The Move Towards Formal Board Evaluation
Sarbanes-Oxley, stock exchange rule changes and shareholder activism have all had a major impact on the operations of boards of directors in recent years. Boards of directors have responded by tightening policies and procedures and adopting frequently emerging “best practices” in corporate governance. One practice that has emerged and is gaining significant traction is regular board self-evaluation.
In 2004, the New York Stock Exchange adopted a requirement that the boards of listed companies must conduct regular evaluations of their boards of directors. This applied to both the board as a whole, as well as the audit, nominating/corporate governance and compensation committees. Since the institution of this requirement, the number of boards conducting regular board evaluations has increased dramatically.
Beyond regulatory compliance, however, increasingly large numbers of non-NYSE private and public companies are also adopting board evaluation processes to improve the overall performance and effectiveness of their boards. In 2007, 88% of public companies conducted a board evaluation on a regular basis, up from 33% in 2002. In addition, 78% of NASDAQ companies now conduct a regular board evaluation, even though it is not a NASDAQ requirement to do so.
All of these companies are instituting regular board evaluation processes to achieve the following key benefits:
- Performance Assessment: Indentify areas of strength and weakness, and help make changes that positively impact shareholder value
- Continuous Improvement: Continuously improve the performance and effectiveness of the board over time
- Accountability: Hold directors accountable for their performance
- Composition: Tailor the overall composition of the board and its committees to best serve corporate objectives
- Alignment: Better align the board with the overall corporate strategy
- Communication: Provide an objective, fact-based vehicle for board member communication regarding performance and responsibilities
- Transparency: Improve board transparency and add credibility in the eyes of shareholders
In fact, the vast majority of directors believe that a formal board evaluation process is the most important tool available for ensuring director effectiveness:
To this point, most companies have established rudimentary internal processes to accomplish this task. However, only 11% of board members feel that their board evaluation process is “very effective”, and 43% feel that there is significant room for improvement.
BoardEvals has been developed to address this need in the market by replacing the ad-hoc, manual processes used by most companies today with a standardized, automated board evaluation process that saves time and expenses, while at the same time improving corporate governance practices.