What Directors Need to Know about Board Evaluations
Degma: Welcome to today’s “Directors & Boards” “What Directors Need to Know about Board Evaluations, Part Two: Moving from Fundamentals to True Strategic Value” webinar. At this time all lines have been placed in a listen-only mode, and we will take questions throughout and following the presentation.
You may ask a question throughout by using the “Ask a Question” button located under the slide. Simply type your question into the box and hit “Submit.” If you should require assistance throughout the conference, please press star-zero on your telephone keypad to reach a live operator. At this time it is my pleasure to turn the floor over to Jim Kristie. Sir, the floor is yours.
Jim: Thank you, Degma. Hello, everyone, and welcome to our webinar today on board evaluations, getting strategic value out of them. I am Jim Kristie, editor of “Directors & Boards”, and I will be assisted today by my two colleagues, Scott Chase and David Shaw. You will hear David Shaw teeing up your questions as we get into the presentation.
A few housekeeping notes real quick. The webinar will run for one hour, ending at 3:00 p.m. Eastern Standard Time. Questions may be submitted at any time, and we will get to as many as we can during this hour. We encourage your questions, and if some questions are left unanswered, they will be addressed in a follow-up form. The webinar will be posted to the “Directors & Boards” website, and the presentation materials will be sent to all registrants after the webinar.
Some of you may have been with us in July when Diligent Board Member Services and “Directors & Boards” first delved into this topic of board evaluations. As we said then, this is a governance issue that is riveting for many boards, especially in the context of debates concerning director tenure, retirement ages, term limits, board turnover, and the whole concept of board refreshment and renewal.
We have three co-leaders for today’s discussion. Dennis Cagan is a very close colleague of ours here at “Directors & Boards.” He has written several important reference articles, including ones on creating an advisory board and “firing” a director, and he has been a keynote speaker at our Private Company Governance Summit. I could spend the rest of the webinar highlighting Dennis’ broad and deep background in management and board service. It is on the webinar website, and I direct your attention to that. Anyone who has served on almost 50 corporate boards as Dennis has will have some sound guidance for us today on evaluating boards and board members.
Catherine Bromilow is also a good colleague of ours, and has made numerous appearances in “Directors & Boards” with the excellent research and advisory work that she is involved in as a partner with PwC Center for Board Governance. I also direct your attention to her detailed bio on the webinar website. She is what I like to think of as one of the premier go-to people in corporate governance, when you need to know what’s happening on boards and what best practices are for board and committee work. We are pleased to have her and Dennis with us today to offer keen insights and guidance on board evaluations.
Jeffry Powell is our moderator for today’s webinar. Jeff is Diligent Board Member Services’ executive vice president of sales, where he is responsible for the development and execution of client acquisition strategies throughout the Americas. Jeff has advised thousands of companies across industries including banking, energy, higher education and health care on how secure electronic access to board materials can improve organizational effectiveness and governance. This experience has enabled him to become expert in critical governance issues. Jeff, I know you are enthused about revisiting this important topic of board member evaluation, so let me turn the discussion over to you to get us under way.
Jeffry: Thanks, Jim. I am enthused about it, and am very happy to be here today with our guests and talking further about this topic. We were very excited that, after the webinar that we did over the summer, that there was such a great response, that we really felt like there was a need for a follow-up session on it. I think that our speakers today will really add a lot of insights as we transition from the first webinar, which was really just talking about the making of an evaluation process for director and board evaluations, and not really talking about how to drive true strategic value for an organization with this process.
Now, here at Diligent, of course, where we are the world’s leading provider of secure board portals, this is a topic that’s interesting for us, because of course we’ve seen the process of distributing information to boards change from something that was of course historically a paper-based process to something that is more and more done securely electronically. We’ve also seen a real change in how boards and board members evaluate or perceive board evaluations, and what the best practices here are.
In our system, even though this is a component that we’ve always had in it, this ability to … whether or not you’re polling your board or having them filling out questionnaires or surveys, it’s always been a component of our system. It’s something that we’ve seen much more not just interest in, but really focus on on the part of boards, and really wanting to use the evaluations with your board members as a way of working with the boards to make key decisions and really improve the overall effect of this as a board. Of course, this process, particularly if it’s done electronically, really offers not only a comprehensive experience but immediacy, and of course secure transmission of those communications.
I certainly hope that some of the people on the webinar were able to participate in the last one or maybe listened to the replay, but just to quickly review what we were talking about at the last webinar, we were looking at the fundamentals of board evaluations, really starting at the beginning. Why would a board want to engage in this process? What are the objectives? Who’s going to be doing the evaluation? Who’s going to be involved in the process? What types of questions are going to be asked? What is it that we’re looking to evaluate, individual performance, overall effectiveness of the board? How is it going to happen? What are the actual physical mechanisms, what are the techniques that are going to be involved, and what’s going to happen with those results?
