Magazine article Ivey Business Journal Online

Individual Director Evaluations: The Next Step in Boardroom Effectiveness

Magazine article Ivey Business Journal Online

Individual Director Evaluations: The Next Step in Boardroom Effectiveness

Article excerpt

Skeptics see little value in assessing the performance of individual directors. But these coauthors, experts in leadership and governance, say that correctly carried out, evaluations are highly valuable and provide a mechanism for the board and the CEO to hold each other accountable for clearly defined performance expectations.

This article was first published in the May/June 2002 Ivey Business Journal.

The quality of a board of directors is a significant factor for institutional investors, according to surveys by McKinsey & Company and Russell Reynolds. These investors want information on individual directors' track records and their contributions to the board. They also want to know where they stand on crucial boardroom issues, as well as careful assessments of board performance.

Over the last several years, we have studied a small group of companies that are leaders in boardroom evaluations. In this article, we describe what we have learned from these standard setters, and why we believe that well-managed appraisals can increase a board's effectiveness and accountability, and improve its relationship with the CEO.

Despite the potential benefits, our research shows that only 40 per cent of major North American companies conduct formal performance evaluations of their boards. Individual evaluations of directors are even less common and more controversial. Surveys by Korn/Ferry and the American Society of Corporate Secretaries indicate that only 15 per cent of Fortune 1000 companies appraise the performance of their individual board members, although it is common practice for boards to evaluate CEOs.

Obstacles to evaluations

The first obstacle to conducting an evaluation is opposition by board members themselves. There is simply a general reluctance among boards of directors and CEOs to evaluate high-profile board members. For example, how does one critically assess a peer without causing conflict and harming working relationships? And, is it reasonable to evaluate busy executives who participate on boards on a part-time basis? At the same time, these questions highlight the importance of constructive evaluations in improving the performance of both the individual director and the board itself.

CEOs and boards of directors worry that evaluating the performance of individual board members could drive away good candidates who feel they have already proven themselves. At a time when there is heavy competition to attract top directors, appraisals might deter good candidates. One CEO we interviewed reported that his board strongly resisted a director evaluation plan that he presented to it. Board members told him it "wasn't worth it" to be on his board if they had to go through an evaluation.

The question of who should actually evaluate the directors is also an obstacle. Board members are peers, and may be reluctant to critique a colleague's performance. They may also lack the information needed to make an accurate assessment because boards spend relatively little time together, and what occurs in meetings may not be the best gauge of a director's contribution. "Not every board member contributes actively and asks questions at board meetings," said one corporate secretary. "A lot of people are very quiet, but they are very effective. They operate in different ways. We've got a board member who hasn't said ten words at a board meeting, and yet one of the other directors said getting that guy on the board was a real home run. It's what goes on in sidebar conversations, at dinners, telephone calls between meetings, that may really matter." Indeed, some boards felt individual evaluations might even promote counterproductive behaviour: "I think it leads to the wrong kind of responses,

encouraging individual board members to talk when there's no need for it," said one director.

Since each director brings a different set of competencies to the board, it can be difficult to establish criteria for assessing members. …

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