Does your board have strong governance practices to effectively oversee your organization? “Finally, board chairs and investors are pointing towards corporate-governance excellence as key to long-term value creation and economic stability. Corporate governance is now a top priority for BlackRock, State Street, Vanguard and others.”

As research emerges linking governance and diversity to performance, board members are called on to react. But how?

Byron Loflin, CEO of the Center for Board Excellence, suggests that a reboot is in order: a recalibration of the board’s composition and an assessment of its responsibilities and direction. Boards must undergo a complete reboot of who they are and how they operate to achieve governance excellence. Read the entire article here.

Directors’ and Officers’ Questionnaires are a labor-intensive process to the legal teams administering them and to the directors and officers completing them year after year. The forms are generic and require manual entry of known information. Questions are often hard to understand, redundant, or sometimes irrelevant to specific respondents. What’s worse, the completed questionnaire review process is cumbersome and inefficient.

We know. We can help.

CBE offers a dynamic, electronic D&O Questionnaire through its EnGauge™ platform that makes the process faster, simpler, and more secure. Click here to download the Pros & Cons of Digital D&O Questionnaire. The table describes how an electronic form can save you and your organization more time every year.

Our experts provide a full-service approach and support to administering your D&O Questionnaire – from set-up to reporting. Let us help you modernize your questionnaire process to see just how much time you can save while getting things done.

I applaud Larry Fink, Jamie Dimon, Warren Buffett and colleagues for stepping forward and advancing this important dialogue.  The group’s corporations represent more than $15 trillion in managed or controlled assests.  Board effectiveness is a key element of a company’s governance and overall success.  Measuring effectiveness through a well designed board evaluation is an important step that high performing boards engage as an annual part of their agenda.

“The health of America’s public corporations and financial markets – and public trust in both – is critical to economic growth and a better financial future for American workers, retirees and investors.

Millions of American families depend on these companies………”

This document, Commonsense Corporate Governance Principles, is a web initiated dialogue on fundamental corporate governance principles put forward by a group of ten business leaders: Tim ArmourMary BarraWarren BuffettJamie DimonMary ErdoesLarry FinkJeff ImmeltMark MachinLowell McAdam, and Bill McNabb.

COMMONSENSE PRINCIPLES OF CORPORATE GOVERNANCE

I. Board of Directors – Composition and Internal Governance

a. Composition

  • Directors’ loyalty should be to the shareholders and the company. A board must not be beholden to the CEO or management. A significant majority of the board should be independent under the New York Stock Exchange rules or similar standards.
  • All directors must have high integrity and the appropriate competence to represent the interests of all shareholders in achieving the long-term success of their company. Ideally, in order to facilitate engaged and informed oversight of the company and the performance of its management, a subset of directors will have professional experiences directly related to the company’s business. At the same time, however, it is important to recognize that some of the best ideas, insights and contributions can come from directors whose professional experiences are not directly related to the company’s business.
  • Directors should be strong and steadfast, independent of mind and willing to challenge constructively but not be divisive or self-serving. Collaboration and collegiality also are critical for a healthy, functioning board.
  • Directors should be business savvy, be shareholder oriented and have a genuine passion for their company.
  • Directors should have complementary and diverse skill sets, backgrounds and experiences. Diversity along multiple dimensions is critical to a high-functioning board. Director candidates should be drawn from a rigorously diverse pool.
  • While no one size fits all – boards need to be large enough to allow for a variety of perspectives, as well as to manage required board processes – they generally should be as small as practicable so as to promote an open dialogue among directors.
  • Directors need to commit substantial time and energy to the role. Therefore, a board should assess the ability of its members to maintain appropriate focus and not be distracted by competing responsibilities. In so doing, the board should carefully consider a director’s service on multiple boards and other commitments.

b. Election of directors

  • Directors should be elected by a majority of the votes cast “for” and “against/withhold” (i.e., abstentions and non-votes should not be counted for this purpose).

c. Nominating directors

  • Long-term shareholders should recommend potential directors if they know the individuals well and believe they would be additive to the board.
  • A company is more likely to attract and retain strong directors if the board focuses on big-picture issues and can delegate other matters to management (see below at II.b., “Board of Directors’ Responsibilities/Critical activities of the board; setting the agenda”).

d. Director compensation and stock ownership

  • A company’s independent directors should be fairly and equally compensated for board service, although (i) lead independent directors and committee chairs may receive additional compensation and (ii) committee service fees may vary. If directors receive any additional compensation from the company that is not related to their service as a board member, such activeity should be disclosed and explained.
  • Companies should consider paying a substantial portion (e.g., for some companies, as much as 50% or more) of director compensation in stock, performance stock units or similar equity-like instruments. Companies also should consider requiring directors to retain a significant portion of their equity compensation for the duration of their tenure to further directors’ economic alignment with the long- term performance of the company.

