Regardless of company size or the level of experience on the board, an issue frequently encountered is the disconnect between senior management and the board. From the perspective of senior management, directors can become “comfortably numb” and not sufficiently engaged.
This is not to say management does not respect board members’ expertise and knowledge. Instead, the executive team can grow disappointed if the board is not operating at its full potential. After long periods of service with little inspiration and challenge from senior management and/or board leadership, directors can reach a point in which they are not as engaged as a highly challenged new director may be.
These directors need to be encouraged to be an influential voice on the board, using their skills and experiences to pose the necessary questions on issues presented at meetings.
Recently, NACD announced its Directorship 2020 initiative, encouraging directors to identify where their board and company should be positioned in the year 2020. Once this vision is established, the board can identify where skills gaps need to be filled in, or what additional efforts should be undertaken. This is particularly relevant–especially with today’s rapidly changing regulatory and technological environment–as boards must quickly meet new rules and changes. Even the most successful boards today need to ask themselves if they are well positioned on the path to 2020.
The state of the economy was remarkably different the last time NACD issued a governance survey dedicated to nonprofit organizations. In 2009, companies were just starting to stage a recovery from the financial crisis, and action plans were in the formative stages. At that point, survey respondents indicated the areas of most critical importance to their board were “board leadership,” “ethics and social responsibility,” and “board effectiveness.”
Fast forward three years to the 2012–2013 NACD Nonprofit Governance Survey, which shows that nonprofit boards have altered structures to meet the economic climate. Across the board, nonprofits have shifted focus to areas directly related to performance and strategy. Today, survey respondents indicate the priority governance issues are those that drive results: “strategic planning and oversight,” “fundraising,” and “financial oversight/internal controls.”
In addition to a more performance-driven outlook, nonprofit organizations have also increased the number of diverse directors present in the boardroom. According to NACD’s 2012 Blue Ribbon Commission on the Diverse Board, this development is a logical step, as boardroom diversity is a business issue: a means to competitiveness. Nonprofits are therefore more than competitive—female representation is ubiquitous with 97.7 percent of respondents reporting at least one female director on their board. The percentage of boards with at least one minority director has increased nearly 20 percent since 2009 to 76.4 percent.
Nonprofit organizations are ahead of their public and private company peers with respect to boardroom diversity. For public companies, diversity is a focus of pension funds and other institutions, as noted in last week’s NACD Directors Daily. Groups such as the Thirty Percent Coalition are urging Russell 1000 companies to increase gender equality on boards specifically—setting a goal that 30 percent of board seats are held by women by 2015. To meet this, U.S. public companies would need to work fast—current reports estimate that just 12 to 16 percent of board seats are currently held by women. Furthermore, according to NACD’s 2012–2013 Public Company Governance Survey, 27.4 percent of boards have zero female directors.
In my last post, I shared three questions every board should ask itself when conducting an evaluation:
Are we independent?
Do we have chemistry?
Do we have the right team?
Now, let’s see how boards are finding the answers.
Preliminary data from the 2012 NACD Public Company Governance Survey to be released this fall shows:
92 percent of boards conduct full board evaluations.
83 percent of boards conduct committee evaluations.
48 percent of boards conduct individual director evaluations.
Of those individual evaluations:
56 percent are self-evaluation.
51 percent are peer evaluation.
31 percent are evaluation by the governance committee.
12 percent of boards allow management to evaluate them as part of a 360° review.
What Do the Numbers Tell Us?
Clearly the vast majority of companies are conducting board evaluations of some type. Is this the result of regulation or a commitment to good governance? Some companies are required to perform evaluations by stock exchange mandate. Others have been influenced by the 2009 Securities and Exchange Commission (SEC) rule on proxy disclosure enhancements, which required boards to expand disclosures with regard to directors’ individual skill sets, diversity and overall board composition.
While meeting regulatory requirements may be part of the motivation behind board evaluations, in our experience of facilitating evaluations, we’ve found that the primary driver is a desire to build a high-performing board, well-suited to anticipate, meet and overcome the challenges ahead. Increasingly, boards are moving away from the “check-the-box” mentality and utilizing evaluations as a tool to ensure the board is aligned with the company’s long-term strategy.
As noted above, almost half of our survey respondents conduct individual director evaluations. While self- and peer-evaluations continue to be the thorniest of the bunch, we’ve found they tend to yield the most fruitful results.
Now is the time to look at your board’s evaluation processes. When was the last time your board examined its composition and performance? Do you approach evaluations as a pro forma exercise, which can minimize insights, or are you taking an honest look at whether your board’s practices and composition are optimized to meet the company’s long-term goals?