Do you mine the collective intelligence of your board?  In today’s world, corporations are establishing processes that have an emphasis on collective wisdom for competitive advantage. This concept can be actualized at the board level through the board evaluation process. A recent study by PwC found that 63% of directors believe self-evaluations are mostly a “check the box” exercise.  This belief may be rooted in the fact that NYSE listed companies are required to conduct evaluations on an annual basis.  (See NYSE Rule 303A.09; NASDAQ does not require an annual evaluation.)  That means that a significant number of boards may be missing out on a valuable opportunity to identify issues with and improve on various board functions. A progressive board uses the evaluation process for high-level thinking in a structured, organized manner. This big picture thinking combined with an action plan moves the needle on board performance and helps to lay a foundation for continues improvement. After some of the more elemental issues that surface or tensions that arise through board evaluation are addressed, a board begins to see how strategic it is, overall. Board composition comes into sharper focus as well as director education needs. Moreover, there can be clarification of how and where improvement for strategic thinking arises. In other words, forward thinking is a result of board evaluation. This progression also involves management and management’s ability - or willingness - to tap into the board’s expertise. Board evaluation, done well, strongly undercuts the idea that boards are just rubber- stamping what management wants.

A great resource for governance professionals is an ebook, see: Board Evaluation: Creating Strategic Performance and Effectiveness ($9.99ebook Amazon, B/N, Apple iBookstore)

In a noted move towards corporate transparency, a 2011 study group of public company directors and a few academics identified seven gaps on their own boardroom turf: purpose, culture, leadership, information, advice, debate, and self-renewal. The report goes on to state boards should “develop policies and practices to ensure ongoing evaluation and education of current directors, using the services of independent third-party facilitators when needed.”

Fundamentally, a board evaluation is an opportunity for boards as a collective body to increase their effectiveness based on feedback the evaluation provides. Continuous improvement and development of board and board committee processes and procedures is key to ensuring board effectiveness. In today’s world, it is vital that a board of directors can measure its strengths and its opportunities for improvement. Board evaluation sets the foundation to purposefully identify and surmount barriers that impede effectiveness. The goal is to receive solid, actionable input. 

In addition, it is a NYSE listing requirement that boards, along with their nominating/governance, compensation, and audit committees, perform annual evaluations. NASDAQ highly recommends board evaluation. Annual board evaluations have become the norm for boards in many countries, with nearly all listed companies in Canada, France, the U.K., and the U.S. conducting some sort of evaluation each year. The practice is also widespread in Italy and Spain, and is gaining attention in many Asia-Pacific markets. Even if a company is not subject to any listing requirements, shareholders and stakeholders are asking questions and evaluating the company as though it is subject to the same requirements. Shareholders, community, and employees are expecting and even presuming the board is using an objective approach to hold themselves and the company to the “best business practices.”

Key Point: The progressive board looks for the time and resources spent on board evaluation to align with their philosophy of continuous improvement and reflective intelligence.

At the very least, a board evaluation will focus on key functions of the board, provide a “gap” analysis that draws weak areas to the surface, provide disbursement of responses, and identify the “tone” of the responses. Board evaluation is most meaningful as a productive activity for the board when it focuses on board development rather than compliance. This requires knowledge not only of board functions, roles, and responsibilities, but also how all this information links to the current business/industry trends and market changes. In addition, a dynamic board evaluation moves the board to a higher level of performance on business issues while enhancing group dynamics. Overall, a board evaluation can transform a group of strong individuals to a collective body of focused board members who become invaluable to the CEO, senior management team, and all stakeholders. A skillful board evaluation can cause directors to say “I’m glad we did that.” This kind of skillful evaluation is produced from: 

• Clear board objectives;
• Reports and feedback from a knowledgeable third-party facilitator where needed;
• Facilitated follow-up discussions with the board to identify board development actions;
• Integration of the board evaluation into strategic leadership and planning; and
• Insights that lead to greater team effectiveness.