e. Board committee structure and service

  • Companies should conduct a thorough and robust orientation program for their new directors, including background on the industry and the competitive landscape in which the company operates, the company’s business, its operations, and important legal and regulatory issues, etc.
  • A board should have a well-developed committee structure with clearly understood responsibilities. Disclosures to shareholders should describe the structure and function of each board committee.
  • Boards should consider periodic rotation of board leadership roles (i.e., committee chairs and the lead independent director), balancing the benefits of rotation against the benefits of continuity, experience and expertise.

f. Director tenure and retirement age

  • It is essential that a company attract and retain strong, experienced and knowledgeable board members.
  • Some boards have rules around maximum length of service and mandatory retirement age for directors; others have such rules but permit exceptions; and still others have no such rules at all. Whatever the case, companies should clearly articulate their approach on term limits and retirement age. And insofar as a board permits exceptions, the board should explain (ordinarily in the company’s proxy statement) why a particular exception was warranted in the context of the board’s assessment of its performance and composition.
  • Board refreshment should always be considered in order to ensure that the board’s skill set and perspectives remain sufficiently current and broad in dealing with fast- changing business dynamics. But the importance of fresh thinking and new perspectives should be tempered with the understanding that age and experience often bring wisdom, judgment and knowledge.

g. Director effectiveness

  • Boards should have a robust process to evaluate themselves on a regular basis, led by the non-executive chair, lead independent director or appropriate committee chair. The board should have the fortitude to replace ineffective directors.

II. Board of Directors’ Responsibilities

a. Director communication with third parties

  • Robust communication of a board’s thinking to the company’s shareholders is important. There are multiple ways of going about it. For example, companies may wish to designate certain directors – as and when appropriate and in coordination with management – to communicate directly with shareholders on governance and key shareholder issues, such as CEO compensation. Directors who communicate directly with shareholders ideally will be experienced in such matters.
  • Directors should speak with the media about the company only if authorized by the board and in accordance with company policy.
  • In addition, the CEO should actively engage on corporate governance and key shareholder issues (other than the CEO’s own compensation) when meeting with shareholders.

b. Critical activities of the board; setting the agenda

  • The full board (including, where appropriate, through the non-executive chair or lead independent director) should have input into the setting of the board agenda.
  • Over the course of the year, the agenda should include and focus on the following items, among others:
  • A robust, forward-looking discussion of the business.
  • The performance of the current CEO and other key members of management and succession planning for each of them. One of the board’s most important jobs is making sure the company has the right CEO. If the company does not have the appropriate CEO, the board should act promptly to address the issue.
  • Creation of shareholder value, with a focus on the long term. This means encouraging the sort of long-term thinking owners of a private company might bring to their strategic discussions, including investments that may not pay off in the short run.
  • Major strategic issues (including material mergers and acquisitions and major capital commitments) and long-term strategy, including thorough consideration of operational and financial plans, quantitative and qualitative key performance indicators, and assessment of organic and inorganic growth, among others.
  • The board should receive a balanced assessment on strategic fit, risks and valuation in connection with material mergers and acquisitions. The board should consider establishing an ad hoc Transaction Committee if significant board time is otherwise required to consider a material merger or acquisition. If the company’s stock is to be used in such a transaction, the board should carefully assess the company’s valuation relative to the valuation implied in the acquisition. The objective is to properly evaluate the value of what you are giving vs. the value of what you are getting.
  • Significant risks, including reputational risks. The board should not be reflexively risk averse; it should seek the proper calibration of risk and reward as it focuses on the long-term interests of the company’s shareholders.
  • Standards of performance, including the maintaining and strengthening of the company’s culture and values.
  • Material corporate responsibility matters.
  • Shareholder proposals and key shareholder concerns.
  • The board (or appropriate board committee) should determine the best approach to compensate management, taking into account all the factors it deems appropriate, including corporate and individual performance and
  • other qualitative and quantitative factors (see below at VII., “Compensation of Management”).
  • A board should be continually educated on the company and its industry. If a Board feels it would be productive, outside experts and advisors should be brought in to inform directors on issues and events affecting the company.
  • The board should minimize the amount of time it spends on frivolous or non- essential matters – the goal is to provide perspective and make decisions to build real value for the company and its shareholders.
  • As authorized and coordinated by the board, directors should have unfettered access to management, including those below the CEO’s direct reports.
  • At each meeting, to ensure open and free discussion, the board should meet in executive session without the CEO or other members of management. The independent directors should ensure that they have enough time to do this properly.
  • The board (or appropriate board committee) should discuss and approve the CEO’s compensation.
  • In addition to its other responsibilities, the Audit Committee should focus on whether the company’s financial statements would be prepared or disclosed in a materially different manner if the external auditor itself were solely responsible for their preparation.