Whereas we may be touching some on those topics in this conversation, what we really want to focus on is not just the results, but how does this process really contribute to the strategic direction and overall value of your organization. I think we all are, but I am particularly pleased to have Catherine from PwC as part of this presentation today, and we were very happy that she shared with us, I guess you would say hot off the presses from the PwC annual boardroom survey, the feedback from directors on how they view the evaluation process. Catherine, we’ve got a couple of slides here with some of those results. As I turn it over to you, please share with us your thoughts on what we’re looking at here.
Catherine: Well, thank you so much, Jeff, and I fully and wholeheartedly agree with both and you Jim that this is a great topic to cover. One of the most frequent governance questions we get from our clients is what they should be doing differently, either for their audit committee or their board as a whole, and we believe it shows just how many directors are truly committed to trying to make sure that the boards are effective and that they understand where leading practice is going.
As you mentioned, these results, you could not have timed this webinar better, because these results are about two days old, just released from our Annual Corporate Directors’ Survey. There is some good news to report here. First of all, directors generally are quite satisfied their boards are using an effective process for their evaluations, and they’re generally quite positive with how board leadership is leading them through the process.
Those are two very sound and reaffirming findings. That said, almost one in five directors very much agreed that there are some limitations to being frank when they’re doing their evaluations, and 16 percent also very much agreed that really the exercise was just a check-the-box exercise. I think those are two areas that we will probably touch on later in our discussion.
In one of our other questions, we ask directors what happened in response to any of the issues that were raised in self-evaluation, and one-half of the directors … and we heard from over 860 directors … said that their boards made no changes. For those that did make some change, the most common one was to add additional expertise.
What’s also interesting is there were two areas where we saw the changes that were made, or more boards make changes in areas than when we asked this question back in 2012, and those two areas where boards were a little more active this year were in counseling one or more directors or in adding board diversity. Hopefully these results will give a little context to our discussion today, and Jeff, with that I will turn it back over to you.
Jeffry: Thanks, Catherine. Yeah, I mean, this information is great to have, and we are very fortunate that you brought this to us and we really appreciate you thinking about that. I am going to refer back to these, but really what we want to get into is talking about maximizing the evaluation effectiveness for a board and what we’re going to call six common pitfalls to avoid. As we move into this, taking a look at the next slide and talking about these activities, Dennis, you’ve been sitting here very patiently and I’m sorry that it’s taken a few minutes to get to you.
As we start to address these specific topics, one of the things I’d like to talk about just in a larger sense is one of the pressures that we see on boards right now is that they’re being asked to do more and more things. It’s not so much that things are dropping off that they don’t have to deal with, it’s that there’s more and more expectations of a board member, more and more time commitments. As we talk about the role of a board member in general, but also specifically as we’re addressing this topic of board evaluations, a board member may recognize that there’s value in this process, but how can you be sure to make proper time for this to be an effective exercise? Maybe Dennis, you could respond to that, and I’d also like to hear what Catherine has to say about it.
Dennis: Well, since 2009 when the SEC has more actively encouraged particularly public companies to select directors based on competence and skills, there’s been an increase in the evaluation process. Sometimes it’s enthusiastically embraced and sometimes not, and it’s pretty much common practice in best practices circles. One of the things that’s not effectively measured in all cases are the softer criteria.
Not necessarily do we check the box for financial competence, do we have an executive on the board that is familiar with manufacturing or this particular industry segment, but how do they interact together? What are the personalities, what’s the communication style? I’m fond of saying that in the case of directors, qualification does not mean suitability. One director may be highly qualified and suitable for one board because of the personality or culture of the board, but not suitable for another.
Where this comes into play is, if you look at the … and I’ll try and make this fairly brief, Jeff … if you look at the real purpose, what’s the purpose of an evaluation? Well, the evaluation should be constructive, not destructive. You’re not there to criticize anyone. The purpose is to improve the board’s overall performance and then that of each specific director, and that’s to up their game, work on their weaknesses.
The extent to which the board communicates together affects the level of communications. Any repetitive comments, where one board member will just repeat something that somebody else said so there’s no … there’s going to be a tendency to pontificate. On many boards … I’ve been on 52 corporate boards … in many boards, if you simply eliminated one director pontificating or repeating again with no real purpose except just to hear themselves talk, something that a previous director has already mentioned or is unnecessary to the discussion, you’re going to add a significant percentage of time back to that board meeting, allowing you to cover the materials that you were intended to cover.
The practice of the board meeting, which can be a factor in the evaluation. Are we staying on the agenda? Are we overtalking a subject, are we undertalking a subject? There can be evaluation criteria that help you measure that and give you back certain time in the board meeting to cover some of the additional obligations and requests that you’re talking about. Ultimately, the board is about strategy and risk, and the board leadership, whether it’s the CEO, chairman, presiding director or so forth, needs to help the board prioritize.
