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.
Having a board evaluation is a regular event for most public companies. But is it a productive practice or just another corporate governance kabuki—a perfunctory, check-the-box exercise with no real impact? “Board Performance Evaluations that Add Value,” posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation, suggests that board evaluations can range from “counterproductive exercises, which exacerbate already fractious and poorly performing boards, to truly transformational change leading to superior governance and organisational outcomes.” But what leads to a superior outcome? The authors suggest that positive outcomes are more likely when boards understand the relative advantages and disadvantages of the different types of board reviews, and properly plan and implement the recommendations resulting from the board’s evaluation. Moreover, the authors contend that the evaluation process itself offers benefits as “an effective team-building, ethics-shaping activity. [The authors’] observation is that boards often neglect the process of engagement when undertaking evaluations; unfortunately, boards that fail to engage their members are missing a major opportunity for developing a shared set of board norms and inculcating a positive board and organizational culture. In short, the process is as important as the content.”