Board Assessment – A Critical Part of Good Governance

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

In 2002, the congress passed the Sarbanes-Oxley legislation that defined and regulated the liabilities and responsibilities of directors of publicly held companies. Since 2002, directors of privately held companies have increasingly come to realize that failure to comply with the spirit, of not the text, of the legislation is in both their and their company’s interest. One particular requirement of SOX has gotten a lot of attention – board assessment.

Every publicly traded board of directors must conduct board assessments to comply with stock exchange listing rules. Doing the bare minimum is one option, however doing the bare minimum is dangerous and causes boards to miss an important opportunity to strategically plan for improvement. Boards that address issues of leadership and strategy and are not afraid to work through conflict provide the best governance for their organization. Leadership styles and governance models that encourage both personal growth and leadership development will seize the opportunity for improving performance a deep and thorough assessment of corporate leadership will bring.

Sarbanes-Oxley imposed regulations led to a new way of corporate governance. It provided new guidelines for directors for publicly traded companies. These rules were also adopted by stock exchanges and many progressive organizations that did not fall under the Sarbanes-Oxley Act of 2002. One requirement under Sarbanes-Oxley provides for succession planning – generally done by a Succession committee.

Succession committee directors sit on one of the most important advisory boards established by an organization. Succession committee’s powers include the ability to hire outside advisers and to prohibit outside advisers from engaging in other advisory work for the organization.

The board is responsible for management’s annual performance assessment prior to receiving incentives and final compensation. CEO’s are accountable to the full board of directors for executing the strategic plan and for the performance of the company. Boards providing professional governance will also conduct a thorough assessment of their own performance and complete a strategic plan for talent recruitment, retention and leadership development for the board.

Board assessment begins with a through review of the board’s previous year work and comparing it to the goals set for the current year. It is essential determine if progress has been made or if the results were either stagnant or negative. The report should include:

• Attendance report
• Board of Directors meeting minutes
• Committee meeting attendance reports
• Committee meeting minutes
• Committee assignments and composition

A poorly designed assessment can damage board of director’s morale. Internally designed and administered ones are particularly vulnerable. That is why I recommend that assessments administered by an independent organization. The cost is minimal but the accuracy and usefulness of the resulting data is considerably more valuable.

One of the most important issues a board must agree on is confidentiality. If the board agrees, the Succession committee should not conduct the assessment of the board a cross section of directors should be assigned to conduct the study. One “best practice” is to assign one member from each committee to the Assessment committee and allow the committee member so elect a chairman. One practice not advised is to allow the chairman of each committee to form the Assessment committee. Composition of any committee is a key to performance.

The board must decide how to handle the results of the assessment. If an independent organization conducts the assessment, I generally present the results to the executive committee of the board – then to the full board. In situations where are significant issues, I recommend follow-on one-on-one meetings with individual directors.

On more than one occasion, I have organized a program designed to address issues identified in the assessment. Peer review can be a sensitive issue with both the reviewer and the director being evaluated feeling uncomfortable, so these steps involve with discretion and sensitivity to the people involved. However, feedback is essential for an assessment to yield positive results. Effective assessments may lead to coaching and leadership development programs for the board. The objective of these – and the assessments – is to improve board performance.

Good governance is not an easy task. Directors find it difficult to maintain the appropriate balance between daily and long-term goals. The properly designed assessment program can yield allow the board to see their performance and interaction among directors. A properly designed assessment will look at how a board functions and gets work done. A bare-minimum assessment can give the board a false sense of security and hinder any attempt at improvement.

My own experience with board assessment programs is that they often turn on the lights in the room. I remember presenting the resulting data on one such assessment. We held a full board retreat on a short cruise out of Los Angeles. The company was public with around six hundred million in annual revenue. I presented the results of the survey at the first session – shortly after we sailed. Over a two-hour period, I laid out the findings, identified the strengths and weaknesses of the board and recommended areas for discussion. It was clear that lights were going on all over the room. Questions were limited to requests for clarification but it was clear even from them that everybody was taking it in. After the session ended, the Chairman said to me “you know you have just saved us a full day of frustration. Normally we would argue about what the problems are and have little time to figure out what to do about them. Now, there is little question what the challenges are – we can get down to working on them.”

Board assessments are a critical part of good board function. As inexpensive as they are, they are money well spent no matter what the size or ownership of the company.

© Dr. Earl R. Smith II

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Related Articles:

• Good Governance and Delegation
• Leadership Development – Good Board Governance
• Succession Committee Imperatives
• Assessment Programs – Important Governance Tools
• Board Assessment: Raising Touchy Issues

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