Board evaluation increasingly a 'real time' process, EY says

Almost a quarter (23 percent) of Fortune 100 firms say board evaluation is now an ongoing process and something that happens beyond the formal annual evaluation, according to EY.

This is an increase from just 9 percent in 2018, EY notes, adding that this ‘real-time evaluation’ allows companies to be ‘timely and agile’ to address issues more quickly and avoid a deepening of problems, as well as allowing ‘continuous improvement.’

In addition to increasingly evaluating board performance outside of a formal once-a-year process, EY says companies are more likely to talk about the actions they take as a result.

Back in 2018, 21 percent of Fortune 100 firms disclosed the actions taken as a result of their board evaluation, a figure that has climbed to a third in 2021. EY notes, however, that these disclosures are ‘typically at a high level.’

‘This increase is responsive to increasing investor interest in the results of a board’s evaluation process,’ Stephen Klemash, EY Americas Center for Board Matters leader, writes in the report, entitled How boards are strengthening their self-assessments and related disclosures. ‘Articulating key outcomes and specific areas of focus for improvement, including changes to the board evaluation program itself, allows boards to demonstrate the rigor of their evaluation programs and their commitment to effectiveness in ways that can foster investor confidence.’

EY says that following conversations with governance specialists from more than 60 institutional investors representing more than $38 tn in assets under management, some trends emerged as to what steps they wanted to see taken when it comes to board assessments in order to boost their effectiveness, with a resounding call for greater diversity.

EY says around 40 percent of investors ‘expressed a desire for boards to have stronger discipline around turnover in the boardroom’ but said board refreshment is both ‘to better align board expertise with strategy’ and to meet investor expectations for board diversity.

The report also notes that around a third of investors are focused directly on diversity ‘across numerous dimensions,’ specifically including race, ethnicity, gender, skills and experiences.

‘Investors were interested in how boards are staying informed and receiving ongoing education to meet evolving oversight demands and navigate a rapidly shifting risk landscape,’ Klemash says. ‘A point we heard consistently is the opportunity for boards to access more external expertise to help management look forward and see how external trends and stakeholder expectations are changing over time.

‘Some investors also encouraged boards to assess the effectiveness of management reporting to the board, including the usefulness of the data and dashboards provided in enabling strategic oversight.’