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July 31, 2017 - Directors & Boards

How Boards Can Self Evaluate

Taylor Griffin and Courtney Hamilton

Although the New York Stock Exchange requires every listed company board to “conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively,” the NYSE provides no guidance as to what such an evaluation should encompass.

Evaluations are commonly conducted by the company’s own general counsel or, at best, outside legal counsel. They tend to focus on the board’s constitution, processes, and compliance with corporate governance best practices. An evaluation conducted on this limited basis is likely to overlook essential aspects of board leadership and effectiveness, such as the contribution of individual directors, overall group dynamics, and most importantly, whether the experience and skillsets of board members are well aligned with the current and future strategic needs of the business.

Our research reveals that many board members recognize the shortcomings of their own companies in terms of evaluating and improving boardroom performance. A recent study by Stanford University’s Rock Center for Corporate Governance and The Miles Group yielded significant findings:

● Only one-third (36%) of board members surveyed believe their company does a very good job of accurately assessing the performance of individual directors.

● Almost half (46%) believe their board tolerates dissent.

● Nearly three quarters of directors (74%) agree that board members allow personal or past experience to dominate their perspective.

● And, perhaps most significant, the typical director believes that at least one fellow director should be removed from the board because this individual is not effective.

The reasons for a board member’s ineffectiveness can range from the professional (experience that has become less relevant to the company’s business over time) to the behavioral (either an overly aggressive attitude or, conversely, a lack of active participation in board discussions). To address these and other board performance issues, a robust evaluation should enable a company to assess—and rectify—the behavior and practices of the full board and individual directors.

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