Board evaluation: a conversation
As a board consultant the question of underperforming and nonperforming directors is a topic of note in many of my conversations. My strategic alliance for board evaluation is Susan Shultz, founder and CEO of The Board Institute. To get a few insights on the topic of board effectiveness, I interviewed her on the current state of the board evaluation and board effectiveness.
Warren Buffet says “The best way to affect the behavior of board members is to embarrass them.” How would you respond to this statement?
I believe the overwhelming majority of directors want to do the right thing. Unfortunately, we only hear about the failed boards. The dramatic untold stories are the 100s of companies, public and private, that have avoided crises, , that have succeeded, because of the advice and counsel of strategic boards of directors who are embracing accountability and moving beyond compliance.
The traditional role of boards is threatened by a perception that directors are failing to do their jobs Yet, most directors want to add value. The irony is that boards have been randomly assembled and almost never held accountable. Now, the market is demanding transparency, and the exchanges, the SEC, and the other regulators are requiring evaluation of the board effectiveness. And, the Board Institute is providing the first web-based, independent suite of evaluation and education solutions.
Board evaluations can be a way to raise the bar to the next level and demonstrate effectiveness and commitment to improving. Board evaluation provides an objective forward focus – a baseline for continuous improvement.. This is both a need and an opportunity to create competitive advantage at the board level. So, directors are motivated to improve.
Can you give us an example of how needs at the director level change in the boardroom?
To have the board aid in creating competitive advantage is an important mindset. Think of it this way. In a pre-IPO company an excellent director will have success in taking a a company public. The candidate’s knowledge and experience in the investment banking world and contacts on Wall Street will add value at the top of the house. But once the company is moving forward, this board member may not have the same value. Now, maybe the strategic plan for the company is to grow the business in China. The board may then decide the best candidate is an executive with extensive knowledge and experience in China. This does not mean that there is a lack of competency in the director that was recruited to help with the IPO rather it is an alignment of knowledge and experience based on strategy and risk.
A directorship is not an entitlement for perpetuity. There is nothing wrong with thanking a good director for his service and bringing on a new board member with capacities targeted more closely to the future needs of the company.
How does a board have a conversation about a director’s contribution in relationship to company growth after a board evaluation?
Most companies have established rudimentary internal processes to conduct evaluations. However, these processes – most of which are manual and ad hoc – do not provide the independence, breadth, standardization or repeatability necessary to fully reap the benefits of a formal board evaluation. The objective forward focus the process of board evaluation provides acts as a ‘heads up’ to the whole board as to what is required. A comprehensive, objective evaluation provides an ideal platform for meaningful discussion and improvement. This is an opportune time to have a conversation with directors who need skills or training to optimize their contribution to the Board. . As the issue of director replacement arises in a board evaluation, the Governance Committee Chair can recommend action, or we can refer consultants who can facilitate the conversation in the boardroom.
With the evolving nature of board evaluation, what are the current surveys saying about effectiveness?
According to a recent PricewaterhouseCoopers study, only 11 percent of board members feel that their whole-board evaluation process is “very effective,” and 43 percent feel that there is significant room for improvement, rating their current process only “somewhat effective” or “not at all effective.”
All evaluations are valuable, because they focus on board effectiveness. However, I have found that most evaluations are cobbled together in-house. Thus, the board is asking – and answering – its own questions. In this extremely demanding environment, directors welcome professional, easy to use, validated evaluation solutions.
With the increased scrutiny towards board since the Financial Meltdown of 2008, what needs for boards are driving the growth at The Board Institute?
In collaboration with our partners, we frequently update the educational content of our Indices (evaluations). For example, in response to new legislation and regulation, we just collaborated with the Foundation for the Financial Executives International (FEI) to update The Audit Committee Index. We are creating new Indices in response to market demand. In process are The Nonprofit Board Index, The Fiduciary Board Index, and The Norwegian Board Index. We look forward to developing vertical Indices as well.