From Compliance to Improvement

This is the first of a series of four Savvy Director articles dealing with various aspects of board and director evaluation. Our next article, “From Evaluation to Action,” will explore key success factors, followed by articles on the topics of individual director evaluations and meeting evaluations.

“How do you take a board that’s good – and make it truly great? How do you take a board that’s great and retain its vibrancy over the years? The answer, believe it or not, is with a board evaluation.” – Beverly A. Behan, author of Board and Director Evaluations: Innovations for 21st Century Governance Committees

Once upon a time, the annual board evaluation was merely a “check-the-box” compliance exercise – a task the board was expected to perform to assess its past performance. Depending on the sector, some boards were expected – or even required – to disclose their evaluation process to stakeholders.

Times have changed. Boards are demanding more value from their evaluations than just a report card. They are looking at the evaluation process as a tool for continuous improvement and a way to help them meet the growing expectations of their stakeholders.

Boards need to take ownership of the evaluation process to make sure they get what they want from it - a confidential process that elicits constructive feedback and produces actionable recommendations for improvement.

Why Evaluate?

“I find it helpful to think of board evaluations not as a report card, but as a platform for a terrific board discussion; a team-building exercise for all directors …” – Beverly A. Behan

The purpose of a board evaluation is not just to gauge the board’s effectiveness – although that’s certainly part of it - but to identify areas where the board needs to improve.

That’s why it’s important for the board to agree on the objectives of the evaluation right from the start. Are there a few key areas that directors want to dive into? Are they hoping to uncover issues that have remained hidden from view? Are they trying to get to the root cause of board dysfunction? Or, do they simply want to “take the pulse” of the board?

Sometimes, a board decides to conduct an evaluation because of a triggering event. That might be a leadership transition, an organizational crisis, or a difficult issue the board has had to address. Other times the board is struggling with dysfunctional dynamics and needs help identifying the root cause. This kind of situation informs the goals of the assessment.

But even for a “regular” or annual evaluation, the board should take the time to identify its objectives. Examples include identifying improvement opportunities; clarifying areas of misunderstanding; improving alignment; revealing gaps in board composition; providing fresh perspectives on the board-management relationship; or strengthening procedures.

When to Evaluate

There is no “one size fits all” approach to board evaluation. Having said that, it’s common practice for boards to conduct an annual evaluation at about the same time every year. The second or third quarterly board meeting is usually a good time to decide about the process for the upcoming year.

Some boards decide to seek feedback on an ongoing basis, which allows them to proactively identify directors’ needs and address them in a timely way. This kind of feedback typically relates to practices such as board agendas and meetings. (Note that the fourth article in this series will explore using ongoing feedback to improve board meetings.)

It’s a good practice to conduct board evaluations following critical inflection points or significant transformations in the organization’s life cycle, such as preparing to go public, a merger or acquisition, restructuring, or a financial or reputational crisis.

That makes this post-pandemic period a good time to conduct an evaluation of how the board responded to the crisis, where the board could examine questions such as:

• What did the organization need from our board, and how well did we deliver?
• What did the pandemic teach us about our strategy and business model?
• What did we learn about the implications for our board’s composition?
• What lessons can we apply about how we communicated and made decisions in a crisis?

Who Is Involved?

The board as a whole owns the evaluation, but typically the responsibility for the process is delegated to the governance committee. The board chair or the chair of the governance committee must be the champion who drives the process forward, sets the agenda, and involves the right people at the right time.

Speaking of involving the right people, the board must decide who is going to participate – all directors or only the independent ones? On many boards, the CEO is an ex officio member – will they participate? What about senior management – should their views be sought? Answers to these questions should become clear if the board has already taken care to clarify its objectives.

Once it has done so, it should also be in a position to select who will actually conduct the evaluation. In general, the options are either self-assessment or third party facilitation.

Self-assessments

Most boards conduct their own assessment. For small organizations without a formal mechanism, self-evaluation is a great way to begin. If the organization has never been through the process before, it’s best to start small and informally with a general discussion at a board meeting. Later, the board can move on to a more formal self-assessment process.

Some boards choose one-on-one interviews between the board chair (or governance committee chair) and each individual director, with a summary report provided to the board for discussion, making sure that responses are not attributed to individual directors.

A formal self-assessment using a confidential questionnaire or survey can be a good option for the board of a small-to medium-sized entity. It’s an effective method for a report-card style evaluation, and, if carefully drafted, can help the board understand how to move forward. There are many sample questionnaires and survey tools available – an internet search will reveal several options.

Third party assessments

Although self-assessments remain very common, more and more boards are starting to use using third party facilitators such as governance advisory firms or independent consultants. These external facilitators bring a fresh perspective, and they can perform a range of services from designing the process, to conducting interviews, analyzing results, and drafting action plans. They have the benefit of having worked with other organizations that have had to address some of the same issues.

Third party evaluators are usually adept at eliciting candid responses from directors, making them especially helpful in circumstances where directors haven’t been forthcoming with an internal evaluator, the board doesn’t feel qualified to conduct a self-assessment, or the board is facing a particularly sensitive situation. Many board members feel more comfortable providing open and honest responses to an external interviewer than they would to an internal one.

But engaging a third party facilitator isn’t an excuse for the board to surrender ownership of the process. The board chair (or governance committee chair) should continue to drive the process, providing direction to the facilitator and ensuring follow-up on action items.

How to Evaluate

Boards often debate what method to use for an evaluation – a questionnaire, interviews, or both. Regardless of the method chosen, it’s a good idea to change it up from time to time to encourage fresh perspectives and illuminate new areas for improvement.