The last thing I’ll say, and let Catherine go at it, is I was recently in another discussion in another seminar on board evaluations, and one thing that came out of that one which really, really impressed me is that one of the most important aspects of being a board member is courage, that courage to stand by your views and your perspective, and have the confidence to say something and risk being wrong, but when you see something that you think is wrong, whether that’s a director not performing … and I’m not saying being blunt … but whether it’s a director not performing or whether it’s just simply not honestly stating an answer, your answer, to the question in an evaluation process, or where it’s not having the courage as a board to get rid of a director who is being destructive to the overall mix, whatever it is, courage ends up, especially these days, being one of the most important factors in selecting board numbers.
Jeffry: That’s really interesting, Scott. What I like about tying that together is what I hear you saying is that courage for being a board member is both having the courage to say something when it’s important, when it needs to be said, but also having the courage not to say something, that is, not feeling like you’re obligated to talk even if you’re not really constructively adding anything to the conversation. Dennis, I think you covered that very well, so Catherine, I’m not trying to put you on the spot, but I do want to give you a chance if you have anything to add.
Catherine: Sure. I am really struck by what Dennis was sharing with the idea of the ability to free up more time, to use the evaluation process to identify areas where maybe the board isn’t being as efficient as possible, and I absolutely concur with the fact that the focus on strategy and risk management are the areas where directors are even telling us they want to spend more time.
Every year in our annual Corporate Directors’ Survey, we ask on a number of elements, “Do you want to spend a lot more time with your board, a little more time, no time change or less time,” and always up until this year, the number one area where directors wanted to spend more time was in strategy. This year it fell to number two, but only because the number one was IT risks, including cybersecurity, which of course has been a really hot topic this year. Actually I really like that, what Dennis suggested, part of linking the outcome of the evaluation to ways to actually use time the way directors would love to use more time.
Dennis: As Catherine is done, I would add one more comment, and Jim knows well my propensity for telling stories, but this one’s apropos. I’ve been on a board for 12 years with a very highly-regarded gentleman, and when he joined my board, he resigned, he phased out, on the board of General Motors, Raytheon, Hewlett Packard and Hughes Electronics. By far, a hugely qualified director. He is the director in these board meetings that speaks the least. After everyone has said something, he only says something if he feels that somebody missed covering something. Otherwise, he just says, “I agree.”
Jeffry: That’s a good story. You know, Dennis, as a sales guy, of course I love to tell stories and am constantly reminded to rein that in on these type of webinars, because if I started telling stories, that screen in front of you would start flashing with all types of messages of the DNB people trying to cut me off. Catherine, obviously you’re right, cybersecurity is an ever-present topic these days, and also is one of those instances of an additional task and time-consuming activity that boards are having to deal with right now.
I wanted to go back to just talking about some of those two slides that Catherine had provided. We don’t need to flip back to them, but they were talking about topics such as the board leadership productively leads this process, we have an effective process, there is sufficient follow-up, et cetera, and there were categories of board members responding that they agreed, they felt like this was very much the case or somewhat the case.
Dennis, I’m interested in hearing, from your tremendous experience as a board member on these topics, what are the kinds of things that would help change a board member’s response from “somewhat” to “very much,” in terms of the board leading the process and having an effective process? If a board member feels like it’s somewhat of a process, what could happen to make them feel like it’s very much of a good process?
Dennis: I think in the end, it’s the result. If it can be … and again, the personalities of both the people and the boards have to be dealt with and finessed, but if each board member left the evaluation process feeling that the overall performance of the board can be improved in certain specific areas that have been identified, and they themselves can even up their game, most directors are very serious and conscious of their fiduciary responsibilities and want to do a good job. If they’re given some tools, a little bit of feedback on how they can improve their performance, and if their feedback on fellow directors for potential improvement seems to be openly accepted and acted positively on, I think that’s a huge win for the company and a huge win for the people individually.
Don’t leave out … you know, we keep talking about directors, but the right kind of an evaluation process should include senior management. You know, state of the art is a 360, which includes management evaluating the board and the board evaluating management in a board context. All that plays together to improve the shareholder value.
Jeffry: Yeah, that’s an excellent point. Oh, I’m sorry, Catherine. Please go ahead.
Catherine: I was just going to say I would also say that, if there is very little engagement from management or executives, another reason for that could be that directors are concerned or maybe suspicious about liability issues. If we don’t ever admit that there’s anything necessarily wrong here, then if anything does go wrong in the company, nobody will be able to find out where we were self-critical and then perhaps almost didn’t even act on it.
I would also say that if there is very little engagement, it may be time to consider changing the process. If the process was a discussion, maybe try and use a questionnaire the next year, or if the process was using a questionnaire followed by discussion, maybe it’s a year to bring in a third party to conduct interviews. There are ways I think that companies and boards can shake up the process to try and address some of the underlying issues why people might not be engaged.
