Board Performance Evaluation - Going beyond self-evaluation

In the echelons of corporate governance, the board of directors is entrusted with steering organizations toward success and accountability. Traditionally, board performance evaluations have relied on self-assessment. However, the limitations of self-evaluation are becoming increasingly apparent, necessitating a shift towards more comprehensive evaluation methods. These methods include external reviews, data analytics-driven reviews, and stakeholder feedback, providing a more objective and expanded understanding of board performance.

The Limitations of Self-Evaluation

Self-evaluations are a common starting point for board assessments, providing a reflective view of performance and areas for improvement. However, reliance on self-evaluation alone can lead to a lack of objectivity, with board members potentially overestimating their strengths or failing to recognize areas of weakness. For instance, a study exploring academic program board self-evaluation found that small group evaluations could potentially influence the objectivity of the reports (Irish Journal of Academic Practice).

The risk with self-evaluation lies in its inherent subjectivity. Board members may unconsciously exhibit bias, overestimating their strengths and underreporting weaknesses. For instance, a survey by PwC found that despite 49% of directors believing at least one board member should be replaced, very few take action, suggesting a disconnect between self-perceived performance and actual effectiveness.

More importantly, most board evaluations focus on how the board members work in various committees, especially the composition, structure of meetings, and assessment of the chairman. The critical question you must ask yourself is: Can all these factors function well, and still, the board fails to deliver? Yes, it is possible. I think board evaluations must go beyond traditional self-evaluations, where board members assess the board's effectiveness and focus more on how it fulfills its board charter and the strategies set for the organization. What is the point of having a well-structured board that fails to deliver on its mandate?

One study examined 250 publicly traded firms in the UK and found no significant correlation between traditional board structure elements (like director affiliation, ownership, and committee composition) and a firm's financial performance. These findings align with similar studies conducted in the US and remained consistent even when different performance measures were applied. Ultimately, these results imply that effective board structures may need to be tailored to individual companies rather than following a mandated, uniform approach as is currently happening with board evaluations.

To show you how this area has been neglected, in the research literature, very few studies have investigated the relationship between board evaluation scores and actual business performance.

Recommendations

Boards of directors play a critical role in the success of an organization. Here's how to refine their effectiveness through focused performance assessments:

• Prioritize Strategy-Driven Performance Evaluation: Instead of relying exclusively on generic competencies, create performance metrics intimately linked with the board-approved organizational strategy. These might include financial targets, market expansion, innovation goals, risk mitigation, or stakeholder engagement. Regularly measure progress against these metrics to gain insight into the board's direct impact on the company's direction.
• Assess Alignment with Board Charter: The board charter defines the board's purpose, responsibilities, and authority. Conduct an annual or bi-annual evaluation against the charter. This must be done by an independent person or consultant who should base their assessments on documented evidence of what the board would have done. Questions for consideration include:
• Did the board effectively oversee strategy development and execution?
• Was the board engaged in key risk management decisions?
• Did the board ensure compliance with regulations and ethical standards?
• Were board composition and committee structures adequate to meet the organization's evolving needs?

• Reframe the Role of Self-Evaluation: Self-evaluations offer value primarily for individual growth. Consider the following:
• Focus self-evaluations on alignment with the established strategy-driven metrics.
• Use anonymized self-evaluations to identify knowledge gaps and inform director development plans.
• While individual improvement is essential, the correlation between high self-evaluation scores and company performance requires further research, as no study has indicated any connection between the two.

• Supplement with External Evaluation (Recommended): To gain an unbiased, broader perspective, consider periodic external evaluations conducted by an independent governance expert or consultant. This provides the following benefits:

• A deep dive into board dynamics and decision-making processes.
• Identification of blind spots or biases that may be hindering the board.
• Benchmarking against industry best practices.

Conclusion:

Aligning board performance assessments with the strategy, board charter, and focused self-evaluation will enhance the board's value contribution. Combined with carefully considered external evaluations, this multi-pronged approach drives boards towards continuous improvement and ultimately contributes to long-term organizational success. Remember, impactful board performance assessment isn't just about compliance; it's a catalyst for sustained high performance.

This shift from self-assessment to a more comprehensive and strategic evaluation will better equip boards to fulfill their mandate and drive their organization's performance forward.