CII advises on disclosure of board evaluation processes

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The Research and Education Fund of the Council of Institutional Investors has released a new report regarding disclosure of board evaluation processes in proxy statements. Robust board evaluation processes are considered a key element in strengthening board effectiveness and, as a result, institutional investors have expressed an intense interest in the review process.  While companies have been discussing their board evaluation processes in their proxies with increasing frequency, CII suggests that these discussions could be more robust. 

CII emphasizes that its focus is disclosure of the evaluation process, not confidential details about the specific board or director evaluations. Based on its review of the proxy statements of 100 prominent companies, CII identifies seven elements of evaluation processes that it views as “indicators” of “strong board evaluation processes.”  Although CII maintains that these seven indicators are “not intended to be prescriptive recommendations, but rather descriptive observations of companies’ disclosure that is particularly effective at building investor confidence that a robust process exists,” it nevertheless advocates that boards consider implementing these indicators where appropriate for the companies’ particular “strengths and circumstances.” The report also provides useful examples of the types of disclosure advocated.

The seven indicators are:

1. Three-Tiered Review. The evaluation process should be performed at three levels: the board, the committees and individual directors. However, how these processes are performed can vary widely, from formal processes at the board/committee level to more informal processes, such as interviews and conversations, for individuals.
2. Consideration of Peer Review. Even if peer review is ultimately not implemented, CII suggests that, to enhance individual accountability, the board should at least consider “whether to augment its process for evaluating individual directors with the ability to anonymously peer review fellow directors.”
3. Appropriate Timing and Format. CII suggests that disclosure “communicate how the board sets the timing of evaluations and balances the use of written questionnaires, oral interviews, group discussions and other methods to most effectively gather feedback,” as well as how the board has considered improving the timing and format of evaluations from year to year.
4. Evidence of Follow-Through. Identifying examples of specific actions taken and changes made in response to evaluations—especially where the actions also advance strategic objectives—can give investors confidence about the effectiveness of the evaluation process. Disclosure of confidential or proprietary information is not appropriate, but disclosure of the role of shareholder engagement in the process would be.
5. Linkage to Succession Planning. Investors use disclosure about the evaluation process “to help inform their voting decisions in director elections.” To assist investors in making those assessments, companies should reflect in their disclosure about board evaluations “a willingness to change if the process reveals that new skills or insights are necessary.” In addition, CII suggests that, where, as a result of the evaluation process and after candid conversations, a decision is made not to renominate a director, the disclosure should communicate that information and identify the “skills the board seeks in a new nominee.” Presumably, this disclosure should be carefully crafted not to disclose personal or confidential information.

6. Strong Independent Director Leadership. Independent chairs or lead independent directors can play a significant role in “filter[ing] information and insights across multiple levels and facilitate[ing] one-on-one discussions with individual directors.” In addition, the nom/gov committee helps to structure the evaluation process and relate that process to director nominations.
7. Prudent Use of Third Parties and Technology. Many companies periodically employ third-party consultants to conduct evaluations to facilitate candid feedback and provide a neutral perspective. CII recommends that the disclosure indicate whether the board considered use of third parties or technology platforms as part of the evaluation process. CII cautions, however, that records related to the evaluation may be subject to discovery in litigation. In addition, CII observes that companies with small boards or in “industries requiring highly technical expertise may not find an external third party useful.”