III. Shareholder Rights

a. Many public companies and asset managers have recently reviewed their approach to proxy access. Others have not yet undertaken such a review or may have one under way. Among the larger market capitalization companies that have adopted proxy access provisions, generally a shareholder (or group of up to 20 shareholders) who has continuously held a minimum of 3% of the company’s outstanding shares for three years is eligible to include on the company’s proxy statement nominees for a minimum of 20% (and, in some cases, 25%) of the company’s board seats. Generally, only shares in which the shareholder has full, unhedged economic interest count toward satisfaction of the ownership/holding period requirements. A higher threshold of ownership (e.g., 5%) often has been adopted for smaller market capitalization companies (e.g., less than $2 billion).

b. Dual class voting is not a best practice. If a company has dual class voting, which sometimes is intended to protect the company from short-term behavior, the company should consider having specific sunset provisions based upon time or a triggering event, which eliminate dual class voting. In addition, all shareholders should be treated equally in any corporate transaction.

c. Written consent and special meeting provisions can be important mechanisms for shareholder action. Where they are adopted, there should be a reasonable minimum amount of outstanding shares required in order to prevent a small minority of shareholders from being able to abuse the rights or waste corporate time and resources.

IV. Public Reporting

a. Transparency around quarterly financial results is important.

b. Companies should frame their required quarterly reporting in the broader context of their articulated strategy and provide an outlook, as appropriate, for trends and metrics that reflect progress (or not) on long-term goals. A company should not feel obligated to provide earnings guidance – and should determine whether providing earnings guidance for the company’s shareholders does more harm than good. If a company does provide earnings guidance, the company should be realistic and avoid inflated projections. Making short-term decisions to beat guidance (or any performance benchmark) is likely to be value destructive in the long run.

c. As appropriate, long-term goals should be disclosed and explained in a specific and measurable way.

d. A company should take a long-term strategic view, as though the company were private, and explain clearly to shareholders how material decisions and actions are consistent with that view.

e. Companies should explain when and why they are undertaking material mergers or acquisitions or major capital commitments.

f. Companies are required to report their results in accordance with Generally Accepted Accounting Principles (“GAAP”). While it is acceptable in certain instances to use non-GAAP measures to explain and clarify results for shareholders, such measures should be sensible and should not be used to obscure GAAP results. In this regard, it is important to note that all compensation, including equity compensation, is plainly a cost of doing business and should be reflected in any non-GAAP measurement of earnings in precisely the same manner it is reflected in GAAP earnings.

V. Board Leadership (Including the Lead Independent Director’s Role)

a. The board’s independent directors should decide, based upon the circumstances at the time, whether it is appropriate for the company to have separate or combined chair and CEO roles. The board should explain clearly (ordinarily in the company’s proxy statement) to shareholders why it has separated or combined the roles.

b. If a board decides to combine the chair and CEO roles, it is critical that the board has in place a strong designated lead independent director and governance structure.

c. Depending on the circumstances, a lead independent director’s responsibilities may include:

  • Serving as liaison between the chair and the independent directors
  • Presiding over meetings of the board at which the chair is not present, including
  • executive sessions of the independent directors
  • Ensuring that the board has proper input into meeting agendas for, and information sent to, the board
  • Having the authority to call meetings of the independent directors
  • Insofar as the company’s board wishes to communicate directly with shareholders,
  • engaging (or overseeing the board’s process for engaging) with those shareholders
  • Guiding the annual board self-assessment
  • Guiding the board’s consideration of CEO compensation
  • Guiding the CEO succession planning process

VI. Management Succession Planning

a. Senior management bench strength can be evaluated by the board and shareholders through an assessment of key company employees; direct exposure to those employees is helpful in making that assessment.

b. Companies should inform shareholders of the process the board has for succession planning and also should have an appropriate plan if an unexpected, emergency succession is necessary.

VII. Compensation of Management

a. To be successful, companies must attract and retain the best people – and competitive compensation of management is critical in this regard. To this end, compensation plans should be appropriately tailored to the nature of the company’s business and the industry in which it competes. Varied forms of compensation may be necessary for different types of businesses and different types of employees. While a company’s compensation plans will evolve over time, they should have continuity over multiple years and ensure alignment with long-term performance.

b. Compensation should have both a current component and a long-term component.

c. Benchmarks and performance measurements ordinarily should be disclosed to enable shareholders to evaluate the rigor of the company’s goals and the goal-setting process.  That said, compensation should not be entirely formula based, and companies should retain discretion (appropriately disclosed) to consider qualitative factors, such as integrity, work ethic, effectiveness, openness, etc. Those matters are essential to a company’s long- term health and ordinarily should be part of how compensation is determined.

