Publications & Resources
November/December 2008
Focus: Directors Issues
A Practical Approach to Director Evaluations
By Cass Bettinger
Through the end of the 20th century, only about a quarter
of
Among the many sound recommendations of corporate governance experts is regular board and/or director evaluations, which is now required of all NYSE listed companies. It’s hard to take issue with the logic behind these recommendations. After all, anyone whose behaviors and performance contribution has a significant impact on a company’s success should probably be involved in a regular, formalized evaluation process that will help identify specific opportunities to become more effective.
Moreover, as more and more boards recognize that they, and the individual directors, are being held to an increasingly higher standard of performance, many are embracing board evaluations as the tool best suited to help them enhance measurably the effectiveness of the board as a whole.
While most money center and many large regional banks have fully adopted a board and/or director evaluation process, most community banks are just beginning to consider seriously this corporate governance “best practice.” One apparent reason for the heightened interest is that many new bank directors serve, or have served, on other boards where board and/or director evaluations have been in place for some time.
The three primary approaches to board evaluations are 1) evaluation of the full board by each individual director, 2) self and peer evaluations by each individual director, and 3) director interviews conducted by outside professionals. Many companies use all three.
In the first approach, each director will respond to a series of statements, often organized in categories such as “Engagement in Strategic Planning”, using one of several accepted scales. In addition, one to three open-ended questions are often included such as “what is the single greatest opportunity to enhance the effectiveness of this board?”
This type of evaluation is generally completed electronically and a window for completion of 7-10 days is usually more than adequate. Each director will receive the evaluation results which will rank each statement by score. A special board meeting/retreat is typically scheduled to review the results and develop specific strategies to make the board more effective. An outside professional is often engaged to facilitate the session.
Typical statements might include something such as:
“The composition of our board brings together the proper balance of skill sets, experience, expertise, independence and community representation (diversity).”
“In our board meetings and/or special board strategic planning retreats, we address openly all strategically relevant issues; there are no ‘sacred cows’ that are off limits to discussion.”
In the second approach, which we call “Maximizing
Director Effectiveness”, each board member completes a self-evaluation, and
evaluates each fellow director, using a series of statements, often organized in
categories such as “Strategic Direction and Common Cause” or “
This type of evaluation is also completed electronically, but because significantly more work and time is required, a two to three week window for completing the evaluations is the norm.
In some cases the evaluations are returned only to the individual directors. In most cases, however, copies also go to the chairman or lead director who then schedules sessions with each director to review the results and to formulate “personal development plans” for addressing any developmental opportunities identified in the survey.
It should probably be noted that in “What Directors Think 2007”, a survey conducted by The Corporate Board Member and Price Waterhouse Coopers, one of the findings was that “nearly one-quarter (23%) of directors say a member of their board should be replaced.”
A well designed and properly executed director evaluation process will identify perceived performance shortcomings early, thus providing the director with the specific information needed to address those shortcomings. In cases where serious shortcomings persist, thus having a negative impact on board effectiveness, the director can be replaced through a process that is fair, objective, and has provided every opportunity for necessary improvement.
Sample statements might include:
This director:
“Maintains absolute confidentiality of information presented and discussed.”
“Comes to all board and committee meetings well prepared and ready to make a meaningful contribution to discussions.”
The third approach, often used in conjunction with one or both of the other methodologies, is individual interviews conducted by an outside professional. While considerably more costly, the advantage is that each director is free to address issues of concern that may not appear on a written survey and which he/she may feel more comfortable discussing in a one on one situation. Also, the outside professional can follow up in subsequent interviews on issues that surface early on.
Summary
The effectiveness of the board of directors, and of each
individual director, has an increasingly significant impact on a company’s
ability to adapt proactively and strategically to change and to achieve
consistent and sustained success. Board and/or director evaluations are an
extremely effective way to measure overall effectiveness and to identify
specific opportunities for improvement. It
is no wonder that they are a corporate governance “best practice.”
Cass Bettinger is president of Cass Bettinger & Associates in Naples, Fla. He will be speaking on this topic in November a the WIB/AABD Directors Conference. He can be reached at (239) 596-2890 or cassbettinger@gmail.com.
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