New Thinking on Board Evaluations: Give Directors Feed-Forward
Since 2009, the New York Stock Exchange has required the boards of listed companies to conduct annual board performance evaluations. The corporate governance codes in Europe all stipulate that annual board evaluations be conducted. And in the UK, the prescription is to use an outside facilitator for that process at least every third year.
In the first few years of the NYSE requirement, many boards responded to the mandate with a rather cursory, “check the box” process that was motivated more by the compliance imperative than the desire to improve the board’s effectiveness. Often, it involved simply distributing a brief survey to all board members. The results were tabulated, and the box was checked.
Best practices in governance today require a much more rigorous approach. In addition to a thorough evaluation of full board and committee effectiveness, individual director feedback should be a component of a robust board assessment. However, studies indicate that only slightly more than half of boards actually delivered peer feedback, and about one-third of the boards that did report that those reviews were ineffective.
One of the chief reasons many boards choose to forego individual director evaluations is that gathering and delivering feedback about director and board performance is a very sensitive process. Poorly done, it can damage the important collegial culture inside the boardroom and inject a tone of caution and distrust into directors’ relationships with each other.
However, most directors who serve on boards are highly responsible, conscientious business leaders who genuinely want to contribute value and would want to know if they are not performing as expected. In fact, 90% of the 625 directors who responded to a joint RHR International/NYSE Governance Services survey indicated that they would like feedback about their performance as a director. So, the question is how can important information be delivered to directors in a constructive manner?
One answer is feed-forward, not feedback. This distinction is more than semantic. Considering that the overarching intention of board and director evaluations is to continually enhance contributions in the future, a focus on what can be done differently going forward to maximize value is much more critical than past performance. While referencing former behavior may be helpful to highlight themes, the majority of boards and directors will benefit most from candid suggestions about how they can improve their contributions in the future. Drawing upon RHR’s decades of experience in this realm, here are a few recommendations for providing feed-forward.
Be clear and explicit about the expected value proposition for the board and each director. Our experience tells us that directors come into their board service with a variety of implicit assumptions about how they think they should contribute. Some directors, motivated by the desire to be helpful, can cross the line from governance oversight into management. Others, wanting to provide a rigorous check on management, can adopt an adversarial posture. The board chair and/or lead director need to be explicit about the expected value proposition of the full board and of each director in the initial selection and onboarding process as well as in director evaluations.
Set up the board and director evaluations with a future orientation. Whether the evaluations are conducted internally or via an outside facilitator, the board survey and interviews with directors (the best-practice combination) should focus on how the board, committees, and individual directors can function even more effectively in the future rather than how they have functioned in the past. This is especially important in light of the fact that the aforementioned RHR/NYSE study indicated that organizations need different things from their boards and directors as the operating landscape and company strategy evolve. Evaluations should focus on what the governance needs of the organization will be in the coming year(s) and how directors can contribute in the future context. Also, keep in mind that the best input is actionable, and any changing behavioral expectations should be clearly defined.
Supplement the required annual evaluation with ongoing input from the board chair or lead director. An annual evaluation is an effective way for a board to gauge how it is functioning and how it can improve its effectiveness going forward. In addition, regular and immediate input provides the best opportunity for behavior reinforcement or modification. Board chairs and lead directors should be proactive in giving feedback and suggestions for improvement to each director in an ongoing fashion throughout the year. This is a great way to follow up on recommendations from the annual evaluation process and, in many cases, may involve simply calling out what a director is doing well that adds value. In other cases, individual directors may benefit from timely course corrections about how they conduct themselves and how they can contribute more effectively in the future. This aspect of the role of chair and lead director is critically important and takes a high level of interpersonal skill.
Taken together, these three suggestions can lead to an effective feed-forward approach to board and director evaluations that will result in raising the contributions of boards to the organizations they govern.
A similar piece was published in The Corporate Board magazine.