
Boards that approach their evaluation process merely as a compliance exercise are falling short of their fiduciary duty to self-examine, refresh, and improve performance. In this blog, we outline three practicable ways boards can begin to translate evaluation insights to action.
In theory, the mindset of performance measurement should be an integral part of the board's culture. The healthiest boards operate in an environment of active discourse, productive conflict, and introspection - and the best board members are receptive, even eager, to receive the kind of feedback that drives improvement.
This attitude towards board evaluations must be clearly communicated and instilled during the onboarding process for new directors. At the outset of every evaluation, board leadership must be crystal clear that the ultimate objective is performance enhancement (across the full board, committees, and individual directors).
Boards that are taking a multi-year approach to their board evaluations (i.e., shifting their focus and methodologies on rotating years) should build flexibility into their evaluation design. This can allow the board to add questions that gauge the progress on last year's action items'whether those entailed forming a new committee, recruiting new skill sets to the board, or improving the organization of pre-reading materials.
'Once these action items are outlined,' said TK Kerstetter, Host of Inside America's Boardrooms, 'they must be followed through. You don't want the board minutes to reflect any weaknesses, which the board identifies then fails to address.'
Too often, boards will conduct a highly effective evaluation, then fail to outline their process in the proxy. This does little to instill confidence in your largest investors, who are looking to your evaluation process as an indication of board refreshment practices and governance proficiency.
[blockquote source="BlackRock, Engagement Priorities for 2017-2018" cite="https://www.blackrock.com/corporate/en-us/about-us/investment-stewardship/engagement-priorities"]Board composition, effectiveness, and accountability remain a top priority...We will seek to better understand how boards assess their performance and the skills and expertise needed to take the company through its future multi-year strategy (rather than the last one).[/blockquote]
Beyond the board's evaluation process, the proxy disclosure should also focus on how feedback is incorporated to improve performance. Again, Donnelley Financial Solutions' Guide to Effective Proxies is an excellent resource to see how other boards are structuring their disclosure for board evaluations (starting on page 155), as well as for other areas of the proxy. In Part 3 of this blog series, we shared specific examples from Goldman Sachs' 2016 proxy statement.
As this blog series comes to a close, we hope you've found our guidance on board evaluations helpful. We continue to believe that an effective evaluation process is key to overcoming many of the challenges faced by today's boards'from lack of diversity to the rapid pace of technological innovation.
- Part 1: Back to Basics: Why the Board Evaluation is a Critical Building Block
- Part 2: What Are the Barriers to Effective Board Evaluations Today?
- Part 3: Five Elements of a Successful Board Evaluation
- Part 4: Recommended Evaluation Formats: Mapping a Three-Year Plan
- Part 5: How and When to Choose a Facilitator for Your Board Evaluation
- Part 6: Three Guidelines for Taking Action on Board Evaluation Results
Throughout this six-part blog series, we've covered several aspects of the board evaluation process: Not only are investors placing a greater focus on evaluations, but many boards are still struggling to leverage the results in ways that drive real change (Part 1). We examined several challenges and inherent barriers to board evaluations today (Part 2), then outlined the critical elements of an effective assessment process (Part 3). We also suggested that boards take a multi-year approach when mapping evaluation methodologies (Part 4), and we outlined key considerations for boards as they attempt to identify the best person to facilitate (Part 5). Now we arrive at our pi?'ce de r?'sistance, Part 6 of the blog series! Too often, we find that the break-down in an otherwise successful evaluation process occurs on the home stretch'when the results are in and it's time for boards to take action. According to PwC's Annual Corporate Directors Survey, over half of corporate directors (51%) say that their board did not make any changes as a result of their last self-evaluation. While we understand that not every board will identify the kinds of issues that necessitate momentous changes, we do believe that this high number suggests that many boards (a) still treat evaluations as a check-the-box exercise, (b) don't have the leadership to take action, or (c) don't want to upset the applecart. And while some boards can continue to take this approach, we can almost always guarantee that a poor evaluation process will catch up to you'whether in the form of underperforming directors, poor time management at meetings, pressure from activist investors, or a disconnect between board skill sets and company strategy.
Boards that approach their evaluation process merely as a compliance exercise are falling short of their fiduciary duty to self-examine, refresh, and improve performance. In this blog, we outline three practicable ways boards can begin to translate evaluation insights to action.
Guidelines for Taking Action
(1) Communicate from the very beginning that the board intends to take action.
If board leadership positions the board evaluation as a compliance exercise, then it will invariably be treated as one. Thus, the board chairman and nom/gov committee chair are responsible for clearly communicating the intent of the board evaluation process (i.e., to improve performance).In theory, the mindset of performance measurement should be an integral part of the board's culture. The healthiest boards operate in an environment of active discourse, productive conflict, and introspection - and the best board members are receptive, even eager, to receive the kind of feedback that drives improvement.
This attitude towards board evaluations must be clearly communicated and instilled during the onboarding process for new directors. At the outset of every evaluation, board leadership must be crystal clear that the ultimate objective is performance enhancement (across the full board, committees, and individual directors).
(2) Assign ownership and timelines to all action items.
Boards should commit to an action plan format ahead of time. We prefer one that lists the action item, its owner, and a timeline for completion. Drafting an action plan happens during the board's discussion of the evaluation results, and the process translates insights into accountable actions and measurable results.Boards that are taking a multi-year approach to their board evaluations (i.e., shifting their focus and methodologies on rotating years) should build flexibility into their evaluation design. This can allow the board to add questions that gauge the progress on last year's action items'whether those entailed forming a new committee, recruiting new skill sets to the board, or improving the organization of pre-reading materials.
'Once these action items are outlined,' said TK Kerstetter, Host of Inside America's Boardrooms, 'they must be followed through. You don't want the board minutes to reflect any weaknesses, which the board identifies then fails to address.'
(3) Communicate to shareholders how your process improves performance.
If a tree falls in the woods, and you forget to include it in your proxy, did it even happen? In the realm of shareholder engagement, the answer is NO.Too often, boards will conduct a highly effective evaluation, then fail to outline their process in the proxy. This does little to instill confidence in your largest investors, who are looking to your evaluation process as an indication of board refreshment practices and governance proficiency.
[blockquote source="BlackRock, Engagement Priorities for 2017-2018" cite="https://www.blackrock.com/corporate/en-us/about-us/investment-stewardship/engagement-priorities"]Board composition, effectiveness, and accountability remain a top priority...We will seek to better understand how boards assess their performance and the skills and expertise needed to take the company through its future multi-year strategy (rather than the last one).[/blockquote]
Beyond the board's evaluation process, the proxy disclosure should also focus on how feedback is incorporated to improve performance. Again, Donnelley Financial Solutions' Guide to Effective Proxies is an excellent resource to see how other boards are structuring their disclosure for board evaluations (starting on page 155), as well as for other areas of the proxy. In Part 3 of this blog series, we shared specific examples from Goldman Sachs' 2016 proxy statement.
As this blog series comes to a close, we hope you've found our guidance on board evaluations helpful. We continue to believe that an effective evaluation process is key to overcoming many of the challenges faced by today's boards'from lack of diversity to the rapid pace of technological innovation.
