This is the second of our two-post series on the increasing importance of board evaluations for corporate compliance by governing boards. The first post of this series stressed the need for board evaluations and this second post will cover how to proceed with performing board evaluations.
Our first post explained that the state law duty of care is viewed as requiring the board of directors of any organization to attract and retain sufficient prudence or expertise as directors, and to provide direction and oversee matters critical to the health of the organization into the foreseeable future (discussed in our May 12, 2014, post).
The Objective of the Evaluation
The first step in the process is to determine the objective or objectives of the evaluation (as discussed in our May 12, 2014, post). Generally there are at least these three:
- Practices Evaluation. The practices of the board and its committees for purposes of improving board governance to meet the future needs of the company;
- Skills Evaluation. The background, skills and experience of each individual member of the company’s board for purposes of determining competence of the board for the future of the organization; and
- Compliance Evaluation. The organization’s compliance with legal requirements and ethical aspirations, including compliance with any regulatory order, including any corporate integrity agreement.
The most common evaluation is the practices evaluation. Most practices evaluations are simply each board member evaluating the organization’s, the board’s, and their committee’s practices. However, a more helpful evaluation would be to identify and use some best-practice benchmarks against which the organization’s, the board’s, and their committee’s practices will be compared.
The skills evaluation is typically used as part of a strategic planning process where the board determines the collective background, skills and experience believed to be required for the future of the organization, compares that with the collective background, skills and experience of the current board, and then determines how to fill any gaps. However, a good question to include in any evaluation, especially a practices valuation, is an open-ended question to the effect of “Do you have any background, experience or skills that may be helpful to the organization and the board that are not being fully utilized?”
Consideration should be given to conducting any compliance evaluation either under the direction of general counsel to the organization or special counsel to the board, in order to add protection of the attorney-client privilege and for advice on legal issues such as probative value of evidence and materiality.
The Subject of the Evaluation
The next step in the process is typically the subject of the evaluation, which can be (with respect to the objectives identified in the first step):
- Full board and its committee where each individual director evaluates the full board and its committees; or
- Individual director self-evaluations where each individual director evaluates himself or herself; or
- Individual director peer evaluations where each individual director evaluates each other director.
Full Board Evaluation
A full board evaluation typically addresses:
- Understanding of responsibilities
- Composition and structure of the board
- Composition and structure of the committees of the board
- Strategic planning
- Policy development
- Board succession
- Company executive succession
- Oversight function
- Financial acumen
- Business development
- Conflicts of interests
- Understanding of oversight of risks
- Decision making
- Board/management relationship
- Information dissemination
- Appropriateness of questioning
- Level of participation
- System of checks and balances for management decisions
The most important board evaluation question is open-ended to the effect of: “The effectiveness of our board could be improved by ______________”.
Individual Director Self-evaluations
Each individual director evaluates himself or herself as to matter such as:
- Understanding role and responsibilities
- Levels of knowledge (both company and industry)
- Willingness to question
- Independence of thought of action
- Business development
- Continuing education
The two most important director self-evaluation questions are “The organization, other directors, and management could improve my effectiveness by ______________,” and “Do you have any background, experience or skills that may be helpful to the organization and the board that are not being fully utilized?”
Individual Director Peer Evaluations
Each director evaluates himself or herself and then separately evaluates each other director on the matters described above under “Individual director self-evaluations. However, we recommend that this be conducted through a third-party evaluator with whom the board has confidence. The report to each director shows the director’s self-evaluation and the average of the evaluations of that director by the other directors. Each of these reports must be confidential. The peer evaluation can be expanded to a 360-degree evaluation where, in addition to other directors evaluating each other director, management, other stakeholders, such as shareholder in a closely-held corporation, and strategic partners, such as outside legal counsel and audit firms also evaluate each director.
If you have questions on this post, please feel free to contact Kevin Kinross at 614.227.8824 or firstname.lastname@example.org.
The next post will focus on how to engage the board in strategic planning, which is one of the board’s most important responsibilities.