David: I have a quick question from the audience that might be relevant here. It comes back to one of Catherine’s slides and Dennis’ observation on courage, and Dennis’ discussion of talking to a board member who might have been evaluated poorly. “It seems like there’s a real conflict, based on PwC’s results that only 16 percent of the respondents actually provided counsel to one or more of its board members as a result of the evaluation. Is that an issue of courage? Is it an issue of liability? What is that an issue of?”
Catherine: Well, I’ll give you results from another module of results from this year that we released. One of the questions we asked directors … and this came out nine days ago so it’s a little older, not quite hot off the press … is what are the impediments to replacing an underperforming director. Just so you know, there are a number of … I’m just trying to get the screen up here. There are over half of the directors thought there were some impediments, and of the ones who thought there were impediments, 34 percent, so one in three directors, said the impediment said that board leadership was uncomfortable addressing the issue. I think almost that is a good answer, or is what directors are telling us of why maybe that courage hasn’t happened because of board leadership.
Dennis: I would echo that, Catherine, and the answer that I would have given initially is that the responsibility for coaching board members, whether it’s anonymously … and it should be fairly anonymous, as anonymous as you can make it within the board itself … but in coaching the leadership of the board, it’s their responsibility. It’s the chairman’s responsibility. If that’s the CEO, then it’s his responsibility and the lead director’s responsibility to coach any other board members, unless it’s them that needs the coaching. If it’s them that needs the coaching, one or the other needs to take the lead.
In the end, then, it’s an independent board member who sits on that board. It’s incumbent on them to have the courage to step up and say, “Look.” Maybe this is settled sensitively, in private, but still, address it with the individuals involved, that there needs to be some change. It is a leadership issue, to Catherine’s point, I think.
Jeffry: Well, it is of course, I think, a leadership issue, and that topic of courage keeps coming up, but I also want to go back to something that Catherine said when talking about the very real issue of liability. As is always the case, but particularly now, I think that board members feel that pressure. It seems that it could be a fine line between somebody wanting to be a proactive, courageous member, and worrying about their own culpability and liability. Catherine, what are your feelings on that, and you and maybe Dennis can talk about it. What are strategies to assure people or help them through what can be kind of a fine line?
Catherine: The whole issue of liability is one that keeps resurfacing, and my caveat should be here, I’m not a lawyer. At all times, people should be talking with their lawyers. It is interesting. One of the things we’ve seen is many boards use counsel as the people or as support for conducting board evaluations, whether it’s conducting interviews or compiling the results of questionnaires, with the hope or the idea or under the understanding and belief that that does provide some privilege around the process.
Again, not a legal opinion, but I have heard people say that that doesn’t necessarily provide you with privilege because, as I think I understand it, boards’ interaction with lawyers that involves privilege is when lawyers are actually providing advice. Whether it’s your outside counsel or your inside counsel, if they are only compiling results, that’s not necessarily providing legal advice. That’s one area to be aware of and think carefully through.
In terms of the liability issue, what I would say is, if there are serious concerns on your board around performance of the board, around the way you’re approaching certain things, around your processes, whether or not they are written down, people know about them, the best way probably to protect yourself from a liability perspective would be to have thoughtful discussions at the board level. Reach consensus on whether or not the issues are serious, and then make sure that you’re taking action and documenting the action, and making the real changes.
I always liken this much like to companies when they first starting doing employee satisfaction surveys. They’re wonderful things, but don’t do them unless you’re actually going to do something with the results and be seen to do something with the results. Because so many board evaluation processes are actually mandated, particularly for New York Stock Exchange-listed companies, you don’t have the option to not do it. I would just say, if you are going to do it, take it seriously, and make sure that you’re working and reacting to any significant issues that are raised.
Jeffry: What I hear you saying is that really part of maximizing the whole value of this process is putting together a scenario where the board members can be encouraged to speak their minds, to show their courageousness that we’ve been talking about, but also having it done in such a way that the process can insure them from the liability standpoint as well.
Dennis: I believe the liability thing is a cop-out. Directors’ fiduciary standards revolve around knowledgeable, reasonable people making decisions in good conscience. You’ve got DNO insurance, and as long as you’re within that range. There’s a lot of discussions that go on within boards that are not documented, not included in the minutes, and therefore not discoverable or disclosed. In addition to that, you’re not reaching any decisions that are questionable, that are going to affect the financials. They’re not going to have financial implications. We’re talking about board performance, and the intention is to improve it.
Many companies don’t even publish the results of their evaluations, and the output from most of them ends up being discussions among the board and board members that don’t have to be documented separately and discoverable anyway. I would pretty much discount that particular objection.
Jeffry: Okay. That’s a very interesting thing to say. When you say that it’s a cop-out, do you mean that it’s a cop-out on the part of an individual board member who doesn’t want to do the hard work, or what exactly are you saying?