Questionnaires and surveys

The most common format is the written questionnaire. They are useful because each director receives the same question set, which makes comparisons easier and can help indicate the magnitude of issues as well as the range of individual perceptions. Questionnaire responses can be provided without attribution, promoting candid and detailed feedback.

But to be effective, the questionnaire must be carefully drafted to focus director attention on matters that cut to the core of board performance and updated each year to reflect current issues. Questions should be written specifically with the goal of eliciting valuable and practical feedback. Numerical responses and ratings should be enhanced by offering participants the opportunity to add open-ended comments.

Template questionnaires can be too long, too repetitive, and include unclear questions that don’t lend themselves to eliciting practical feedback. Moreover, directors dislike questionnaires full of routine questions that aren’t relevant to what’s on their minds. So, if you’ve decided to use a questionnaire, it’s best to use the template as a starting point to tailor a survey for your board, one that suits your current circumstances and focuses on topics of genuine interest to directors.

Interviews

“The only way to get after … critical board issues involves a shift from ‘check-the-box’ board assessments to a more meaningful board evaluation process designed to gather actionable and constructive feedback through comprehensive, confidential interviews.” – Beverly A. Behan

Director interviews are becoming increasingly common. They allow for follow-up questions and encourage directors to elaborate on what’s on their minds. Well-planned, skillful interviews elicit valuable, detailed, sensitive, and candid director feedback and insights that get to the nub of the issues.

And they are far more engaging for participants than completing a questionnaire. Directors typically enjoy the interview process. After all, who doesn’t love the opportunity to expound on their views?

Interviews are particularly effective when there’s a sensitive issue to address. Directors often prefer to discuss rather than write about sensitive topics, provided that the interviewer is well-informed, skilled, and – most of all – trusted.

The wide availability of videoconferencing, and directors’ growing comfort with using technology, have contributed to the increasing use of interviews. Boards that were on the fence about interviews are now making the transition, as they find that videoconferencing can accelerate the timeline and eliminate travel costs.

A combined approach

Keep in mind that it doesn’t have to be an either/or choice - questionnaires and interviews can be used in combination. The questionnaire would be used to elicit responses that can be compiled without attribution and analyzed to identify issues and common themes. The findings can then be used to focus interviews in areas that need a deeper dive to gather insights that aren’t easily discovered in a questionnaire.

Also, it’s a good idea to vary the evaluation approach from one year to the next. A full-fledged interview evaluation is not necessary every year – every two or three years is sufficient. That kind of schedule allows for meaningful progress on the action plan. Questionnaires then have a valuable place as a check-in in years where interviews are not conducted, providing a means to measure progress year over year.

Board observation and document review

When the board decides to engage a third party, the evaluation process might also include observation of board meetings as well as a review of governance documents, committee charters, board meeting minutes, and board meeting agendas.

Including these activities as part of the evaluation process makes for a robust and valuable assessment of all aspects of the board’s performance and effectiveness.

What to Evaluate

In his April 2022 Savvy Saturday presentation on Board Evaluations, Kieran Moynihan, Managing Partner at Board Excellence, a board advisory firm that operates internationally out of Ireland and the UK, outlined five areas for evaluation. (If you’re a DirectorPrep member, you can check out the Savvy Saturday presentation and slide deck here. You’ll need to be logged in to access it.)

A comprehensive board evaluation would include assessments in all five of these areas, whereas a more targeted evaluation could focus on one or two of them.

1. Governance Infrastructure – Board composition, diversity, and succession; roles and responsibilities; board orientation, development, and evaluation; and committee effectiveness.
2. Performance and Focus – Mission, vision, and strategy; risk management, internal controls, and cybersecurity; and decision-making.
3. Conformance and Oversight – Governance, compliance, and policies; agendas, minutes, and meeting material; executive oversight; and CEO evaluation, talent development, and succession.
4. Dynamics and Culture – Board dynamics; board chair leadership; board-CEO relationship; and culture, ethics, and values.
5. Board Engagement – Investor relations; stakeholder engagement; employee engagement; and ESG. 

Acting on the Evaluation

Look for our next Savvy Director article, “From Evaluation to Action,” to explore what to do after the evaluation - and how to ensure a successful process with positive outcomes.

Your takeaways:

• The annual evaluation should be more than an exercise in compliance. It’s an opportunity for improvement.
• The board should be clear about the objectives of the exercise.
• Some key decisions involve the choice between self-assessment or third parties, and between questionnaires and interviews (or both).
• The board should take ownership of the process and drive it forward to produce actionable recommendations.

Resources:

• Available only to DirectorPrep members (you’ll need to be logged in to access it.) Board Evaluations: Savvy Saturday with Kieran Moynihan. DirectorPrep.com. April 2022.
• Board and Director Evaluations: Innovations for 21st Century Governance Committees. Beverly A. Behan. © 2021 Board Advisor, LLC.
• How boards are strengthening their self-assessments and related disclosures. EY Centre for Board Matters. October 2021. © 2021 Ernst & Young LLP.
• Board Evaluations: The Complete Q&A Guide for Nonprofits. Boardable. July 2020.
• Strengthening the Board’s Effectiveness in 2020: A Framework for Board Evaluations. Lyuba Goltser and Aabha Sharma. Harvard Law School Forum on Corporate Governance. February 2020.

Thank you.

Scott

Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online hub with hundreds of guideline questions and resources to help directors prepare for their board role.

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