The Evolving State of Board Assessments

As investor scrutiny of board effectiveness continues to increase, board assessment continues to evolve. In its infancy, a board assessment was typically an informal process overseen by the board chair and focused largely or solely around the macro issue of “are we doing a good job?” Individual director responses were rarely confidential, and the output, as would be expected, was typically benign.

As scrutiny of board governance increased, board assessments first evolved into an evaluation by outside legal counsel focused primarily on adherence to good governance standards. In turn, this has further evolved in the last several years into an in-depth assessment of board structure, leadership, and process by a trusted and independent third-party advisor. Given its rapidly changing nature, it is important to step back and ask what currently comprises “best practices” in board assessments, and to be cognizant of where board assessments are heading. An effective board assessment comprises five key elements:

1. Encompasses all Key Aspects of Board and Committee Structure, Leadership, and Process

A comprehensive board assessment should address each of the following issues and topics, which should include relevant current issues (such as the board’s response to COVID-19):

2. Interview-Driven, not Survey-Based

While relying on written or online surveys can be economical and less time consuming, in person, video, or phone-based interviews allow directors to provide nuances that are impossible to capture in surveys, even if they take the time to provide optional written comments. Often, these nuances provide the “meat” of their response and are critical to surfacing issues.

3. Conducted by a Trusted and Independent Third-Party Advisor

There is no substitute for entrusting the assessment process to someone who is independent i.e., someone who is not a close acquaintance of a director and who does not provide other meaningful services to the company or board), who has experience in board assessment, and who has the gravitas to engender trust and confidence. Collectively, these factors allow for open and candid dialogue, which is at the heart of a good assessment process.

4. Provides a Specific Action Plan for Addressing Identified Issues

As with any process, an effective board assessment should result in a specific action plan to address identified improvement opportunities.

5. Candidly Presented to the Full Board

Finally, the results of the assessment process should be openly and candidly presented to the full board by the board chair or the chair of the nominating and governance committee, ideally supported by the trusted advisor who performed the assessment.

A number of boards have begun supplementing assessments with a full peer assessment of each director focused on identifying specific strengths and improvement opportunities pertaining to their service on the board. While still somewhat in its infancy, this process can be invaluable in identifying and addressing correctable issues with a given director before they become divisive. In certain extreme cases, it also allows for problem directors to be identified through an independent process, which can facilitate their eventual removal from the board.

Looking ahead, one can envision additionally supplementing interview-based assessments with behavioral assessments that focus on developing a better understanding of each director’s approach to problem-solving and personal interaction. These assessments, which are currently used by many companies as a basis for executive development, could also serve to enhance overall board effectiveness.