Board evaluations: driving continuous improvement, not compliance

Leading View

Being a corporate board director is more challenging than ever. The pause for reflection offered by a robust board evaluation is an opportunity to raise the bar on board and individual performance. So, is that how boards actually use their evaluation?

To answer this question, I worked with colleagues at Korn Ferry and renowned law firm, Gibson Dunn on our annual review of the current state of play and emerging trends in U.S. public company board evaluation practices: https://www.kornferry.com/content/dam/kornferry-v2/featured-topics/pdf/Annual-State-of-Board-Evaluation-US.pdf.

Our focus was listed companies in the S&P 500. By carefully analyzing their 2022 proxy Statements, we were able to determine several highlights and one area of concern.

Only 456 companies (91%) disclosed at least some basic information about their board evaluation. Of those companies, 440 disclosed detailed information. We call the latter group the "disclosing companies."

First, the highlights drawn from the disclosing companies:

• 60% are evaluating individual directors, not just the board or its committees
• 53% are using interviews as part of the process, rather than relying purely on surveys
• 32% use a third party evaluator either annually or periodically

Why are these elements of a board evaluation important?

Individual Director Review: the third leg of the evaluation stool

The data we uncovered fits anecdotal evidence from the market, that boards are increasingly looking to evaluate individual directors, not just as part of the re-nomination process but also to improve individual performance.

The most common approach we have seen is when the board leader (independent Board Chair or Lead Independent Director) or a third party conduct a peer review process where each director is asked to reflect on their own performance and that of their fellow directors.

In my experience, very few board directors are getting constructive feedback about their contribution to the board and how it can be enhanced, yet they were almost always given feedback in their executive roles. Feedback to improve individual performance should not stop at the boardroom door.

Conducting interviews: Getting at the heart of the matter

For many years, boards evaluated themselves solely on the effectiveness of their structure and processes. Increasingly, concern has shifted to who sits at the table and for how long, how to ensure newly diversifying boards are inclusive, and how to strike the right relationship with management. It is much harder to get at those issues with a survey.

We were encouraged to see that the majority of disclosing companies used interviews as part of their process. They were not relying on a survey approach or a group discussion, neither of which tend to inspire the level of candor required. Discussions between individual directors and the board leadership (often the Board Chair/Lead Independent Director and Nom/Gov Chair in tandem) can unlock the real issues impacting board effectiveness.

Using an independent evaluator: the third leg of the evaluation process

A third party, or independent evaluator, can collect confidential feedback from each director and, preferably, members of management who work most closely with the board (for example, the chief financial officer and general counsel). By protecting confidentiality it is possible to inspire deeper candor.

An independent evaluator has typically seen more boardrooms, and a wider set of situations, than most directors and can bring that experience to the assessment. Using a firm with the appropriate resources also allows the board to take advantage of benchmarking the practices and composition of peer, aspirational peer, and/or best-in-class companies. Investors have access to that type of data, and the board may want to understand how it stacks up compared to others in the industry or by market cap.

Now, what about our one area of concern?

• Only 23% of the disclosing companies (the ones that provided more detailed information) disclosed any changes made as a result of the evaluation
• Typically, those companies disclosed updates to Board or committee responsibilities, agendas and materials or changes to board succession planning

Disclosure of outcomes: the missing ingredient

We were disappointed to see that fewer than a quarter of the companies disclosed the changes made following the evaluation. Of those that did disclose the changes, they tended to pick lower hanging fruit rather than letting their investors and other stakeholders know just how rigorous the evaluation had been. There is a missed opportunity to share that the board takes continuous improvement seriously.

There could be much more effective disclosure of the evaluation process and outcomes, as seen in the other markets. This might include an overview of the process, key takeaways and updates on the key takeaways from prior year evaluations.

If you would like to discover more ways to move your board evaluation from an annual compliance exercise to a continuous improvement process, please contact me to discuss your options.

Anthony Goodman is Senior Client Partner and Head of the Board Effectiveness Practice at Korn Ferry - all views shared on LinkedIn are my own.