d. Companies should consider paying a substantial portion (e.g., for some companies, as much as 50% or more) of compensation for senior management in the form of stock, performance stock units or similar equity-like instruments. The vesting or holding period for such equity compensation should be appropriate for the business to further senior management’s economic alignment with the long-term performance of the company. With properly designed performance hurdles, stock options may be one element of effective compensation plans, particularly for the CEO. All equity grants (whether stock or options) should be made at fair market value, or higher, at the time of the grant, with particular attention given to any dilutive effect of such grants on existing shareholders.

e. Companies should clearly articulate their compensation plans to shareholders. While companies should not, in the design of their compensation plans, feel constrained by the preferences of their competitors or the models of proxy advisors, they should be prepared to articulate how their approach links compensation to performance and aligns the interests of management and shareholders over the long term. If a company has well- designed compensation plans and clearly explains its rationale for those plans, shareholders should consider giving the company latitude in connection with individual annual compensation decisions.

f. If large special compensation awards (not normally recurring annual or biannual awards but those considered special awards or special retention awards) are given to management, they should be carefully evaluated and – in the case of the CEO and other “Named Executive Officers” whose compensation is set forth in the company’s proxy statement – clearly explained.

g. Companies should maintain clawback policies for both cash and equity compensation.

VIII. Asset Managers’ Role in Corporate Governance

Asset managers, on behalf of their clients, are significant owners of public companies, and, therefore, often are in a position to influence the corporate governance practices of those companies. Asset managers should exercise their voting rights thoughtfully and act in what they believe to be the long-term economic interests of their clients.

a. Asset managers should devote sufficient time and resources to evaluate matters presented for shareholder vote in the context of long-term value creation. Asset managers should actively engage, as appropriate, based on the issues, with the management and/or board of the company, both to convey the asset manager’s point of view and to understand the company’s perspective. Asset managers should give due consideration to the company’s rationale for its positions, including its perspective on certain governance issues where the company might take a novel or unconventional approach.

b. Given their importance to long-term investment success, proxy voting and corporate governance activities should receive appropriate senior-level oversight by the asset manager.

c. Asset managers, on behalf of their clients, should evaluate the performance of boards of directors, including thorough consideration of the following:

  • To the extent directors are speaking directly with shareholders, the directors’ (i) knowledge of their company’s corporate governance and policies and (ii) interest in understanding the key concerns of the company’s shareholders
  • The board’s focus on a thoughtful, long-term strategic plan and on performance against that plan

d. An asset manager’s ultimate decision makers on proxy issues important to long-term value creation should have access to the company, its management and, in some circumstances, the company’s board. Similarly, a company, its management and board should have access to an asset manager’s ultimate decision makers on those issues.

e. Asset managers should raise critical issues to companies (and vice versa) as early as possible in a constructive and proactive way. Building trust between the shareholders and the company is a healthy objective.

f.  Asset managers may rely on a variety of information sources to support their evaluation and decision-making processes. While data and recommendations from proxy advisors may form pieces of the information mosaic on which asset managers rely in their analysis, ultimately, their votes should be based on independent application of their own voting guidelines and policies.

g. Asset managers should make public their proxy voting process and voting guidelines and have clear engagement protocols and procedures.

h. Asset managers should consider sharing their issues and concerns (including, as appropriate, voting intentions and rationales therefor) with the company (especially where they oppose the board’s recommendations) in order to facilitate a robust dialogue if they believe that doing so is in the best interests of their clients.

For more, visit www.governanceprinciples.org

Request a board evaluation demo

As boards today face issues related to growth, globalization, and technological change, board refreshment is becoming more and more critical. The model of board-member-for-life — the proverbial pale, male, and stale — is likely to miss the boat as far as possessing the skill set and familiarity needed to address emerging crises and changes in investor and customer profiles. In fact, any board that defaults to the status quo and does not plan for the future is notholding its own; it is actually falling behind.

In a February 2016 article in Agenda, I address how board refreshment is crucial not only for a company’s effectiveness and survival in a changing world, but for protecting it from encroachment by activist investors and other outsiders. The skills that any board should comprise in order to be able to position the company for growth include:

  • IT strategy
  • Cyber-security understanding
  • Financial expertise and independence
  • Understanding of business and customers
  • Demographic understanding
  • Social media insight
  • Geopolitical expertise
  • Open-mindedness
  • Self-awareness

(Agenda, February 2016)

Some skills that are critical in cultivating new board members are those on the forefront of new technologies. It’s essential to not simply catalogue the tech know-how a board needs, however. These skills need to be paired with an ability to contextualize how they can move the company forward strategically and compete in current market environments.

A key starting point is board self-awareness. Are the directors as a group addressing current and future needs of the company? Are they responsible stewards, able to communicate effectively with the technical officers and the CFO? Are they aware of their responsibility for ensuring compliance with reporting and regulatory agencies?

