6 Proven Ways To Improve Board Evaluations And Associated Disclosures
Boards can ensure continuous improvement by encouraging board members to share and receive feedback. This exchange can also be extended to senior executives and external parties they share regular correspondence with. If done properly, this feedback can drive crucial committee and board composition changes, processes, talking points, board dynamics, and meeting resources and materials.
Stakeholders and investors want to know how committed boards are to improving their performance and composition by regularly assessing the current situation. In addition, investors can better understand the board’s goals and actions based on the disclosures obtained from the board’s evaluation process.
In recent years, Fortune 100 companies have continuously filed proxy statements to the EY Center for Board Matters (CBM), which are then reviewed to discover relationships in board evaluation practices. Consequently, companies’ evaluation practices and associated disclosures are continuously evolving. About 95% of 2020 Fortune 100 proxy filters offer some insights into their evaluation process, especially in 2018 and 2019. Although the extent and focus of these disclosures are not the same, here are six observations and trends from them
- More companies are evaluating individual directors.
The most prominent change recorded since 2018 is the increasing interest of boards in individual director evaluations. This has led to the expansion of evaluation processes, with about 50% of the Fortune 100 proxy filters performing an individual director evaluation alongside board and committee assessments. This marked a significant increase from the 26% recorded in 2018.
In addition to being a requirement for New York Stock Exchange public companies, board and committee evaluations are seen as standard practices in most cases. But the same cannot be said about the individual level assessments, which are now seen as a way of ensuring a healthy yet optimal mix of candor and introspection.
There are doubts about whether the companies that performed individual director evaluations included either director self-evaluation or peer evaluation or both. Only 29% of the participating companies reported using director peer evaluations in their director evaluations, compared to the 10% in 2018. Furthermore, 11% said they opted for self-evaluation, compared to the 5% in 2018.
- More companies are combining questionnaires with interviews.
Questionnaires have always been a means of obtaining thoughtful qualitative responses or quantitative ratings. They can be administered and completed without attribution, while the data analysis can help identify the vital talking and actionable points to enhance effectiveness. Another upside of questionnaire responses and analysis is that they can be designed to serve as individual one-on-one interviews with directors. The findings can provide useful information to improve overall performance.
- There is increasing use of third-party facilitators.
According to our findings, boards are gradually expanding the use of third-party facilitators. Essentially, external counsel and governance advisory firms are finding valuable roles in designing and implementing board evaluations. They are also increasingly crucial to formulating action items that process the feedback from the process. Third parties help partly or wholly in evaluation, especially in reviewing and drafting evaluation questionnaires and streamlined evaluation programs. Among other things, they are trusted sources of market insight and practices that improve the assessment process. Moreover, their contributions help eliminate the biases or blind spots often present among boards. Records have also shown that directors tend to be more cooperative and open with a third party, especially while offering a peer director’s insights or potential development sections.
- There is an increasing disclosure of the scope of board assessments.
More than half (53%) of the 2020 Fortune 100 proxy filers publicized the scope of their boar evaluation programs. This is a substantial increase from the 49% and 40% recorded in 2019 and 2018. According to their disclosures, the most common topics include meeting board information needs, the board’s dynamics and culture, relationship with management, structure, composition, effectiveness, succession planning, and execution. However, boards need to consider disclosing the evolution of assessment topics. This disclosure can be crucial to addressing the new areas of stakeholder focus, including ESG initiatives, privacy, cybersecurity, geopolitics, crisis preparedness, disruption/innovation, talent/D&I, culture, and purpose.
- The disclosures about evaluation-induced changes are on the rise.
Our observations also showed that substantially more companies that disclosed, at high levels, acted based on the findings of their board evaluations. Some of the changes mentioned include;
- amendments to committee responsibilities and structures;
- improving the director education and orientation programs;
- expansion of the independent board leader’s responsibilities; and
- streamlining the agendas and priorities of the committee and board, leading to improved discussions, extensive presentations on vital topics, improved pre-read and meeting presentation materials, and refreshment.
This increase becomes necessary considering the increased interest of investors in the findings of a board’s evaluation process. By noting these critical outcomes and particular areas requiring improvement, boards can show how comprehensive their evaluation programs are. It also underlines their readiness to demonstrate their effectiveness and assure investors of the same.
- Stronger calls for ongoing assessments instead of the annual exercise.
A section of the Fortune 100 proxy filers disclosed they consider some evaluation matters while pushing for an ongoing feedback process rather than the annual evaluation. Twenty-one percent of the 2020 proxy filers admitted this, more than 2x the 9% in 2018. Adopting ongoing evaluations means directors, committees, and boards can pick out lapses in information needs and other engagement issues. Fixing these issues is easier with prompt identification, which drives continuous improvement.
Interestingly, directors often reveal to the CBM that board and director performance assessment is done in real-time, either during or at the end of a committee or board meeting. In such situations, the board might see if disclosing these practices and outcomes can represent their efforts in a better light.
Finally…
Board composition and effectiveness remain a crucial foundation for value creation and sustainability in the long run. The newer business challenges we are seeing will push the boards to enhance competencies, improve agility, and enhance diversity while promptly addressing stakeholders’ concerns.
Boards are now switching to more frequent virtual meetings. Therefore, there is a need to assess how effective and secure these virtual meetings are, especially in meeting the board’s information needs in line with the demands of the current business landscape. Boards can demonstrate their attentiveness and commitment by disclosing how they are working to be more effective by responding to the present crises and tomorrow’s demands.
What can the board do better?
- Consider improving the board evaluation process to enhance board performance and meet the changing expectations of the stakeholders.
- Ensure the scope of the evaluation is wide enough to identify areas of strength and how to improve decision making, information practices, structure and composition, dynamics, meeting schedules and agendas, and overall board effectiveness.
- Ensure the evaluation process is handled by qualified committees or individuals to ensure proper participation, in-depth information, and candor while ultimately enhancing overall board effectiveness.
- Consider the use of a third party to ensure objectiveness and improve the process and the obtainable outcomes.
- Encourage ongoing evaluation, either formally during quarter executive sessions or informally and in real-time during board meetings.
- Ensure the board evaluation process can pick out the crucial talking points to enhance performance and the timely address of the same.
- Tailor the evaluation process to focus on the candidness of the directors amongst themselves, the proper handling of criticism, and engaging in robust yet healthy rigorous debates.
- Ensure the board evaluation process identifies the proper steps to take to improve board dynamics.
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