Catherine: I would say it’s depending on who’s making the claim, “Well, we’re concerned about the liabilities involved should something go wrong, somebody come back.” If this is a board member saying that, an individual, then I would say, “Hey, come on, man up here.” If it’s the company, then I would say, “What are you worrying about? You don’t have to document this, you don’t have to release the results. It’s a confidential discussion within the board, so what are you trying to avoid?”
It really depends on who’s using that as what I would consider an excuse. Again, I’m not an attorney either, Catherine, but in a board situation, this is exactly what I would say to another director or to management that had that concern.
Jeffry: Well, I appreciate that. I will just add here that I’m not a lawyer either, and am not expecting either of you to be obviously legal professionals on this topic. As we move through, I think there’s always going to be this backdrop of the engagement of the board and senior management in this process.
The next topics that we have on these pitfalls really have to do with the specifics of what’s going on in the evaluation. They’re I think the next three things we might be able to address as a group, one of which is questions are too vague, or the comments are too personal rather than constructive, or people are worried about a lack of confidentiality. I think that these things all … I think we’ve been bumping up against these topics as we talk about these things.
Catherine, maybe we could talk about it just from a process standpoint, if you’re really trying to drive an effective process where there’s going to be dynamic engagement, there’s going to be pointed commentary, and there’s going to be action items that are followed up on from a results standpoint. How do you ensure that you’re asking the right questions, that people don’t feel attacked or that people are worried about what they say being distributed to people that they would feel inappropriate to hear those comments?
Catherine: Sure. The whole issue of whether you have the right questions, if your process uses a questionnaire, is I think probably the place to spend your planning time. Questionnaires can be used, as probably people know, in many ways, either handed out for the directors to complete them, or some companies hand them out for directors to look at them and then come back and have the discussion, but without filling them out. There can be a lot of challenges with questions, particularly if, when a director is looking at them, so many of them seem just not applicable to what he or she is seeing.
I remember speaking with one director who indicated that they used a questionnaire and the questionnaire was really great, and in the first few years they used it, they were able to identify lots of areas to make changes and improve their process. Then he said, “By the third or fourth year we were using it, everything looked like we were doing wonderfully by the questionnaire, but I know there’s other things we should be doing and the questionnaire just wasn’t getting to it.” The idea of taking a cold or almost a zero-based look at your questionnaire every few years to see if it’s still serving I think is a really, really good approach.
I just want to, maybe, before we hear from Dennis, just share some views on issues around the whole question about whether the comments are too personal. Back to what Dennis said, ideally self-evaluations are really about improving board effectiveness and not about trying to move anyone off the board or get anyone kicked off the board. That said, over 75 percent of the directors in our survey indicated that a director was removed after the self-evaluation, after the board’s self-evaluation, so that’s one element.
Another element that I know you talked about on the first webcast was peer evaluations, and again I think, if you’re going to do that … because they do get tricky and very personal very quickly … think about how you want to phrase the questions and which questions you want to ask. I was talking with one director who talked about the success they’d had in a peer evaluation, director-to-director, and she said they really used two pretty simple questions.
The first question was, “What does this director do well that you’d like to see them continue doing,” and then, “Can you give examples of two or three things that you’d like the director to do differently to be more effective?” Something like that, that’s not just what’s wrong with this director but how can they be more effective, almost in a coaching format, may be a little more helpful when you get into some of the peer evaluations.
Jeffry: Sure, and I can see how that would be the case. Dennis, turning it over to you, whereas I would really appreciate being on a board with you where you said something, whether that was to me or somebody else, such as, “Come on, man up.” I know that you don’t always necessarily have that opportunity.
Just following through on some of the things that Catherine is talking about … and Catherine touched on a lot of very interesting points there … how do you do that? What are the types of questions? What are the types of comments where you can really, in a positive sort of way, try to make points with someone about something you’d like to see them do better?
Dennis: Well, first of all, besides just questionnaires, one of the more effective techniques is actually interviewing the board members and asking probing questions, the same as you would interview an employee, whether it’s done by the chairman or whether it’s done … typically it’s more effective if it’s an outside party. The key there, you can’t arrive at an authoritative conclusion unless you get all the information, and the only way you can get all the information from a director about their feelings about themselves and about their colleagues is if they’re ensured both confidentiality and that the information will be handled sensitively. This is not about confronting directors, this is about improvement.
The one question I would have about the statistic about how many directors were removed is I would ask how long after the evaluation were they removed. If they were removed the day after the evaluation, I would say there was something wrong, there was something done wrong, because the objective is to improve those directors. They were put there for a good reason. How long have they been performing badly? If the evaluation is to improve them, why let them go the next day? If they were removed several board meetings after the evaluation was done, then I would say clearly they failed to respond to constructive criticism, no matter how it was delivered, and improve those things that they were coached on in the first place.