If not, it may be time to make room for fresh perspectives, especially ones that reflect a more technologically adept and more diverse demographic. Millennials are comfortable with the rapid pace of change in technology and social constructs, both of which impact a company’s customer base. They also embody a new approach to entrepreneurship, often melding social media and cyber-savvy with social consciousness and a greater openness to diversity.

Diversity embraces race, ethnicity, age, and gender, but it is not an end in itself. Rather, its value lies in how it brings fresh perspectives to the table that probably would not arise from a more homogeneous group.

Board Refreshment Checklist

Below is a checklist for the board assessment process to help directors ensure that refreshment is addressed on a regular basis.

  • Conduct an annual board peer assessment that incorporates a skills matrix as a tool to evaluate each board member’s contributions and to expose skill and diversity gaps on the board as a whole;
  • Reinforce that the purpose behind the assessment is to identify areas that need improvement, create dynamic dialogue, and lead to action items for the board as a whole;
  • Watch industry trends to get a sense of what skills will be needed in the future;
  • Involve the CEO and top managers in the process;
  • Determine what is needed in terms of board education.

In 2000, few people could imagine the 2008 financial crisis, the explosion of 3-D printing, or the rise of cyber-security issues that corporations face today. Similarly, today’s board of directors cannot know what its company will face in the future.

By including ongoing board refreshment and a regular review of the board’s skills matrix, however, it can include individuals with up-to-date skills and industry insights who can ensure that the board — and the company — are on the path of continual improvement.

CEOs and boards have different jobs to do. They face very different challenges in performing their jobs effectively, which can make their working relationship complicated.

And sometimes that relationship can go terribly, terribly wrong.

Since 2014, the directors of American Apparel and the company’s founder and past CEO, Dov Charney, have been battling over the company’s future. Charney was ousted after mismanagement on his watch led the trendy, US-produced clothing manufacturer into bankruptcy.

Could a CEO evaluation have helped in this situation? Most likely. If Mr. Charney was held accountable earlier and coached to lead for the long term, the result may have been very different. According to a Jezebel interview, one American Apparel director, Allan Mayer, saw Charney’s mix of provocation and idealism as the company’s calling card.  Mayer seems almost enamored with Charney’s proclivities for poor behavior and sexual misconduct. It is unlikely that a majority of the Board would have felt the same way. A well crafted CEO evaluation combined with a Board Evaluation, would likely have focused the Board on these issues and either helped coach the CEO in a different direction or created an impetus for change.

A different perspective on board-CEO relations — minus the drama — comes through in a 2013 Harvard Business Review leadership report, “What CEOs Really Think of Their Boards,” about how established, well-respected CEOs view their companies’ boards of directors.

The CEOs interviewed in the study talked about board members who put self-interest above shareholder interests, whose risk aversion suppressed the bold thinking that made the company great in the first place, and whose entrenched points of view blocked exploration of new ideas and strategies. CEOs further felt the burden of dealing with board conflict fell on their shoulders. The study quoted one company head as saying, “It’s difficult when you make the CEO accountable for dealing with disruptive personalities.”

Meeting in the Middle

Whether in the context of an established Fortune 500 company or an industry maverick, boards and management need a baseline for managing all aspects of their working relationship.

The essentials should be found in the company’s mission statement, the CEO’s contract, the board handbook, and long-term strategy. But compliance with these documents — and adherence to the company’s core mission and values — is often best measured through the annual board and CEO evaluation process.

Reciprocity and buy-in from the top down are key to successful evaluations. Our short tag line from Peter Drucker, ‘What’s measured improves,’ requires that board leaders appreciate a self-evaluation process and act on its results.  I have spent hundreds of hours with board members, and there is a clear difference between high performing and underperforming directors. When a board reviews its CEO’s performance but is not subject to evaluation itself, or doesn’t take the process seriously, it sends the message that performance assessments are not important.

An approach to assessments that includes developing evaluation tools for the board, the CEO, and upper management helps build a team that can work synergistically. For instance, questions about product development goals may show that the CEO and multiple board members share the same concerns, but never had the opportunity to discuss them. It also leads by example and sets the tone for these same types of assessments throughout the company.

Evaluation beginning at the top can bring out other insights.

  • board’s self-evaluation gives the CEO evaluation more credence and establishes performance assessments as part of the company culture.
  • The board evaluation can help set clear actionable goals for the board and help set performance metrics for future evaluations.
  • An effective board evaluation process will provide good substance to incorporate into public company proxy statements.
  • Information compiled from a CEO evaluation helps the board reach clarity on what the CEO wants and expects.

When data from standardized questions and open-ended responses are aggregated into an objective report, that report can be used to more effectively promote communication, collaboration, and analysis.

Open Communication Is Key

Boards that incorporate meaningful assessment send the message that they are ready for challenging dialogue and are open to change. For their part, the CEOs interviewed for the Harvard Business Reviewstudy don’t want their recommendations rubber-stamped. They welcome informed, thoughtful questions that are forward-focused and bring fresh perspectives to the table. Honest, open engagement by both directors and CEOs can help them stay focused on their common goals — adhering to their core vision and positioning the company for growth.

