Board and Director Evaluation

Modern management teams insist on getting feedback about their behaviour as a basis for performance improvement - now boards of directors who implement corporate governance are doing the same. Corporate governance is the process by which the objectives of a company are set and the methods of monitoring and achieving these objectives are determined. Board and director evaluations or assessments are an important method for developing better corporate governance. Many stock exchanges have issued best practice codes which endorse regular board and director evaluation e.g. the Toronto Stock Exchange, the London Stock Exchange and New York Stock Exchange. Board and director evaluation involves board members undertaking a constructive but critical review of their own performance, identifying strengths, weaknesses, then writing and implementing plans for further professional development. The provision of feedback on board performance and governance processes is the most crucial element of director evaluation. The benefits There are many benefits from board and director evaluation.

The process helps to identify weaknesses to develop as well as strengths that can be further built upon. Evaluation enhances relationships by encouraging open communication amongst board members and management. It increases performance by clarifying roles, expectations, responsibilities and by fostering collaborative goal setting. Board evaluation leads to specific improvements in boards focus, strategic planning, efficiency and time management.

Increased performance leads to increased board productivity. A survey involving 3,000 of the largest U.S companies by the recruitment consultancy, Heidrick and Struggles together with the business improvement organisation, The Corporate Board, found that nine out of ten companies who undertook director evaluation said that the evaluation made their boards more productive. Harvard Business Review in 2004 reported a survey of 200 large corporations, where director evaluation was found to be among the top activities to improve board performance. The benefits for individual directors include building greater levels of professional leadership, greater role clarity, teamwork, accountability, decision making, communication and more effective board operations.

Institutional investors clearly believe that enhanced director performance is worth paying for. The consultancy firm McKinsey and Co surveyed more than 200 institutional investors in 31 countries in 2002 and found that about three-quarters of investors were willing to pay more for shares of companies with good governance. They suggested that price premiums averaged between 12 and 14 percent in North America and Western Europe. Sound director evaluation systems are based on well established governance frameworks such as the London Stock Exchange Practical Guide to Corporate Governance see http://www.londonstockexchange.com/companies-and-advisors/mainmarket/companies/listing/practical-guide-to-corporate-governance.pdf The process The board needs to start by being clear about why they are undertaking the assessment and what they want to get out of it. Common reasons for undertaking director evaluation include: 1. to assess the quality of the board's corporate governance processes against a comprehensive best practice model 2. to write a Board Development Plan which sets out the specific actions to improve governance practices 3. to assess the skills and abilities of individual directors 4. to improve the interpersonal dynamics in the boardroom 5. to fulfill the requirements of good governance. Typically board chair take the lead role in the director evaluation process however in some boards the governance or nominating committee may lead the process. Types of evaluation There are three main types of evaluation process: 1. The consulting-based evaluation where a qualified professional will interview the directors, review the board policies and papers and produce a report with recommendations for improvements. 2. The web-based evaluation in which the board selects from a range of questionnaires:full board evaluation, chair evaluation, executive director evaluation, non-executive director evaluation, CEO evaluation and so on. The board members complete the on-line questionnaires and when these are finished a series of reports are automatically generated for the board to consider. An example of this service is www.directorevaluation.com

3. Paper based evaluations are usually simple whole of board evaluations which are distributed to members and then the data collated and feedback to the board by the chair. No matter what form of director evaluation is used the issues that are raised in the feedback reports should be discussed, prioritised, assigned and managed by the board. Inaction following the evaluation will quickly undermine the whole process. Undertaking evaluations on an annual basis is useful as it allows the board to assess the progress it is making in a range of areas over time. Some web-based systems offer multi-year reports which makes comparisons over time very easy. Altering the evaluation process from consultant-based to web-based over time can reduce any risk of staleness in the evaluation. Confidentiality is an important element in any director evaluation as it fosters trust, honesty and openness, which are essential elements of an effective evaluation. Without these factors, the free flow of information may be seriously curtailed. For this reason director evaluation information is usually aggregated and feedback given in summary form. No matter what the process it must be meaningful and useful, easy to use and be practical enough to produce specific improvements in governance. Conclusion Every board of directors should strive for improvements in its quality of governance. Board and director evaluations are an effective tool to achieve this and the benefits of evaluation clearly outweigh the costs and potential disadvantages.