Getting results from board evaluations

When Elaine Weinstein, executive vice president of Mullin & Associates, served on KeySpan’s board, a self-evaluation of the board revealed that some directors didn’t feel comfortable contributing because they were so intimidated by chairman and CEO Robert Catell’s reputation as an industry legend. After learning the results of the board evaluation, Catell, who Weinstein notes was widely admired for his inclusiveness, made an adjustment – he took greater pains to personally ask directors for their opinions. The evaluation uncovered what was behind the directors’ silence and gave the board chairman new insights for improving overall board effectiveness.

The evaluations also revealed that some directors felt they lacked the technical knowledge of the energy sector necessary for them to contribute fully, says Weinstein. KeySpan therefore identified internal experts to help get newer directors up to speed. Weinstein, who now sits on the boards of the Brooklyn Academy of Music and the Nature Conservancy, maintains: ‘Board evaluations have tremendous power, if done well.’

Although board evaluations are mandatory for NYSE-listed companies, they’re still relatively uncharted territory for many, and getting them right isn’t easy. According to a 2009 survey by Corporate Board Member and PricewaterhouseCoopers, 46 percent of directors felt that board evaluations were effective at improving board performance, while one in ten directors found evaluations ineffective.

Even though the board evaluation process may need some fine-tuning, the general consensus is that it has tremendous potential. Sylvia Groves, founder of Calgary-based GG Consulting, helped Nexen do its own internal evaluations when she was chief governance adviser there.

‘If people are thoughtful as to the approach, I think a good evaluation can add value in almost any circumstance and at any company,’ says Groves. ‘In bad times it can be instrumental in helping to clarify what’s really happening, and in good times it can help to make sure nothing is starting to slip off the page.’

Why do board evaluations matter?

At some companies board evaluations are perfunctory, merely fulfilling a regulatory imperative. However, Laurence Stybel, vice president at Board Options in Boston and executive in residence at the Sawyer Business School at Suffolk University, believes board evaluations are especially worthwhile for companies that want to walk the talk when it comes to a continuous improvement program. ‘If the board of directors doesn’t subject itself to ongoing process improvement, how can the culture take it seriously?’ he asks. ‘The board should lead by example.’

Stybel also points out that evaluations benefit cultures in which collegiality is prized and there’s no mechanism for confronting fellow directors. In instances like these, an evaluation may be a way to nudge a disengaged director towards retirement – without making enemies.  Holly Gregory, a partner at Weil, Gotshal & Manges, has also observed this phenomenon. ‘Sometimes boards don’t move people along as fast as they should because of the cultural issue,’ she explains. ‘It’s hard to vote someone off the island after you’ve worked with them for a while.’

Although board evaluations are sometimes used to send difficult messages, they can also spur some very practical adjustments within the boardroom. Dannette Smith, secretary to the board at UnitedHealth Group, notes that her company has used director comments to clarify some of its board materials and identify new topics that directors wish to have addressed at meetings. In some instances, creative solutions have emerged from directors’ feedback.

Asking the tough questions

Companies face myriad decisions around how best to conduct board evaluations. Most companies use either paper or web-based questionnaires, interview directors face to face or by phone, or combine these approaches. Each year, for instance, Winn-Dixie’s board evaluates its own performance, as well as that of the firm’s committees and individual directors, through a written questionnaire, explains Tim Williams, general counsel and corporate secretary. After the results are compiled, the company holds an executive session of the independent directors to discuss the full board evaluation.

‘Our evaluation process has not resulted in major changes in either board structure or operation, but it has raised awareness of matters of interest to directors,’ Williams says.

A good evaluation hinges on questions that are designed to elicit candid and useful information. Weinstein lists some excellent questions she’s encountered: ‘Do you feel that you can contribute fully and comfortably? Do you have recommendations for how you would change the operations of committees or of the board as a whole? Is there enough time for you to get to know people and socialize?’

Often, how the evaluation is conducted depends on the board’s culture. ‘If a board has a culture of being open and sharing perspectives, a confidential questionnaire or interview process may not be needed every year,’ Gregory says. ‘Sometimes I will simply lead the board in a discussion of what they think they’re doing well and what they think they could be doing better.’ She also notes that boards should consider varying how they do their evaluations from time to time, sometimes taking a deeper dive and sometimes examining with a lighter touch.