Deciding Whether to Use a Third Party Facilitator

As the board embarks on the evaluation process, it is important to decide whether to use a third party facilitator. Employing a third-party consultant usually allows for greater objectivity and credibility, not least as a means of satisfying shareholders that an independent review has been carried out. The board can choose the level and the areas of engagement for any board consultant. At times the third-party facilitator may only help with question development, or simply analyze the data, or the facilitator may be assigned to run all aspects of the board evaluation. The board may want to start with a small project, such as evaluating one of the committees, to become more familiar with the consultant and process. After a trust level is established, the board can increase the engagement level. 

A board may not need a consultant for every annual evaluation, or while the board’s agreed-upon action items from previous board evaluations are still in process. The board would probably not use a facilitator when the board chair has only been in the position for a short period of time, or when the board has just recruited, or is in the process of recruiting, a number of new directors. 

To choose the right methodology and provide a balanced approach, the board should understand the risks and rewards of a board evaluation. 

Risks of Engaging in a Board Evaluation

Some examples of risks that I have seen from board evaluations, and ways to alleviate those risks, include:

Risk: Consultant misuse of data.
Remedy: Ask how and where data is stored, and for how long. If answers are unacceptable, consider using the third-party facilitator just to analyze data and provide feedback.

Risk: Loss of collegiality and negativity as a result of candidate feedback. 
Remedy: Review the past methods of board evaluation and assess the level of feedback given to the board. Consider a hybrid methodology that includes a questionnaire accompanied by a self-evaluation for each director.

Risk: Directors’ perception of performance is not in line with evidence that suggests otherwise.
Remedy: Consider hiring a third-party facilitator to provide feedback and possible coaching sessions with the board.

Rewards of Engaging in a Board Evaluation

Examples of rewards that I have seen from board evaluations include:

• Provides a timely platform for directors to voluntarily resign, and sharpens the discussion of the experience, expertise, diversity, independence, leadership ability and character needed by the new directors;
• Identification of new or refined actions for risk reporting to the board, including crisis and reputational management;
• Clarity and enhancement of management reporting practices that affect the board; and
• Enhanced board effectiveness with identification of board dynamics and facilitation of discussion to ‘clear the air.’

In today’s world, corporations are establishing processes that have an emphasis on collective wisdom for competitive advantage. This concept can be actualized at the board level through the board evaluation process, even though evaluation techniques are still in their infancy. The process can result in high-level thinking in a structured, organized manner, and lay the foundation for continuous improvement. 

For more information, see: Board Evaluation: Creating Strategic Performance and Effectiveness ($9.99ebook Amazon, B/N, Apple iBookstore)

The Wall Street Journal reports approximately 19 percent of the largest public U.S. companies hired an outsider to evaluate their boards in 2013 — a 17 percent leap since 2010. Those numbers come from Spencer Stuart, an executive search firm. In five years, up to 35 percent of major companies could be putting "board doctors" to use. Financial and banking firms were some of the first to start making calls for checkups.

Fundamentally, a board evaluation is an opportunity for boards as a collective body to increase their effectiveness based on feedback the evaluation provides. Continuous improvement and development of board and board committee processes and procedures is imperative to ensuring board effectiveness. Today, there is an increased level of acceptance and sophistication in board evaluation. However, the evaluation techniques are still in their infancy. I foresee that this acceptance will continue. You may ask why. My observation is that the driving forces are based in the heightened regulatory environment and increased reputational concerns coupled with pressures from shareholders.

Today, each individual director’s value to the board is coming under sharper scrutiny. Conqueringly, I see a new generation of directors on boards that come to the position with openness rather than a resistance to evaluation. These new directors do not seem to be nervous about evaluating their colleagues, and they have their own standards of excellence and hope that their colleagues do as well. Basically, they do not see their performance in the boardroom outside of the standards of their executive capacity. They want to know what a board evaluation involves, what works, what does not work, and why. Finally, most notable, little by little, the antipathy that sometimes surrounds board evaluation is being replaced with a desire to see how an individual director’s performance compares to that of his or her peers.

For more information, see: Board Evaluation: Creating Strategic Performance and Effectiveness ($9.99ebook Amazon, B/N, Apple iBookstore)