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April 3, 2017 - Veritas Executive Compensation Consultants

How Board Evaluations Fall Short

Taylor Griffin, David Larcker, Stephen Miles and Brian Tayan

The New York Stock Exchange requires that the board of each publicly traded corporation “conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively.” The purpose of this exercise is to ensure that boards are staffed and led appropriately; that board members, individually and collectively, are effective in fulfilling their obligations; and that reliable processes are in place to satisfy basic oversight requirements.

Research evidence suggests that, while many directors are satisfied with the job that they and their fellow board members do, board evaluations and boardroom performance fall short along several important dimensions. In particular, board evaluations do not appear to be effective at the individual level. Only half (55 percent) of companies that conduct board evaluations evaluate individual directors, and only one third (36 percent) believe their company does a very good job of accurately assessing the performance of individual directors.
Directors also have only modest satisfaction with boardroom dynamics. Only two thirds (64 percent) of directors strongly believe their board is open to new points of view; only half strongly believe their board leverages the skills of all board members; and less than half (46 percent) strongly believe their board tolerates dissent. Forty-six percent believe that a subset of directors has an outsized influence on board decisions (a dynamic referred to as “a board within a board”). The typical director believes that at least one fellow director should be removed from their board because this individual is not effective.

These are troubling statistics that suggest that many companies do not use board evaluations to optimize the contribution of their members.

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