The practice of conducting full-board, committee, and/or individual-director evaluations has largely become commonplace. Ninety percent of respondents to the 2016─2017 NACD Public Company Governance Survey: Aggregate Resultssay their companies conduct full-board evaluations. Approximately 78 percent of respondents facilitate committee evaluations, and 41 percent conduct individual director evaluations, the survey finds.
The New York Stock Exchange since 2003 has required listed companies to disclose how their boards address evaluations. Although Nasdaq-listed companies have no such requirements, many conduct these assessments to enhance governance standards. NACD has long been an advocate for routine board, committee, and individual-director evaluations as part of a larger strategy of continuous improvement.
In keeping with these listing requirements and recommendations from our research, NACD recently created the Resource Center on Board Evaluations. Resource centers are repositories for NACD content, services, and events related to top-of-mind issues for directors. In these resource centers, individuals can find practical guidance, tools, and analyses on subjects varying from board diversity to cyber-risk oversight. Below we have highlighted a sample of helpful materials from our new board-evaluations resource center.
The NACD Directorship magazine article “The Argument for Yearly Board Evaluations” by Salvatore Melilli, national audit industry leader for private markets at KPMG, examines the importance of assessments specifically for private company boards. Less than half (48%) of respondents to the 2016─2017 NACD Private Company Governance Survey say their boards conduct full-board evaluations. Melilli’s article highlights several reasons why evaluations are critical to improving oversight evaluations. They can help vet company and board culture, identify gaps in talent or skillsets, and streamline processes for the board to engage in difficult conversations with the executive team.
Boardroom Tools & Templates
This resource center’s boardroom tools and templates are segmented by evaluation type—full-board, committee, and individual-director levels. The tools offer questions and considerations that help boards and directors ask questions that can drive healthy conversations about strengths and areas of improvement.
Videos & Webinars
An NACD video series featured in the resource center focuses on the role board evaluations play in improving governance practices. One video in the series, called “Why Confidentiality is Key,” focuses on the benefits of confidentiality in the evaluation process. Another video, “Transform Insight into Action,” discusses the value of creating tailored educational or development programs based on insights that emerge from evaluations.
If you would like help finding resources on a specific subject matter, please let us know. We welcome the opportunity to engage with directors on pressing needs and concerns.
This year, NACD began a series of programs designed to address the changing nature of directorship. Intended to identify the board composition, processes, and resources necessary for the future board, the time frame lends a twist to this launch—no defined outcome has been chosen at this initial stage. Instead, with the awareness that the economy, and the boardroom, is in a state of unprecedented change, NACD Directorship 2020™is a multi-year initiative designed to help provide clarity to an uncertain picture regarding the future of directorship.
This initiative started with three exploratory meetings in New York, Chicago, and Los Angeles, the last of which concluded this week on the West Coast. In each city, feedback has allowed NACD to continually refine the program design, as well as re-think the questions posed to attendees. Perhaps mirroring the movement of the meeting’s locations from east to west, the conversations have become more focused on the processes directors can implement to meet the coming challenges.
At the SLS Hotel in Los Angeles, more than 100 directors attended the afternoon session to discuss two topics: the future state of information flow between the board and C-suite, and how to select performance metrics that will generate sustainable organizational profit. Sessions were led by NACD Managing Director and CFO Peter Gleason; Akamai Technologies Lead Director and Audit Committee Chairman Martin Coyne; Investor Responsibility Research Center Director and current NACD Director Richard Koppes; and former Bell and Howell CEO, current NACD Director, ContextMedia Non-Executive Chairman, and Northwestern University Professor Bill White. During the highly interactive sessions, each table was given a specific set of questions to discuss and provide thoughts among their peers. Takeaways from the event include:
Asymmetric information risk is inherent in directorship. If the board had the same level of operational knowledge as management, directors would be running the company.
An imbalance in information can occur within the boardroom as well. Boards are at a higher risk if one director is viewed as an expert in a technical area. In these situations, the rest of the directors may defer to his or her proficiency and not exercise the necessary skepticism. Further, board structure, with committees that delve deeper into technical areas, adds to the potential for information imbalance.
The risk of information asymmetry is not an issue, but a catalyst. Discussing the balance of information flow between the board and C-suite can expand into many interconnected topics, including board composition, culture, metrics, and leadership.
Board portals may be “greener,” but they encourage information dump. Attendees agreed that their board books have largely grown in length, due to the ease of transferring files rather than creating physical board books. Today, it is more important than ever for the board to communicate what information it needs from management.
By bringing more viewpoints to the boardroom, directors that are diverse in skill set and experience are more likely to explore all sides of an issue. Diversity of directors will change the dialogue in the boardroom going forward.
Boardroom culture should welcome constructive challenges from directors.It is necessary for directors to ask probing questions on issues without fearing negative repercussions. A culture that welcomes constructive criticism will enable more effective individual director evaluations that address problems head on.
There is no one-size-fits-all solution to addressing the current and future challenges posed by legislators, regulators, and stakeholders. While the underlying principles are consistent, application of new processes will be tailored to each company.
As a result of the rapid pace of marketplace change, directors need to adopt a mindset that their business is going to be disrupted. This adjusted mindset will allow for continuity planning to be built into the strategy to help offset future disruptions. As Bill White observed: ”If you have the mindset, the metrics will follow.”
In the year 2020, metrics will increasingly focus on speed and agility. Attendees largely agreed that there is no such thing as a competitive sustainable advantage, as a result of disruptive technologies. Speed and agility not only apply to the operations (speed of execution, acceptance of new products), but also to talent (willingness to change, ability to adapt).
In the era of big data, you can “metric yourself to death.” Directors should not look at metrics and dashboards blindly, but instead they should view them in a broader context, including what implications they may hold. It is also important to counter internal metrics with data that shows how the company is viewed externally.
NACD Directorship 2020 will officially kick off next month at the 2013 NACD Board Leadership Conference. Until then, NACD’s blog will feature viewpoints and research from our NACD Directorship 2020 partners—Broadridge, KPMG, Marsh & McLennan Cos., and PwC—that will take a deeper look into the emerging issues and trends that will redefine directorship in the years to come.