Many practitioners recommend conducting live director interviews at least once every few years.  Although the majority of companies do board evaluations via questionnaire, Susan Boren, a partner and head of the North American board assessment practice at Spencer Stuart, believes the real value lies in the interviews.

‘Boards that have been doing evaluations for several years have become disenchanted with the paper-and-pencil questionnaire,’ says Boren. She maintains that while interviews are more expensive and time-consuming, they truly help boards improve their effectiveness.

Some directors appreciate a process that’s facilitated by an outsider. K. Sue Redman, a board member at Apollo Group, notes that internally administered board evaluations are ‘a good mechanism for addressing high-level board issues and opportunities’, but she believes even more value could be realized if the evaluations were administered by a third party. ‘On a board, everyone is your peer, and good board culture requires collegiality. Internally administered board evaluations generally do not address individual board member performance.’

No matter what method is used, the conversation about how to conduct board evaluations is an important part of the whole process. For instance, UnitedHealth Group has used different formats to its advantage during different years. Last year, Smith says, the board did evaluations via interviews conducted by a third-party facilitator, while the previous year there was a written questionnaire with space for comments.

Each year ‘the board decides how best to conduct the evaluations,’ Smith says, noting that no decision has been made about the format for future evaluations. Smith believes this is ‘proof that UnitedHealth’s directors find evaluations effective’ and maintains that ‘the board is invested in how we’ll evaluate ourselves each year’.

Getting personal: feedback on individuals

Peer reviews don’t always run so smoothly. ‘There are many horror stories of individual director evaluations going awry,’ says Susan Shultz, president of The Board Institute, a Phoenix-based company that has created a web-based board evaluation process. Some boards have been rumored to fall apart, with directors resigning en masse, after peer-on-peer evaluations. Nonetheless, Shultz believes that these assessments are valuable, so long as they’re done well.

The hallmarks of a well-run peer-on-peer evaluation are anonymity and a moderator who is capable of speaking with directors candidly but respectfully. As a third party who conducts board evaluations, Stybel often approaches the chairman of the nominating and governance committee for advice on how best to communicate a message to each director and for insight into any special sensitivities.  ‘Our motto,’ he says, ‘is ‘No surprises’. We would not say anything to the full board before discussing the issue privately with the individual board member concerned.’

Gregory estimates that only around 20 percent of boards engage in a formal process around individual director evaluations. However, Nicole Sandford, national leader for the governance services practice at Deloitte & Touche, sees individual evaluations as a growing trend.

‘Five to ten years ago, no one had the stomach to do peer assessments,’ she says. ‘The problem is that peer-to-peer analysis isn’t done until the dynamic is too messed up, and it gets everyone even more upset.’

Sandford believes that the key to success is conducting individual evaluations on a regular basis. ‘We have never had anyone viscerally offended by it,’ says Sandford. ‘These are grown-ups. They can take it.’

At Eaton, a Cleveland-based diversified power management company, each director is evaluated by his or her peers before being re-nominated to the board. Tom Moran, senior vice president and secretary, says the entire board is invested in the evaluation process, and that the board takes the assessments of both individual directors and the full board and all of its committees to heart. In his three years at Eaton, directors have retired, but none have failed to be re-nominated. Now that Eaton is in the process of declassifying its board, however, the peer-to-peer review process for directors facing re-nomination could change.

Turning feedback into action

‘A board should not do a board evaluation if it’s not prepared to act on what is brought up,’ maintains Sandford. Gregory agrees, noting that the most valuable growth happens in the board discussion when feedback is given: ‘The key to extracting value from a board evaluation lies in the opportunity for the full board to discuss the compiled perspectives and consider ways to make improvements.’

How to deliver the messages gleaned through questionnaires and interviews can be the most sensitive part of the whole exercise. ‘When I prepare to talk to a board about the perspectives that have been shared with me through questionnaires or interviews and must deliver something critical, I ask myself: how can I deliver this message so they’ll be able to hear it and act on it in a positive way?’ says Gregory. ‘It can be very delicate, but when it works well I’ve had boards say, These have been some of the best discussions we’ve had.’

Beyond the insights gleaned from the evaluations, the exercise itself can bring boards together and forge tighter bonds. ‘Just the fact that the board sits down and discusses effectiveness is a huge breakthrough,’ says Shultz. She concludes: ‘Evaluations are really a way to deflect risk. You’re showing that you’re doing the right thing.’