Topics:   Board Composition,Board Evaluations,Corporate Governance

Topics:   Board Composition,Board Evaluations,Corporate Governance

May 21, 2021

Activate the Director Renomination Process to Increase Impact and Diversity

May 21, 2021

As shareholders and stakeholders demand greater boardroom diversity, board turnover remains modest. The lack of turnover equates to a lack of new director opportunities, which directly impacts a board’s ability to become more diverse. Even more disturbing is that various director surveys reveal that directors themselves believe one or two of their colleagues should be replaced.

Most boardroom turnover continues to be achieved through age limits. While annual election of directors is now the norm, the internal process for renominating current board members is routine, almost automatic. And board succession planning often is not a priority.

That’s not to understate the board’s critical role as long-term stewards of the corporation. Savvy boards are dedicated to balancing board continuity and refreshment, strengthening institutional knowledge and what’s already working well for the board while also incorporating diversity and new ways of thinking.

The good news is that skills matrices are readily used by many boards. In fact, some companies publish their skills matrices in their proxy statements. But in 2021, there’s an opportunity to do more. The chair of the board and the chair of the nominating and governance committee possess underutilized tools to make board evaluations more robust and, thus, the director renomination process more vigorous. It’s worth noting that the majority of respondents to the 2020-2021 NACD Trends and Priorities of the American Boardroom survey replied that improving the board evaluation process is only moderately, slightly, or not at all important to their boards this year. But using and improving upon evaluation tools, the board or committee chair can also help their boards become more proactive in making way for new and diverse talent and perspectives.

What are these tools?

If not already in place, forward-thinking chairs can set an annual personal performance evaluation for each director. Establishing these individual evaluations at the outset of the chair’s term acknowledges and ingrains the idea that individual performance reviews are a logical part of the governance process—and makes the move less personal and controversial.

Chairs can also establish individual peer evaluations. In assessing the performance of fellow directors, each member of the board should adopt a private equity mind-set. They can ask themselves, “If I owned 51 percent of the company, would I want this director to continue in their role?” As challenging as it sounds to ask such a question, it brings focus to what shareholders are implicitly asking: “How is a particular director adding value?”

The next—and perhaps most important—part of this individual evaluation process is to share the results with each director privately. In the best of all possible worlds, sharing the results one on one is a chance to coach underperforming directors; receptive directors can thus learn how to improve their performance to positively impact the company. 

Sometimes, though, these one-on-one talks focus on a director’s lack of availability, for example, and result in the director admitting that they are too busy for the role. Occasionally, health issues or other obstacles have developed that eat into the time the board member would usually dedicate to board work. In such instances, the board or nominating and governance committee chair can have a fact-based conversation with the relevant director, resulting in a hopefully mutual decision to create an opportunity for a new director to join the board.

As the annual election of directors becomes routinely tied to board and individual evaluations, directors will come to see their role as a temporary one, serving for a period of time as long as their skills, interests, and commitment are relevant and aligned with company strategy. And as shareholders gain confidence that a company’s annually presented slate of directors goes through a true renomination process, board legitimacy will be reaffirmed. Bolstered evaluations and a fortified renomination process enable the board to retain its most productive members—while refreshment and the creation of vacancies are positive side effects that allow the board to recruit for greater diversity and new and needed skills.  

The stakes have never been higher to ensure that the most diverse and relevant expertise exists in the boardroom. Refreshing the director renomination process can help boards meet this imperative head on.

Karen Kane, former board secretary of the Federal Reserve Bank of Chicago, is an NACD Certified Director and Governance Fellow, writes frequently on governance topics, and works with CEOs and boards to improve board performance. Irene Chang Britt is an experienced and forward-thinking independent board director at MikMak and at Brighthouse Financial, where she chairs the nominating and governance committee; chair of the board at Amica Senior Lifestyles; and an advisory board member of Peloton Capital Management in Canada.


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Comments

Catherine NelsonJune 04, 2021

Thank you for sharing your perspectives on Board change, Karen and Irene. These last few years I have discovered the death of my ego can be a jumping off place, and I detect an analogy here. Walking in the boots of a shareholder, and appreciation of the lack of diversity in the data strike me as potential catalysts for change. According to McKinsey and Lean In, in 2020 women of color represented 18% of the entry level corporate pipeline and a measly 3% of c-suite. There are c-suite deficits in caucasian women and men of color as well. It takes courage to change.