Board evaluation, to me the areas that … and these are softer areas, as I said, that most directly affect the performance of the board … the first is communication. How do they communicate together? The second is the individual characteristics of each board member, and the third thing is the process that the board goes through, how they set the agenda, how they keep time of … you know, how they move from one subject to another, what subjects they cover, how deep they allow people to go, those kinds of things.
In every one of those categories, there are things that are just very, very common across a lot of boards. There’s always somebody who talks too much, there’s always somebody who’s checking their email, there’s always a leader that’s not going to step up. You know, there’s all kinds of things, and so getting them to loosen up and give you their true opinion from sitting there … because these are all fairly accomplished people typically … and then dealing sensitively with it where there’s no confrontation and it’s in a coaching environment, to me those are the keys to effectively coming out the other end with improvement, which was the objective.
Catherine: One other thing I’d like to mention is that we’ve been talking a lot about evaluation in terms of how directors are behaving, and whether they’re bringing the right skill sets and whether they are personally effective. Dennis touched on this when he talked about the meetings and how the meetings are run, but there are other improvement opportunities coming out of these evaluations that are nothing to do personally with any of the directors but that can be really helpful, like the view that the materials that the board gets should be improved or more concise, or better executive summaries, or is that the meeting length, the meetings really maybe should be a little longer or a little shorter, so people can maintain their attention. There are also different other kinds of evaluations that come out that can really help the board performance.
David: Jeffry, there’s a couple of questions from the floor related to the previous discussion. Catherine, you had mentioned two very specific types of questions, but several attendees have asked do you have other examples of questions, and this can be for Dennis as well in the interviewing format. “How would you change questions that are currently being asked, or what would you ask that is different?” This would be in addition to the two questions that you had suggested, Catherine.
Catherine: Well, it almost depends what you’re looking for, but I will say … and maybe it can be sent out with the follow-up email … we do have two discussion guides for evaluating board performance and audit committee performance. They’re nine or ten questions each, trying to get at a high level, help directors think about different kinds of questions to ask. I’m happy to share those.
One of the other questions that I quite like because I think it’s a forward-looking question … and we ask this both when we’re working with audit committees as well as full boards … is, “Knowing what you know about the company and the challenges it’s facing and the opportunities and the company’s strategy, and when you think about the skill sets and experience that are around the board table right now, are there other skills or experience we would love to add to our board?”
I just find that a fairly positive question that can get people thinking more strategically. Then if there are, and the decision is made that you need to seek those other kinds of directors, then you have to deal with whether or not you’re going to make your board larger, or ask someone whose maybe skill set isn’t quite as current … back to I think what Dennis said near the start, which is just because you’re qualified doesn’t mean you’re suitable anymore for a board.
Dennis: To Catherine’s point, I agree. Many, many times, a board position should not be considered a lifetime engagement. Companies change, management changes, board members change over time, and so the board needs to be somewhat flexible in adding additional capabilities, disengaging in certain situations. For example, if you change the CEO, the CEO may have a completely different style that just doesn’t work quite … even though the board may have selected them, it just doesn’t work quite as well culturally with the board, and so maybe there need to be some changes there one way or the other?
Jeffry: Dennis, of course I agree with you, but who drives that process? Is that driven by the chairman or the CEO or the corporate secretary? How does that get enacted?
Dennis: Well, I would say not the corporate secretary, but I would say yes, either the chairman or the CEO or the lead director have to exert strong leadership. If they don’t feel it falls in their list of responsibilities, then they need to determine. Now, for example, it could easily be handled by a special committee of the board, if it was of that magnitude. We’ll have a special committee and we’ll take a look at what we need to do to resolve this issue, and that begins to separate it from the different personalities, hopefully at least.
Jeffry: David, is there another question?
David: Not at this time, though I would remind everyone that you can use the “Ask a Question” button at the bottom of your screen if you’d like to pose some questions for our panelists.
Jeffry: Okay. Well, I have a question for the panelists, and Dennis, I am going to tell a little story here. I’m going to keep it brief, though. Of course, we have thousands of clients, and every single day I get to talk to people like the two of you, professional, accomplished, very smart people who are very serious about what they do, and that is one of the best parts of my job. I don’t want to sound like I’m talking negatively about anybody in the world of corporate governance, but something that I do see on this topic of board evaluations is companies which will develop a questionnaire and use the same questionnaire in perpetuity.
That goes back to one of the things that, Dennis, I think you were talking about … or maybe it was both of you … talking about questions and how they need to change, but it seems to me that’s an inherent weakness if it’s just the same form every year. By definition, if you are changing process and enacting change and looking for new, improved and better ways to do things, then in the evaluation process, whether or not it’s filling out a form or being interviewed, the questions have to change, right?
