Companies increase board evaluation disclosures, survey finds

Major US companies are increasingly focusing on board and director evaluations and reporting around those efforts, according to a new survey.

The study by the EY Center for Board Matters (CBM) of proxy statements filed by Fortune 100 companies finds that almost half (48 percent) this year disclosed that they conducted individual director evaluations in addition to board and committee evaluations, up from 24 percent in 2018 and 39 percent last year.

‘While board and committee evaluations have long been required of all public companies listed on the [NYSE] and are a best practice for all public companies, this growing momentum around individual-level assessments is new,’ writes report author Stephen Klemash, EY Americas CBM leader. ‘By more directly addressing questions of director performance, individual director evaluations may raise the bar for clear introspection, respectful candor and healthy dissent.’

But many companies that report conducting individual director evaluations do not say whether the assessment involved peer evaluation, director self-evaluation or both: 29 percent say the individual director evaluation includes peer evaluations, an increase from 10 percent in 2018, while 11 percent report that it involves self-evaluation, up from 5 percent two years ago.

Almost a third (31 percent) of companies this year report using both questionnaires and individual director evaluations, continuing a gradual increase in the numbers doing so from 26 percent in 2018 and 29 percent last year.

Klemash welcomes the use of questionnaires as a method that can ‘elicit thoughtful qualitative responses or quantitative ratings that can be completed without attribution and analyzed to identify matters for discussion and action on improving effectiveness.’ This information can also be used to target interviews with some or all directors, he adds.

Similarly, boards are increasingly turning to outside parties such as governance advisers or attorneys when conducting evaluations. Almost a third (31 percent) of the Fortune 100 this year used or considered using a third-party facilitator, an increase from 27 percent last year and 22 percent in 2018.

The survey also finds that companies are being more open about what board assessments entail and what effects they have: 53 percent of the Fortune 100 this year disclose in their proxy statements the general topics covered in their board evaluation program, an increase from 40 percent two years ago.

According to the EY CBM report, board assessments often include topics such as agenda and meeting effectiveness, structure, composition, culture and dynamics, the board’s relationship with management, succession planning – a topic that has been particularly top-of-mind this year amid the Covid-19 pandemic – information needs and effectiveness of strategy and risk oversight.

Klemash suggests that boards consider disclosing how assessment topics are changing given emerging areas of focus for stakeholders including talent/diversity and inclusion, ESG initiatives, purpose, crisis preparedness, culture, disruption/innovation, cyber-security & privacy and geopolitics.

Thirty-two percent of companies in the survey this year disclose actions taken in response to board evaluations, up from 21 percent in 2018 and 25 percent last year. ‘This increase is responsive to increasing investor interest in the results of a board’s evaluation process,’ Klemash writes. ‘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.’

According to the report, changes companies disclose include:

• Changing committee structures and responsibilities
• Increasing the independent board leader’s responsibilities
• Changes intended to have board and committee agendas target strategic priorities and allow more robust discussion. Also changes to add presentations on important issues and improve pre-read and meeting presentation materials, as well as board refreshment
• Improving director education and orientations.

In addition, just over a fifth (21 percent) of proxy filers in the Fortune 100 this year report that they address certain evaluation matters and seek feedback on a continuing basis outside of the formal annual evaluation. This is an increase from 9 percent in 2018.

‘Anecdotally, the CBM often hears from directors that board and director performance is assessed in a real-time manner as part of an executive session or at the conclusion of a board or committee meeting. In such cases, boards might consider how disclosure of these practices and outcomes might better reflect their efforts,’ Klemash writes.