Board evaluations are rapidly becoming a best practice, in part because shareholders demand it. To ensure that directors are better informed about their duties and to regularly measure their effectiveness, a growing number of companies are conducting regular director evaluations.
Typically, the governance committee initiates the board-evaluation process. But there is no such thing as a "one-size-fits-all" board-evaluation template.
"There is really a menu of approaches," says Holly J. Gregory, a partner in the corporate governance practice of Weil, Gotshal & Manges LLP, an international law firm in New York, who has counseled companies on their board-evaluation processes. The choices range from full-board open discussion to committee-centered evaluation to individual board member review, peer review and questionnaires.
"But there is really no right or wrong way of doing it," she says. Instead, boards tend to tailor their approaches to their particular style, characteristics, openness and goals. And often, that may mean choosing a combination of methods that work best.
"Boards must ask themselves, 'What is our purpose in doing this and what do we want to get out of it,' " she says. "The answers will help drive the approach you take."
Lately, Gregory sees more boards moving away from a paper-based, questionnaire approach to evaluation--in part due to liability concerns of having written records of the problems or issues identified.
"One thing really driving how you do evaluations right now is some uncertainty about how discoverable this information is," she says. "This is an open issue and one that boards need to be aware of and put into the mix when they're making decisions on how to evaluate."
Instead, more boards seem to be taking a full-board discussion approach, sometimes facilitated by others, she says.
While there's value in conducting individual board member evaluations, especially if they're tailored to the particular contributions a member is--or isn't--making to the board, Gregory advises to always include full-board discussion as well.
"No matter what method is chosen, you must also do the full-board approach" to get a truly effective meeting of the minds, she says. "After all, the board as a whole is more than the sum of its parts."