Dennis: Absolutely. This went to Catherine’s point about after a certain period of time it wasn’t effective, because they were still asking the same questions. This is why the preparation and decisions on how to conduct the evaluation are so important, because you can reflect on the current landscape, current board standards, governance standards and so forth, in compiling the questions.
Always obviously, if it’s a company that can afford to hire an outside consultant, there are plenty of people that specialize in helping you do evaluations besides just your law firm. NACD has a consulting group that will help companies do evaluations, and they’re very, very reasonably priced. Well, these people are doing dozens if not hundreds of evaluations, so they’re much more current on the kind of questions being asked on a broader spectrum of companies and so forth, and so you’re going to get a little bit more progressive thinking on that.
Jeffry: That’s a great point. Catherine, I just want to give you a chance if there’s anything else you wanted to add, since this was a topic you touched on before.
Catherine: No. I’m going to try to be what Dennis calls a good director, and not say anything just to repeat what’s been said.
Jeffry: Well, I appreciate that. Okay, so moving on to the next topics on the pitfalls, I think, Catherine, I will use your advice and combine the last two, which is really talking about feedback and follow-up. Potentially a pitfall is that there is no plan, no plan is set following receiving the feedback from the questionnaires and/or the interviews, and potentially there’s no other follow-up on the plan other than when the plan is set. Some of this may seem obvious, but obviously this is a critical issue, right, that if you’re going to go through this process, if you’re going to be diligent about the process, then you want to enact change. Catherine, I’m starting with you. How do you go about ensuring that that happens?
Catherine: Well, the good news … and just because people probably don’t have photographic memories … is that the first slide we had with our Annual Corporate Directors’ Survey results, there were north of 85 percent of directors who said there is sufficient follow-up afterwards, that they agreed with that either somewhat or very much so agreed with that. For the most part, this is not necessarily a big area, although only 35 percent said they very much agreed, so there’s always room for improvement.
One of the areas maybe I’ll just draw the webcast participants’ attention to is, based on how you are doing or the process the board or the committee is using for the evaluation, that can drive how well follow-up plans are captured and documented, and let me give you an example. We see a number of companies where their evaluation is basically a discussion among the committee or the board members in an executive session, and that can be absolutely fine. It’s a really efficient way to get it done, and with the right leadership or the chairing and facilitation of that discussion, it really can be effective.
If the chair doesn’t have any follow-up points that he or she communicates to the management team or asks to be captured in the minutes, or action plans being set out of it, then that can be I think an impediment to really getting any change coming out of it. You’ve had a nice discussion, maybe the minutes say that they discussed it in executive session, but if there’s nothing else, then it’s just not going to be hugely effective. I would put that responsibility on whoever is chairing that discussion, to get back and really help drive those action plans.
Jeffry: Dennis, maybe the same topic, your thoughts on it?
Dennis: Yeah. To echo Catherine’s sentiments, one thing I’d say is that the evaluation process, once you start it, if your board hasn’t yet started it … and many of mine just haven’t, because it’s a constant evaluation on a meeting-to-meeting basis because it’s a very small board or an early-stage company or something … but in any mid-stage or later-stage company of any size whatsoever, it’s part of the process. It’s part of upgrading your governance standards within the company for the benefit of the shareholders, and as such it’s a process.
It’s not a one-shot deal. If you’re going to start it, you’re going to be continuing year to year. It makes a lot of sense to have, at least in next year’s evaluation, to say, “Okay, how did we do in following through and providing feedback, and providing guidance and suggestions to all of the recipients of the feedback, whether it’s management, whether it’s us, our overall process, or whether it’s us individually? How did we do in providing the feedback, and how did we do in reacting to it and following up on it?”
Good leadership might even have a mid-term on that. Six months later they may say, “Let’s just do a sanity check here. How many feel that they are getting something out of it? Any suggestions? Did you get feedback?” You can track it and measure it and then improve it the next year. That would be … what I would say in that situation is it’s probably not going to be perfect the first year, but there’s a lot of ways of improving with even doing some research on how other companies do the feedback, that might be better for us than what we’re doing now.
Jeffry: Along to that last point, is this … I guess, Catherine, I’ll start with you and then maybe flip it back over to Dennis … but is this a topic where you see a lot of benchmarking among companies, where they’re really interested in, “Well, what do other companies of my size or my industry or my structure, how do they handle this process?” Is that part of what goes into the planning?
Catherine: I haven’t seen benchmarking on the process per se. Where I have seen benchmarking that feeds into some discussion on board effectiveness or board evaluations has been more in terms of the metrics that are easier to know. For example, the National Association of Corporate Directors has information on average number of meetings, board meetings and committee meetings, and meeting length, from their annual survey. We’ve seen benchmarking in terms of that, sometimes benchmarking in terms of peers around board size or committee size, so it’s been more the benchmarking on some of the harder statistics.
Jeffry: Dennis, as such an experienced board member, do you get asked your opinion on best practices? “What do the other boards you’ve been on do, or what do you think we should do?” Is that something that people … is that an extra burden people put on you?
