Maximizing Board Effectiveness through Comprehensive Evaluations

Board evaluations offer a strategic advantage to enhance an organization’s corporate governance. They provide valuable insights into the effectiveness of the board in fulfilling its duties. As reported in the 2023 Governance Pulse Report, 84% of board members, executives, and governance professionals expect increased or sustained scrutiny and time requirements for board service over the next year. Due to this, boards may need to assess whether they are prepared to meet these demands. This requires a review of board composition and culture, relations between the board and management, expectations set for performance and compliance, and quality of oversight of organizational risks and opportunities. Additionally, it is important for those in positions of board leadership to convey to board members the significance of their engagement with the evaluation process and the way their insights will be examined and shared through leading practices to improve board evaluations.

Leading Practices to Improve Board Evaluations

Annually assess the full board. An annual board evaluation is a best practice that enables alignment on upcoming board priorities and reinforce a culture of continuous improvement. Boards that do not conduct an evaluation annually may miss opportunities to enhance the quality of corporate governance, or may be unprepared to deftly manage sudden changes, such as board or management turnover, new stakeholder pressures, or evolving regulations. An annual evaluation process allows board members to provide candid, thoughtful, and actionable feedback on the board’s performance, as well as identify high priority governance areas.

Evaluate board members individually.  Conducting individual board member evaluations is a key method to derive greater value from members individually, as individual board member behaviors can impact the board’s culture and effectiveness.  Through this type of individual evaluation, board members may receive constructive feedback from peers regarding their contributions and performance, which expands on general group feedback gained through the board evaluation. Targeted individual feedback has dual benefits. First, it provides opportunity to address undesired, unproductive, or disruptive behaviors, which may risk undermining the cohesion of the entire board. Second, it identifies development opportunities for each board member that can enable them to leverage their knowledge and skills more impactfully, resulting in stronger board dynamics and added value through fulfillment of board duties.

Incorporate quantitative and qualitative components into the evaluation. Two common methods to facilitate board evaluations are through questionnaires and/or board member interviews. A questionnaire with both quantitative and qualitative questions facilitates the review of statistical data and open-ended commentary from board members. It can also provide comparative results across governance responsibilities, and tracks progress toward objectives over time. Interviews provide an opportunity for board members to elaborate on their observations and recommendations, including sensitive topics, which can add depth and breadth to the evaluation process. These evaluation methods are sometimes performed independently; however, when questionnaires and interviews are combined in one process, they maximize the dynamic quality and impact of the evaluation.  It is critical to maintain strict confidentiality and anonymity of responses for both the questionnaire and interview-based processes. This enables board members to respond with candor and maintain trust in the integrity of the evaluation process.  While the questionnaire process should be viewed as an annual exercise, Nasdaq’s Global Governance Pulse found that board member interviews are typically conducted every other year or once every three years.

Identify knowledge gaps and education opportunities.  A strategically created board evaluation may reveal gaps in specific areas of expertise or skill sets within the board, including technological, financial, or sector-specific knowledge, and help determine opportunities for the education of board members. As demands on boards continue to expand, it is even more important that boards prioritize strategic areas of education for the board, its committees, and individual members.  Well-informed board members are typically equipped with the necessary knowledge to fulfill their responsibilities, navigate complexities, and drive strategic decision-making.

Define action plans from the evaluation results. A Nasdaq survey found that only 7% of governance professionals indicate that their board evaluation process results in specific action plans to address opportunities, risks, and weaknesses. But board evaluation best practices indicate that merely presenting the evaluation results is insufficient. If the results are presented without any meaningful discussion or determination of follow-up actions, board members may feel their contributions to the evaluation are unvalued, leading to potential disengagement and reduced participation in future meetings, discussions, and evaluation processes. Conversely, a board that engages in a thorough discussion of key findings and develops action plans can better understand the board’s unique characteristics, strengths, and areas for improvement. This type of board action plan development and implementation enhances board effectiveness and fosters a culture of self-awareness and a growth mindset.

Leverage third-party providers. It is common practice for board evaluations to be conducted internally, which can present limitations as it puts additional strain on the resources of in-house teams or board leaders. The implicit bias present when an evaluation is conducted internally can cause board members to withhold insights or skew responses for fear of retribution or negative perception. Additionally, the process may not be as well informed on current governance practices. These limitations can be combatted through facilitation by a knowledgeable and trusted third-party. The independent and objective nature of a third-party facilitator encourages candor and transparency as the board navigates sensitive or challenging topics. Experienced third-party advisors also bring value through the breadth of their work withmultiple, diverse boards, which can ensure the board maintains alignment with leading governance practices.

Complement board evaluations with a CEO evaluation that incorporates management feedback. Robust board evaluations set the tone at the top for a performance-based culture and should include a component that assesses the board's relationship with management. The CEO evaluation process is a complementary process to expand on how the board sets expectations and maintains its relationship with the CEO and management. CEO evaluations ensure that the CEO’s performance drives the organization’s strategic objectives and is aligned to the board’s priorities. It also helps promote accountability, transparency, and growth. A board should also consider whether and when to include the CEO’s direct reports in the CEO evaluation process. Including these reports provides a more holistic understanding of the CEO’s leadership and how they drive board and management relations. Additionally, it gives the board and CEO a more informed understanding of the CEO’s managerial style and potential blind spots, serving as an effective way to address underlying issues before they escalate and support developmental growth as the CEO moves throughout their tenure.

By evaluating the board, individual board members, and the CEO on a consistent basis, organizations can enhance understanding and transparency of their governance practices, frameworks, and policies. This enables the board to measure progress towards the execution of strategic goals, monitor risks, and create value for key stakeholders. To learn more about Nasdaq Board and CEO Evaluations, visit Board Evaluations.