Board members have long embraced the responsibility to evaluate the performance of senior executives, but the tables are beginning to turn, as shareholders are now demanding that directors evaluate their own performance as well.
In the 2018 Compensation Survey produced by Bank Director, 42 percent of respondents cited conducting an effective board evaluation as a top governance challenge. One reason is the growing need for stronger board compositions, be it in the context of diversity, age or expertise. Board evaluations can be crucial to bringing about this change.
The purpose of a board evaluation is to ensure a board is staffed and led appropriately, that directors effectively fulfill their obligations and that reliable processes are in place to satisfy oversight responsibilities. Also, by helping identify ineffective directors, the process facilitates changeover, pushing ineffective directors out and freeing up seats to be occupied by directors with the skills, expertise and backgrounds needed in today’s boardroom.
Three areas should be examined in an evaluation: leadership, management and contribution.
The importance of assessing a board’s leadership can’t be overstated, as ineffective leadership can bring about complacency, loss of focus and lack of accountability.
The effectiveness of board leadership can be assessed at several levels, including the overall board, committees, individual members and the independent chairman. Banks and credit unions should avoid the default method of viewing leadership through the lens of volunteer activities and length of service. The evaluation should focus instead on background, temperament and ability to fill a specific void, such as expertise in cybersecurity.
The way a board meeting is conducted can be just as important as the agenda itself. Is the meeting organized to maximize productivity and an honest exchange of ideas? Is full participation encouraged? Are outcomes clearly determined and documented, with appropriate follow-up assignments? Does the board produce an annual calendar of events? Do directors receive information packets in advance of meetings?
These are critical questions to explore, as eliciting preparation is key to getting the most out of meetings. The overarching goal is to know where you want each meeting to go and to diligently manage to that end.
A diverse board will bring a wealth of knowledge and expertise to meetings, allowing the board to have a constructive impact on business. As such, an effective board evaluation should include both a qualitative and quantitative assessment of how board members interact when topics are discussed and decisions are made.
It’s crucial that directors ask the right questions, actively engage in discussions and provide input that helps guide conversations in a fruitful direction. Furthermore, personal conflicts can be a root cause of reluctance to openly express ideas. A board evaluation can identify these issues and enable the board to address them.
How to get started
Conducting a board evaluation isn’t complicated, but it should be done in a thoughtful manner. Most importantly, a board evaluation committee should be formed to set clear goals and objectives. That committee can then customize the evaluation to fit the unique needs of the underlying organization.
Here are some areas to consider:
- Identify areas in the three categories above that need improvement.
- Determine whether specific directors’ contributions match the needs of the board and organization.
- Identify issues or areas that need more attention at board meetings.
- Evaluate the diversity and composition of the board.
- Question whether nominations are merely a rote exercise.
- Assess the strength of each individual board member, and determine whether they would benefit from further development.
Board evaluations are not easy, nor are they welcome by all boards, but they are a necessity in today’s environment.
If your board currently performs a self-evaluation, that’s great—though the process and questionnaires should be reviewed annually to ensure they remain relevant to the company and the board’s evolving needs. Alternatively, if you’re just beginning to consider a board evaluation, it’s time to start now.
Either way, an effective evaluation can bring about the type of change a board needs to fulfill its obligations and provide meaningful oversight.