Board of Directors Self Assessment

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Creating Value through Board of Directors’ Self-Assessment—By James U. Jensen

EXECUTIVE SUMMARY:

This article describes how a company can start the process, measure the benefits, and avoid risks in a formal self-assessment by the board of directors.  It seems self evident that self evaluation by a board of directors can improve company performance.  But the practice has not been visible in most public companies and it is only now that the practice is mandated by regulations for the largest companies.

.  Good governance, of course, should start (rather than finish) at the board level, but the boards of such large companies have not yet reported their first experience with self-assessment.  The boards of New York Stock Exchange listed companies are now required by rule to report on annual board self-assessment while the boards of registered mutual funds must report on their conduct of self-assessment beginning January 16, 2005.  Yet it is not too early for smaller and not-for-profit companies to include in their good governance practices, the annual conduct of self-assessment by their boards of directors.

HOW TO GET STARTED:

A good beginning can be found in the booklet entitled: “Results of the NACD Blue Ribbon Commission on Board Evaluation:  Improving Director Effectiveness.  This booklet was published in 2004 by The National Association of Corporate Directors (NACD) and The Center for Board Leadership.  NACD in Utah can be reached at www.nacdut.org or contact David B. Winder, President-Utah Chapter ( 801) 532-1815.

To start the process, the chairman could assign this project to the board’s nominating and governance committee or he/she could start informally by assigning to a few independent directors the collection and assimilation of reading material.  The corporate secretary’s office and/or the general counsel’s office would be an optimum place to get support resources.  Outside counsel, too, could be used in this process.  The matter can be discussed at the next board meeting where formal assignments and a work plan can be set.

The self-evaluation process might begin with the board and CEO working together to produce a statement of their relative rolls.  This can strengthen the practice (frequently already in place) of the board’s annual evaluation of the CEO and the management team and should highlight the difference in the role of the CEO and the board chairman.  The  process could mature with self-assessment by individual board members and perhaps by peer evaluation delivered orally through the chairman or by a professional.

HOW TO MEASURE PROGRESS:

Any evaluation is made against a standard.  NACD suggests that the evaluation process should start with the board adopting a mission statement along the lines of the following:

Mission:  To be a strategic asset of the company measured by the contribution we make collectively and individually—to the long-term success of the enterprise.

The board’s self-assessment may begin with a discussion of probing questions such as the following:

  • What are our current strengths and weaknesses?
  • What can we do to clarify the respective rolls of management, the board committees and the full board?
  • How can we guard itself against providing too much management or too little guidance and monitoring?
  • What is the appropriate level of director familiarity and/or competence with business, finance, legal industry and company activities?  What can we do for improvement?
  • What are the company’s risks, how do we assess them and how do we measure the effectiveness of our responses?
  • What is the optimum composition/size for our board; how do we use committees; how frequently should we meet; and how much should directors be paid?
  • What resources should be available to us to do our work?

Many written self-assessment forms circulate in publications from NACD and others, in lawyers’ offices and web sites.  But as described below, care should be given to the collection, recording or archiving of written responses on the chosen form.

WHAT ARE THE RISKS?

Under performing boards can be exposed to public criticism or to legal challenge.  But the board should also remember the motto of the practicing physician:  “First seek to do no harm.”   The SEC did not mandate that the self-assessment process must be in writing and written results of this process would be discoverable in litigation.  Experienced lawyers are accustomed to providing recommended procedures to minimize these risks.  For example, some corporate attorneys recommend that answers to the self-assessment questions be delivered by hand and that the attorneys summarize and homogenize the answers, which also can be shared orally with the board, rather than in writing.  Readers are encouraged to seek competent legal advice before beginning this process.

Some feed-back can be brutally honest and this process may pose the risk of loss of desirable congeniality. But this risk should be manageable with focus on the process and the desired outcome, with little need to personalize the process.

WHAT ARE THE BENEFITS?

The NACD publication contained this pithy justification:

[E]valuations can help directors measure how well they are

meeting their duties of care and loyalty and their fiduciary

responsibilities.  Equally important, evaluation says to all

concerned, “We want to do better.”

At a minimum, the board should find that self-assessment will:

  • Clarify the role of the board, the chairman, the management team and the CEO.
  • Focus on risk assessment and on long-term strategy and objectives.
  • Enhance a culture of disciplined decision making and accountability.
  • Provide for optimum and timely production of relevant board information.
  • Establish an agreed standard of director commitment and performance