United States: Director Evaluations: Improvement And "Fit Limits"

Imagine a board of directors that operates like a basketball team, in which each member plays to their strengths, complements each other, and strives for excellence and improvement. This is the vision that individual director evaluations can help achieve, if undertaken properly and respectfully.

Board self-evaluations are common for listed companies, to enhance governance, accountability and performance. However, many boards avoid evaluating individual directors, fearing conflict or resentment.

If done properly and respectfully, however, individual director evaluations can provide constructive feedback, cultivate improvement, and help directors determine how to enhance their contributions and when a thoughtful succession plan might be in order. Such a merit-based focus not only provides accountability that directors demand of executives, but it is also better than cruder tools like age or term limits (call this "fit limits").

Why Evaluate Individual Directors?

Individual director evaluations can help boards achieve several goals. They can improve each director's skills, knowledge and contribution, by highlighting excellence and development areas, and providing guidance and support for growth. They can enhance the board's collective performance, by identifying and addressing gaps, overlaps or misalignments in the board's composition, structure and processes, and ensuring that each director adds value.

Individual director evaluations can promote a culture of high standards and accountability, by signaling to directors that performance matters, that they are held to certain expectations. Such evaluations can also facilitate board renewal and succession, by creating opportunities for directors to reflect on their tenure and commitment.

What are the Challenges of Evaluating Directors?

Despite potential benefits, many boards face obstacles and resistance to implementing individual director evaluations. For one, many directors may claim that they already engage in self-evaluation and self-improvement through existing board self-evaluations.

There is also a lack of clear authority and accountability for conducting and acting on the evaluations. Individual directors are elected by, and are accountable, to the shareholders, not to fellow directors, and are not employees or managers, but peers and colleagues who operate as a collective body. Directors also should think and act long-term and may fear that periodic evaluations would lead to short-termism.

In addition, providing honest and constructive feedback can be difficult, as directors may be reluctant to criticize or praise each other, or may be influenced by personal biases, politics or friendships.

Perhaps the greatest risk is that such evaluations will overlook how an effective board is like a good basketball team. Competitive players tend to be fast, strong, and tall, but not every player must have all three traits. A team can succeed with some players who are short but fast and strong and others who are slow yet big and powerful. More than the sum of its parts, team performance is further influenced by coaches who instill intangibles, such as sportsmanship and teamwork.

The same is true of boards. Excellent directors tend to be competent, committed, and collegial but some outstanding directors are strong in only two of those suits. Each of those suits contains sub-elements at which not every director needs to excel when they excel at other important elements. Some extremely valuable directors are more like coaches than players.

How to Design and Conduct Effective Individual Director Evaluations?

To overcome these challenges boards might consider some of the following practices. First, they might establish a clear purpose and process for evaluations, by defining in advance the objectives, scope, criteria, and outcomes. Evaluation frequency should be considered, such as triannual evaluations on the third anniversary of a director's appointment, rather than annually.

The method of evaluation should be tailored. Methods may include a combination of self-assessment and peer review, as well as quantitative and qualitative measures, to capture a comprehensive and balanced view of performance, strengths, and areas for improvement.

Some boards may benefit from engaging a third-party facilitator, who can provide an independent, objective and confidential perspective, and help design, administer, analyze and report on the evaluations, as well as facilitate the feedback and action planning sessions.

Boards should assure that all communications and materials associated with the evaluations should be and remain strictly confidential within the board to promote constructive and actionable feedback. The point is to generate feedback that is relevant, timely, respectful, and supportive.

Finally, follow up with concrete actions and support, by developing and implementing individual and board action plans.

Conclusion

Individual director evaluations are not a panacea for board effectiveness, nor a substitute for board self-evaluations. They can be, however, a valuable tool to enhance each director's performance, contribution and fit, and to foster a culture of high standards and accountability. Rather than imposing arbitrary service exit points, such as age or term limits, boards can use evaluations to help directors plan for transitions. In doing so, boards can become more like winning basketball teams, where each player knows their role, respects their peers, and plays to win.

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