Dennis: Not necessarily me, but in the course of just the kinds of things that executives attend and where they go, and even if it’s a meeting with a customer at a certain level. I do see a lot of discussion about, “Well, I’m on this board,” and they say, “Oh, really? Well, how do you do this or how do you do that?” There is that, kind of on a professional level among directors with other directors, but I haven’t seen it formalized.
Particularly on the area of evaluation, that’s not something that I get asked about a lot. There are other things, like stock option plans or financing alternatives or succession or just a whole bunch of different things, or, “How are we going to get rid of that CEO?” There’s all kinds of things that people do ask me, but evaluations is not one of them typically.
Jeffry: It’s funny. People ask me that all the time too.
Catherine: Actually I want to make one point. We’ve been talking about board evaluations, given the intense interest we know our directors have and our management teams have on them, but I just want to make sure people are aware that this is also an area where investors are getting more interested. Earlier this month, the Council of Institutional Investors issued a short paper calling on more companies to provide more disclosure about how the board’s evaluation process works.
It looks like CII is on a path to try and encourage more, and they quote and provide examples of how some companies in other countries provide disclosure about board evaluation processes. That’s one area where, if they are successful at getting more companies to provide that kind of disclosure, that could be another source of your ability to benchmark how you are doing versus other companies.
Jeffry: That’s great stuff.
Dennis: I recently was in a seminar with an expert in this area from Canada, and Canadian companies, it’s a requirement to have an evaluation. The other thing I’d say to Catherine’s comments is notice what she said, was the investors want to look at the board’s evaluation process, not the specifics. That goes back to that liability concern.
Jeffry: Uh-huh. Very interesting. Well, I know that we’re getting down to the last few minutes, and I’m sure that there are questions from the audience.
David: There are indeed, Jeffry. I’m going to try and condense some of these. One is, “There was some discussion about using outside entities to conduct the evaluation. Can you speak a little about the relative merits of using a law firm, an audit firm, a governance consultancy or other model for outside facilitation?”
Dennis: Well, I can say that my response would be that it’s really a matter of what would suit that particular company and its board best. If they’re more concerned about confidentiality or whatever, they might pick a law firm. If they’re more concerned with the range of options and the techniques for conducting the evaluation, they might pick a firm that specializes in doing board evaluations. There’s a number of consultants.
There’s no one answer for everyone, but there are alternatives that you can look to with a little bit of research, that maybe they only assist you in preparing and designing the evaluation and they don’t assist in consulting it, so it’s not one size fits all. There’s going to be a methodology that will fit what you can afford, what the company can afford in both money and time, and what would work best with that set of people.
David: Okay. Given our time constraints, there are several questions. These will be presented to all of our presenters for follow-up after the webinar. I’d like to close with one big question that might be the result of some of these evaluations, and this is asking for advice. How does a board that has never removed a director do it for the first time?
Dennis: Well, Jim Kristie would tell you to go back to the archives and read the article that I wrote on how to fire a director. It ranges all the way from the CEO or the chairman just taking somebody aside and saying, “Hey, look, So-and-so, it’s time to move on,” all the way to a situation … I just had a discussion this morning in a breakfast meeting about how to remove a CEO, and it’s quite possible that they should have their law firm there in the room and a police officer standing outside the room when they inform this gentleman that it’s either this or this, “Take your pick, but you’re leaving anyway.”
It can range all over, and it depends on the stakes the person has in the company and the whole things, but there are techniques that can try and deal with it as best as possible. That’s a whole seminar in itself.
David: Jim, for you to close.
Jim: Okay, good. Thank you, David. Gosh, I harken back to a comment that was made earlier. I think, Dennis, you first brought it up, was the element of courage. I think somewhere on the spectrum of courage, it is an important impetus to doing a director evaluation and getting some results and some value from it. That’s my two cents.
I want to thank, on behalf of the “Directors & Boards” team, I want to thank Diligent Board Member Services for sponsoring today’s webinar. We’ve had several very successful webinars with Diligent this year and last year, so I’m delighted to again present the firm and its expertise to the audience. Thank you, Jeffry, for moderating this informed briefing. Thank you, Dennis Cagan and Catherine Bromilow, for providing your distinctive insights and guidance, and yes, stories. Dennis, you do have great stories.
I thank our listening audience for your time and attention to this presentation of key issues in board evaluations. Please keep tuned in to your emails for our future programs on this. I think we still have much more coverage we can do on this topic and on other topics. Degma, let me turn it over to you to close us out for today.
Degma: Thank you. This does conclude today’s webcast. We thank you for your participation. You may disconnect your lines at this time, and have a great day.
...wanting to use the evaluations with your board members as a way of working with the boards
Executive Vice President of Sales
to make key decisions and really improve the overall effect of this as a board.