What Your Institutional Investors Want to Know about Board Assessments

D&O Questionnaire

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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.

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