*   *   *

On January 25, 2016, a U.S. bankruptcy court judge ruled in favor of American Apparel’s plan to exit bankruptcy. Watch for an analysis of the company’s ups and downs in a future blogpost.

Board Evaluations That Go from “Check-the-Box” to Transformative

What board member hasn’t heard, “The board speaks with one voice or not at all”? Every board should agree on the core beliefs that support the success of its organization. Projecting a unified message that reflects those core beliefs is critical.

However, sometimes the “one voice” principle — designed to guide the board’s behavior after examination of board business and discussion — can seep into boardroom discussion, suppressing inquiry and new ideas.

Creative Tension

While embracing different viewpoints isn’t always easy, successful corporate boards will create an atmosphere that encourages questioning and sharing diverse perspectives. “Creative tension” — the messy, sometimes raucous dialogue that arises from constructive discontent, respectful challenge, or asking “what if?” questions — is what Punit Renjen, CEO of Deloitte Global, calls this process of questioning in his Forbes article titled “The Crucial Edge that Makes a Board Exceptional.”

Boards may not welcome questions or challenges for a variety of reasons: unwillingness to upset the status quo, inflexible agendas, new or more reserved board members uncomfortable with speaking out, concern about exacerbating tensions with the CEO or upper management, or just a “That’s the way we’ve always done it” mentality.

Even if board members recognize the value of considering opposing views, certain factors may get in the way of embracing creative tension. Strong personalities dominating the conversation, discomfort with confrontation and an inability to see past challenging questions to the new ideas they may spark can stymie a board’s best efforts.

The annual board evaluation process, facilitated by a third party in a manner that ensures anonymity, can be a vehicle for bringing out board members’ concerns and ideas that may not fit neatly in an agenda category.  This can also be preferable to an interview based model, which can be tainted by interviewer bias or just discourage forthright or critical comments.  Open-ended response categories included in an anonymous evaluation questionnaire can provide a neutral setting where board members feel comfortable bringing up ideas that might challenge the “one voice” that can dominate board conversations.  Even more standard scored questions can highlight where board members have differing views on particular topics and provide the basis for more pointed dialogues at a meeting.

From What-if? to Aha!

Openness to creative tension is a key factor in making good boards exceptional, according to Renjen. “Opposing views can collide, but they also can converge and yield exciting new ideas, especially when an organization’s core beliefs unite everyone involved.”

As many as 63% of directors feel that the board self-evaluation is a check-the-box exercise, according to a 2014 PWC Annual Corporate Director Survey. Can an evaluation instrument tailored to bring out divergent perspectives change directors’ and board chairs’ feelings about the process? If board members recognize the value of creative tension in generating ideas and promoting dialogue, they may see the evaluation process in a new light, more as a tool for board growth than a regulatory chore.

For comments in an evaluation instrument to be of value, however, the instrument must have a mechanism — preferably built into the process from the beginning — to present these ideas for discussion.

Rapid change in many technology and financial sectors constantly brings out new questions across industry sectors. Boards that embrace creative tension know that it is healthier — for the board and the organization as a whole — to address these questions in the boardroom than to have them posed by their shareholders in public.

CBE and MPK&D Launch the Higher Education Assessment Platform

The Center for Board Excellence (CBE), a leading provider of governance solutions, and MPK&D Partners, noted higher education consulting experts, announced today a unique partnership for comprehensive board evaluation and leadership consulting services to higher education. CBE and MPK&D have developed a portfolio of leadership and board assessment products and solutions designed specifically to address critical issues affecting governance in higher education today.

“Higher Education faces greater challenges now than ever before,” said Kent John Chabotar, MPK&D founding partner and president emeritus of Guilford College. “The governing boards and leaders of these institutions need tools to help align the institution’s mission with the requisite leadership characteristics, while also assessing their own performance. This partnership brings to potential clients CBE’s extensive experience with best practices in business and other organizations with MPK&D’s knowledge of the culture and processes of higher education including faculty governance.”

The new Higher Education Assessment Platform combines CBE’s international expertise in creating effective assessments for governing boards of entities and organizations with MPK&D’s higher education strategy and leadership experience. With the specific needs – and budgets – of college and university boards in mind, CBE and MPK&D have developed an innovative and effective evaluation tool that is accessible and useful for institutions seeking to identify their own risks and weaknesses, while also reinforcing areas of strength. Following the initial assessment, MPK&D could then provide strategy and solutions to assist institutions with the development and implementation of plans to address the results.

“With greater demand for accountability, colleges and universities are under a harsh magnifying glass,” said Byron Loflin, CEO of CBE. “We are pleased to partner with MPK&D to provide a new and unique solution for promoting board performance at the university level that aligns with our array of cost-efficient and effective governance products.”

