Board Evaluations and Board Dynamics

Thursday, March 16, 2017

Authored by : 

Dave Larcker

The New York Stock Exchange requires that the boards of all publicly traded corporations “conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively.”1 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 in areas such as strategy, risk management, financial reporting, performance measurement, compensation, and succession planning.

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. According to a study by The Miles Group and the Rock Center for Corporate Governance at Stanford University, directors rate their board a 4 on a scale of 1 to 5 in terms of effectiveness (with 5 being “extremely effective” and 1 being “not at all effective”). The vast majority (89 percent) believe their board has the skills and experience necessary to oversee their company.2

Unfortunately, at the same time, respondents express significant negative sentiments. 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 (see Exhibit 1). More attention to individual assessment is a necessary step to ensuring the performance of the group in aggregate. 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.

Read the full Article.

Target Audience: 

Article Topic: