Along with this new method of recruiting, here’s the hottest trend in 2010: boards, even those of mid-cap companies, are using director peer and self-evaluations as an additional tool, rather than simply relying on traditional term and age limits to renew themselves. This links with shareholder scrutiny about:
- Why certain individuals may still be serving on the board.
What value individual directors bring to the boardroom and beyond.
“These board evaluations are not director assassinations,” says Dysart of Heidrick & Struggles, who notes that if the evaluations are not done effectively, the concept and results become dysfunctional and unproductive. He and other experts agree that peer and self-evaluations are best done by outside third parties who specialize in removing the emotion from the data and can concentrate on the performance metrics in matrices such as team building, communication ability, and other soft skills that every corporate entity has as part of its internal HR function. But for directors, unlike management and employees, a year-end review should also address soft skills in relation to shareholder return.
Many veteran board members who are aging or terming out are urging their board colleagues to take a focused look at the company’s corporate strategy and use director peer evaluations to align those corporate requirements to the skill sets of potential board replacements. “Very often they will raise their hand and say ‘Hey, I am willing to leave, if it’s the best thing for the company,’” Dysart says.
According to the NACD 2009 Public Company Governance Survey, director peer evaluations are increasingly being used as tools for addressing board composition. In fact, the NACD survey reports that individual director evaluations are used more frequently for refreshing the board than are term limits or age limits: In 2009, individual director evaluation was used by 67.2 percent of surveyed directors, up from 58.3 percent in 2008.
Suzanne Hopgood, director of Board Advisory Services for the NACD, speaks first-hand about the concrete value of director evaluations, not only as an in-boardroom expert who helps boards conduct them, but as a public company board member herself.
“Boards are under such pressure today that they really want the right people with them on the board,” Hopgood says. She says she knows of at least two public company boards, which after undergoing peer evaluations and other metrics, recently came to the same blunt conclusion: “We’re not the right people.” In both instances, the boards determined what skills and dynamics had to be added to eliminate leadership gaps, saying: “We need to take some action. This is a very dynamic time.”
By using skill-set matrices, board members can narrow the board’s needs and erase the emotion that’s often involved. “The value of these board evaluations is helping the board realize where they can make a difference. Will they need someone with branding experience? They may need to look for a different set of perspectives. If it is a cosmetics company, consider whether there should be a woman on the board,’’ Hopgood says.
Then, she says, there is the final question: “Who is the board member of tomorrow?” The skill-set matrix may not be the crystal ball to provide that answer, but will allow for guidance and clarity for future member qualifications.
The NACD Blue Ribbon Commission on Board Evaluation states that director evaluations should answer the question of “Who watches the watchers?”
According to the BRC on Board Evaluations:
- It is imperative for boards to have standards of performance metrics. Without these, the board cannot assess its own successes and failures.
- Directors should be held accountable for the responsibilities for which they are paid. Evaluations make them aware of this accountability.
- NACD does not support the “one-size-fits-all” approach to governance. Good governance is an organic process, and evaluations should relate to the unique situation of a particular company.
- As an evaluation progresses, it must serve one clear objective: to provide guidance that will create superior long-term shareholder value.
- The development of an evaluation process often occurs in stages, building from CEO evaluation to full board evaluation to individual director self-assessment and, finally, to peer evaluations.
- To evaluate itself, a board should compose a description of its specific duties, goals, and objectives, and then set about measuring its performance against those responsibilities.
With this new mainstream method of determining recruitment criteria, board composition can be maintained by tools such as peer reviews and 360-degree feedback that transition a relationship board to a skill-set board committed to do what is best for the corporation and shareholders, regardless of countervailing pressure.
In summary, skill-set boards are the wave of the future and board evaluations are the map to accomplish the change from relationship boards.
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Every company has a unique culture & every boardroom has a different feel.
Small & mid caps trying to grow internationally–they should either seek sitting board members in those target countries or senior executives with strong financial track records, an understanding of applicable laws such as “FCPA,” someone able to forecast new technologies/trends and an ethical background.
These candidates will bring diversity and the new fresh prospective the law intends.