PEER REVIEWS ARE RARE, BUT FRUITFUL
Who wants to undergo a formal performance evaluation? Pretty much nobody, and the same goes for bank boards of directors.
That annual check-in-the-box exercise is one that few employees in corporate America enjoy. Boards hire the CEO and manage his or her performance, so why should they question or evaluate their own performance?
In the words of researchers at the Rock Center for Corporate Governance at Stanford University, “there is no reason to believe that forming a board from a group of successful CEOs will produce a high-functioning board.” I agree with that statement. No one starts board service knowing how to be a high-functioning board member, and well executed board evaluations are one way to improve the board’s function and identify areas of improvement.
Although the New York Stock Exchange requires an annual board evaluation, the exercise can be limited in scope and evaluations of an individual’s performance on a board are more rare. All but seven S&P 500 boards reported doing a board self-evaluation, but only about one-third reported they evaluated the full board, board committees and individual directors, according to the 2016 Spencer Stuart Board Index, which is published by the Spencer Stuart recruiting firm.
Although boards tend to evaluate themselves as either highly or very effective, there is room for improvement. A significant percentage, 44 percent, say board members do not understand the boundary between oversight and active management of the company, for example. Twenty-three percent disagreed with the statement that: “Our board is very effective in dealing with directors who are underperforming or exhibit poor behavior,” according to a 2016 Rock Center survey of 187 directors of public and private companies in North America.
Individual evaluations are one way to take the process of board improvement seriously. Self-evaluations are more common when boards do evaluate individuals, but peer reviews also are conducted. Clear job descriptions for the various roles, including committee chairperson, should be provided a year before the review. The board should be prepared to address issues that arise, and one-on-ones should be scheduled with a lead independent director, board chairperson, committee chairperson, or by a third party such as an advisor or legal counsel.
In this issue, Bank Director interviews Neal A. Holland Jr., the nominating committee chairperson at Renasant Corp., a Tupelo, Mississippi-based bank, who says the process of peer evaluations has played an important role in improving board performance.
It’s never too late to start the process of getting better.