Board Evaluations Are a Recent Phenomenon

The Great Recession of 2007-09 forced boards to re-evaluate virtually everything about their processes, including the need to evaluate their own performances as individual board members on an annual basis. 

There Are Many Good Evaluation Approaches

From comparing your board’s performance to its own past performance, to comparing your board to other boards, to being mindful of board trends in your industry, consider several best practices. 

Don't Forget About Diversity

Diversity comes in many forms, from gender to racial/ethnic background to diversity of thought. What’s most important is to ensure your approach to diversity, equity, and inclusion leads to better board performance.  

Webinar recap: Donna Hamlin Ph.D., Founder & CEO of BoardWise, shares guidance and strategies for board evaluation and annual planning for 2023 and beyond.

Design Lines

October is nearly over. So if you’re like most boards, your 2023 planning is now underway. 

First, you must take an honest look at past performance. This involves celebrating wins and identifying areas for opportunity. In addition, you must understand the challenges that may be approaching in the next 12 months.

According to Donna Hamlin, Ph.D., Founder & CEO of BoardWise, this requires board directors to stay current, as things change overnight. But it also requires them to be like Yoda. “We have to understand the forces in play that are going to impact us and understand a greater context for the work we’re doing,” she said.

In October, Donna joined us for a discussion on the evolution of board evaluation – and how boards can plan for the coming year and beyond. Donna explored such topics as how to:

  • Objectively evaluate board and director performance and seize on opportunities for improvement
  • Apply practical futurism despite frequent and rapid change events
  • Optimize collaborative decision-making and planning by understanding the differences between problem-solving personality types

In this blog, we’ll share the highlights from this session.

The History of Measuring Board Performance

A couple decades ago, board evaluations weren’t a common practice. That all changed during The Great Recession of 2007-2009.

Prior to that, there was a widespread belief that systems would take care of functionality and contributions at the board level. There were 5 common philosophies on governance, which varied by region. These philosophies affected how organizations set structure, regulation, and compliance.

  1. Checks and balances: Distribute power to avoid abuse
  2. Behavior: Define clear ethics and moral rules and hire with integrity
  3. Market discipline: market pressures improve governance
  4. Rules and processes: Apply strong rules and processes and monitor
  5. Market ordering: Fix the overall system within a marketing sector and governance will improve (i.e. overhaul the banks)

Before the Great Recession, governance was primarily evaluated with a focus on checks and balances and market discipline. After the collapse, everybody shifted toward behavior, market ordering, and rules.

The collapse was proof positive that the way things were being done wasn’t working. As such, boards across the globe scrambled to make changes and determine which ones worked – and which ones didn’t. During this time, boards made changes to structure, accountability, process, leadership, skills and competencies fit, and efficiencies, among others.

At the same time, there was an announcement that organizations should be conducting board evaluations. Early reactions to this announcement varied from avoidance to backslapping and everything in between.

Board Performance Measurement is Evolving

We’ve moved far from that indigent stage. Today, board evaluations typically take 1 of 2 styles:

  1. Personal best: Annual evaluation comparing incremental progress over time.
  2. Normative best practices: Annual evaluation comparing performance to external best practices.

A best practice today is to use an independent third party to conduct board evaluations – with a no-conflict-of-interest approach.

These evaluations look at data to see how a board is performing in a number of different areas, including (but not limited to):

  • Board access to information
  • Board composition
  • Board meeting quality and effectiveness

Increasingly, evaluations are tying these factors to corporate performance metrics and industry and global best practices.

But it’s no longer enough.

Board content is expanding to include things like ESG, cybersecurity, climate change, long-term strategy, and stakeholder relations. Because of the expansion of the content, more board talent is needed. As Donna put it, “The composition of the talent has to match with the expansion of the load.”

As boards grow, board meeting frequency increases, and committee work changes, organizations must adapt their approach to board evaluation.

Boards Must Always be Trend-Spotting

Knowing the facts isn’t enough. Donna reminded us that all directors must understand the forces at play. As Donna puts it, “You have to be Yoda.”

There are many forces at play, including:

  • Meeting expectations of sophisticated shareholders and stakeholders (including the planet!)
  • Slower speed to market
  • Stricter requirements to access institutional investor funds
  • Fuller formal transparency
  • Tighter regulations and reinforcement
  • Data management related to ESG
  • Stretching of governance accountability

These factors require boards to reframe what they’re doing. As Donna put it, “The whole idea of looking at board evaluations is more existential than it ever has been before.”

She’s not alone in this thought. Just earlier this month, the National Association of Corporate Directors (NACD) released its Future of the American Board Report, which reclassifies the principles we should be using to reframe what we’re doing in governance.

“We have to think about things in a much greater context than we have in the past,” Donna said.

Four Practices to Consider

So, what does this all mean for boards? According to Donna, “It means we have to have more talent, we have to have more expertise to cover more topics, and we have to create more available time to do the work.”

Boards must come together to explore:

  • Redesign
  • Planning for work assignments
  • Ongoing education
  • Attracting and retaining qualified directors
  • Reframing governance for the future

“We are moving from ‘Hey, let’s check on 18 variables to see how we’re doing,’ to oversight in a greater context for our duties as wise directors for long-term views to a much broader audience,” Donna said.

With that in mind, Donna shared 4 practical ideas for boards to consider:

  1. Create an educational program so directors can get the education they need.
  2. Set up a strategic planning session offsite for boards to consider how they’re doing and the best ways to forge ahead.
  3. Assign directors as mentors for executives in management to enhance working relationships
  4. Review global governance best practices to get ideas for adoption.

Diversity Makes Good Boards Great

Oftentimes, boards are evaluated on such factors as attendance, team size, and capacity to perform. But what factor is most closely tied to performance?

According to Donna, “The strongest variable is team functionality. Are we robust? Do we have a culture that’s respectful, trustful, and candid?”

This isn’t something that can be managed as easily as event attendance. As Donna said, “It’s more about the emotional traction that’s going on in the group. It’s more about psychology than ever before.”

Boards must focus on diversity to achieve the right mix. While diversity is often thought of in terms of gender and cultural background, boards should also consider diversity of thought.

“The way we solve problems isn’t always the same. If we increase diversity of thought, we get more impact,” Donna said.

The value of focusing on diversity, equity, and inclusion (DEI) can’t be denied. Research tells us it leads to outcomes including increased corporate valuation, access to capital, and retention of talent – among other things.

Justin Trudeau, Prime Minister of Canada, is quoted as saying “Diversity is a fact; inclusion is a choice.” However, Donna suggests a slight amendment: “Diversity is a fact. Inclusion is a competency.”

Boards must incorporate DEI metrics into their evaluation process. Gaps can be identified – and then recruitment efforts can focus on closing those gaps.

Interested in learning more about the role of technology in improving board effectiveness? Register for our next Atlas Leadership Webinar, Technology as Your Board’s Advantage, featuring IBM Fellow Nick Donofrio. The first 50 attendees will receive a free copy of Nick’s new book, If Nothing Changes, Nothing Changes.

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