About MPK&D Partners

Founded in 2014, MPK&D is an experienced team of higher education leaders, including Mary Pat Seurkamp Ph.D., Patricia Bosse, Kent Chabotar, Ph.D., Daniel Carey, Ph.D., three of whom are former college presidents, and who deliver practical and creative solutions to some of the most complex challenges facing institutions today. For more information, visit www.mpkdpartners.com.

About the Center for Board Excellence

Founded in 2010 by attorneys and technologists, The Center for Board Excellence has built an innovative platform for board assessment, CEO evaluations and other governance processes. CBE streamlines laborious, costly and previously paper-based processes through its proprietary, private, cloud-based solutions. These solutions create efficiencies that save organizations’ directors, in-house counsel and governance professionals substantial time, effort and money.  For more information, please visit the company’s website at www.boardevaluations.com.

The latest pronouncements from Volkswagon’s Chairman Hans Dieter Pötsch, would like to paint his company’s recent wrong doings as a “chain of errors”.  Basically, it was just some buggy code, right?  A few errors that were just missed and then built upon themselves.

There is nothing in this story of corporate misdeeds that truly resembles an error.  This scandal is the result of a very calculated set of decisions motivated by money.  In a recent NPR piece, John Ydstie says that, “VW developers couldn’t figure how to meet U.S. emissions standards within the timeline and budget they’d been given, so they developed the software defeat device.”  Basically, they couldn’t figure out the answer so they cheated.

These kinds of things don’t just randomly happen at a company the size of VW.  This was not just the result of a chain of errors. There is a fundamental cultural problem at VW that will not be fixed until the Board of Directors itself is cleansed and indoctrinated with sound governance and ethical practices.

As technology has brought increased awareness of individuals and their public identities and reputations, it has also brought greater access and understanding of the interworking of organizations and the people that run them. Perceptions of corporate boards as “Oz” like institutions have dissipated, and people have come to understand that board members are people with individual characteristics and defining qualities.

The traditional homogeneity of corporate boards faces increasing criticism. A corporate board not only has an identity as a whole of being a governing/supervisory body, but now also reflects the composite of the identities of the individuals serving as board members. Members of the public who are customers, clients, and stakeholders of these organizations expect boards to be conscious of their total and individual identities and regularly evaluate and make concerted efforts for self-improvement.

Over the past decade, the pressure to increase female representation on boards has continued to mount. Approaches to effectuating this change vary. Some countries regulate the minimum percentages of female board members.

  • Norway was the first country to pass a female board member quota law requiring all public limited liability companies to have at least 40% women on the board or risk dissolution.
  • Similarly, Spain, France, Finland, and Iceland set their minimums quotas of female board members at 40%. Denmark also requires a 40% minimum, but does not attach sanctions to the requirement.
  • Italy, Belgium, the Netherlands, Malaysia, and most recently Germany all require 30% or more female representation. Sweden and the United Kingdom do not have binding minimums, but set goals to increase female participation.
  • The United States has a minimally instructive rule for gender diversity on boards through the Securities and Exchange Commission, which requires boards to disclose how they consider diversity when choosing board members.
  • European nations lead gender parity rankings with all of the aforementioned EU nations having well above 20% and some reaching 40% of board seats held by women. Growth in the United States has been significantly slower, with only about 10.7% female representation on boards of 6,920 companies according to Catalyst (a nonprofit research firm studying women in business), but with about 19.2% percent of women on the boards of S&P 500 companies.

Quotas are effective in increasing the number of women on boards according to Dan Konigsburg, Deloite Global managing director in “Deloitte’s Women in the Boardroom: A Global Perspective”; however, they are subject to criticism and raise questions regarding the qualifications of women being elected to some boards, especially those in male-dominated industries.

The idea that there are not a sufficient number of qualified women to serve on boards has been rebuked on a number of fronts. Instead, the quotas and policies behind them and thought leadership influencing this change increasing female presence on boards challenge a long-standing, unsavory status quo and open networks of highly qualified women to join the ranks of their male counterparts on boards.

Board directors increasingly are recognizing the imporatnce of diversity. PWC confronted the thoughts and perspectives regarding diversity on boards in their 2015 Annual Corporate Directors Survey.

  • In surveyed directors, over 95% viewed diversity as at least a “somewhat” important director attribute, but 70% of directors also believe there are impediments to increasing board diversity.
  • Interestingly, PWC discovered that over 67% of mega-cap company directors think diversity is “very important” to board composition, contrasted with only 31% of directors at micro-cap companies granting diversity that same ranking, which raises questions about smaller companies’ recognition of the benefit of increased diversity.
  • Further, a vast majority of directors (over 80%) believe diversity enhances board effectiveness and company performance.

