Ownership is the Key to Self-Evaluation

Audit committee evaluations are mandated by the NYSE and generally recognized as a corporate governance leading practice. But what if the self assessment process itself doesn’t pass muster? According to the recent ACI/ NACD Annual Audit Committee Member Survey, only 28 percent of audit committee members are “very satisfied” that the self-evaluation process enhances their committee’s effectiveness, down from 37 percent in 2006.

    Some fear that self-evaluations may pose a litigation risk or offend individual committee members whose performance may be assessed. Others hold concerns that the audit committee does not know how to conduct the evaluation or that the process is too time-consuming—or simply that some committee members may not take it seriously. So how can audit committees improve self-evaluation? Recognizing that it is an examination of the oversight process and not just of the audit committee, we offer the following suggestions:

    Establish Realistic Objectives. Consider the self-evaluation an ongoing process critical to the committee’s continuous improvement. The objective is not to fix all the problems now or create a world-class audit committee overnight. Rather, it is to identify opportunities to improve the committee’s effectiveness in key areas.

    What is realistic? Generally, the focus should be on broad oversight areas, such as: Is the committee devoting sufficient time to the most important issues? How can management better support the committee so that meetings are more productive? Other topics might include composition and overall effectiveness of the committee. The evaluation will be more productive if committee members believe the objectives are realistic and achievable, and agree from the outset on what activities are to be evaluated.

    Assign Ownership. If the self-evaluation is viewed as a check-the-box exercise, it will be just that. Establishing a process owner can help everyone see the value in the effort so they will participate fully. The owner should be someone who perceives self-evaluation as an important tool in the committee’s continuous improvement, and who has the independence and credibility to encourage members to take the process seriously.

    A respected audit committee chair or lead director should spearhead the process, relying on the assistance of legal counsel or an outside consultant, where appropriate.

    Get Buy-in. The self-evaluation process typically has three major components: initial fact gathering, discussion about opportunities to improve the committee’s effectiveness, and development of an action plan. To get buy-in, members need a detailed understanding of the process. Among the questions to be considered: How will the initial feedback be obtained, and from whom—committee members, other directors, the CFO, the internal and external auditors, or the CIO? How will the feedback be used? Who will administer the process? Should an outside consultant be engaged as a facilitator?

    The format for obtaining feedback may include one-on-one interviews or questionnaires. As one audit committee chair observed, “The more detailed the questions, the less effective they are in soliciting good feedback.” Often, dialogue is more effective than a questionnaire. Given the legal implications of evaluations, it is important that counsel be involved.

    Follow-up is Essential. At subsequent meetings, the status of the action plan should be a regular agenda item, and progress toward timely completion of the action plan should be monitored.

Tim E. Bentsen is the Southeast area managing partner at KPMG . Caryn Bocchino is a senior manager at KPMG’s Audit Committee Institute.