October 13, 2008

Evaluating the board of directors

Filed under: Corporate governance — Nicola Rowe @ 5:19 pm

The modern corporation is used to evaluating performance: employee performance, business unit performance, and, if the company is worth its salt, customer performance. But it’s rare for those in charge of the kit and caboodle to be evaluated themselves: at the turn of the century, only one listed US company in five regularly evaluated its board of directors.

Now, as noted earlier, directors enjoy wide protection from scrutiny – not just from others, but from themselves: a director’s chair comes with a brass nameplate, but rarely a silver mirror. Boards have been reluctant to evaluate themselves for many reasons – some lack the time, some find it more confrontational than clubby, and some simply don’t know how – but this needs to change. The NYSE’s  Rule 303A(9) now requires boards to conduct a self-evaluation at least once a year. So how can a board best evaluate itself – and what should it look out for?

The key question the board must ask itself is, “How well did we perform our duty as a board?” That question points to the two kinds of inquiry it must make: into how well it performed – that is, into how well its own processes functioned – and into how effective it was in fulfilling its duties. The board should start with the second question, asking itself “What did we aim to do this year?” If the company’s governance is good, the answers to this question will be in the company charter, and will include developing long-range strategy, holding management to account for agreed performance goals, approving financial reporting, and so on. The next question must be, “Did we achieve each of our aims effectively?” This should be more than just a tick-and-cross exercise. If the board achieved a goal, it should ask, “Why? What worked well?” This will be useful data for compiling a list of best practices. If a goal was not achieved, or not achieved easily, the board must ask why not. Once it has gone through its performance by goal and collected a list of best practices and concerns, it should take one step back and look at its processes. Which worked well? Which need improvement? In a final step, the board should incorporate its findings into its governance process for the following financial year.

Evaluation should be tied into the board’s annual operating schedule, with annual objectives set at the beginning of the financial year, data collected during the third quarter (once it’s becoming clear whether the board’s expectations of management performance are aligned for the year) and a review session at the end of the year.


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