Recent research shows that companies are more profitable and have higher market performance when women are on boards. An article in the Academy of Management Journal featured the results of such research combining results from 140 studies, which highlighted better prerformance based on an internal view on asset utilization and income generation and on an external view on perceptions and stock performance when women are on boards. The differing experiences, backgrounds, and communication and interaction styles of women enhance all functions of boards through more productive and effective deliberation and keener oversight from a broader viewpoint and expertise.

“The idea is that when a group is held to a higher standard of accountability, it will draw on the knowledge of everyone in that group, leading to better decision making” said Corienne Post, PhD., a professor at Lehigh University and author of the article. This negates traditionally held notions that there exists a largely unsuitable pool of diverse candidates and instead points to either a board’s inability or unwillingness to recognize a major weakness, which can be easily remedied through board evaluations. It may require thinking outside of the restrictive traditional confines of director eligibility and recruitment pools to ensure boards are properly constituted with appropriate gender representation.

The ideals of increased accountability and efficacy of boards are at the basis of the continued efforts to increase gender parity on boards. Boards are required to be cognizant of diversity matters and reputation based thereupon in order to remain competitive. Through proper board and peer evaluations, boards can assess strengths and weaknesses of the board as a whole and of each individual director to determine the number and expertise of female directors necessary to enhance their ability to properly govern and lead their organizations to higher successes.

Just as you would not stock your football starting line-up with all kickers, the notion of boards continuing to be comprised of all or an overwhelming majority of men is similarly absurd.

Few activities within the corporate world garner more angst than the annual assessment or evaluation process. This is true at all levels: from the individual employee processes conducted by HR, all the way through to the process undertaken by the Board of Directors.

Employees are expected to write a self-critical analyses of their performances, walking the tightrope between bragging and self-confidence while also acknowledging areas for improvement (at least to the extent their managers think improvement is necessary). In most cases, annual bonuses, salary increases and retention decisions are tied to the process. Few companies get this process right— yet, nearly every company I know requires all employees and managers to participate. Although the evaluation process at the employee level is imperfect, it aims to be a substantive process. It provides a full view of the employee’s performance and skills in light of the duties of the role, and provides a basis for setting goals and benchmarks of achievement.

In the Board context, each Board member is essentially an employee of the investors.  While many directors might balk at this notion, it’s not a big stretch.  In the Boardroom, the evaluation concept is similar, but the investors don’t often get much of a report about the Board’s performance. I’ve never heard of compensation of any kind being linked to the evaluation, and it’s quite rare for there to be any outcome at all, other than checking a box that the process was completed at the required interval. In fact, in PwC’s, 2014 Annual Corporate Director Survey, they found that 63% of directors felt that the board self-evaluation process was a check-the-box exercise.

If directors are completing evaluations solely for the purpose of completing them, should we then expect thoughtful and thorough results from these evaluations?

While there are some companies where governance has a prominent seat and the evaluation process is a rigorous and serious endeavor, it is still quite rare for companies to conduct third-party anonymous evaluations. And yet, in that same PwC survey, 70% of directors said that it was challenging to be frank in the board evaluation process. Could this be because the chair of the nominating and governance committee and the general counsel are reading everyone’s evaluations?

It’s no wonder that institutional investors are asking more questions about the board evaluation process. You might ask what took them so long. But, what do they want to know? We heard recently from Raki Kumar, head of corporate governance for State Street Global Advisors and Glenn Booraem, principal & fund treasurer, Vanguard Group Inc., at a panel about Board refreshment at the ACC Annual Meeting 2015. Both stressed the importance of the evaluation process. Kumar outlined the four things she looks for in the Board evaluation process:

  1. Identify which director is responsible for the evaluation and empower that person to carry it out;
  2. It should be an annual exercise;
  3. The Board as whole as well as each committee and each individual should be evaluated; and
  4. There must be an outcome.

Booraem emphasized the outcome aspect, saying that, “having a rigorous board evaluation process with some form of outcomes, is perhaps the most important thing when considering board refreshment.” These outcomes can be as simple as more training around cyber-security or as complex as needing to remove (or simply not nominate) certain directors and look for ones with different skills. But the point is that investors want to know that your company has a rigorous process and at the end of the process they want to know your outcomes.

As more boards contemplate board refreshment and other pressures from investors, a thorough, objective evaluation process with clear outcomes may not be a golden ticket, but it will show a commitment to at least asking the questions.

We use cookies to give you the best online experience. By agreeing you accept the use of cookies in accordance with our cookie policy.

CBE Privacy Settings

When you visit a website, it may store or retrieve information on your browser, mostly in the form of cookies. Control your personal Cookie Services for our website here.

These cookies are necessary for the website to function and cannot be switched off in our systems.

In order to use this website we use the following technically required cookies wordpress_test_cookie wordpress_logged_in_ wordpress_sec

Decline all Services
Accept all Services