New York Stock Exchange listing standards require boards of listed companies to conduct self‑evaluations at least annually to determine whether the board and its committees are functioning effectively. Although Nasdaq Marketplace Rules are silent on board self‑evaluations, a growing number of companies are considering such evaluations as a matter of best practices.

Benefits of Conducting Board Self-Evaluations

Conducting effective board self‑evaluations can help the board, the company and shareholders by developing a board that is a strategic asset to the company and its management. Specific benefits include:

    • Focusing the board on setting long‑term objectives and strategy.

    • Providing a disciplined structure for re‑visiting the board's role, objectives and strategies, and how those relate to the company's goals and progress.
    • Assisting the board to operate as a team.
    • Demonstrating to shareholders that the board is active and serious about monitoring and improving its performance.
    • Providing useful information for the succession and nomination process.
Practical Tip

Conduct Regular Board Self-Evaluations as a Best Practice. Board self‑evaluations are rapidly becoming "best practice" for all public companies, not just NYSE listed companies. It is both a good practice, and a message to shareholders that your company is serious about corporate governance, to institute board self‑evaluations before your shareholders raise the issue.

Risks Related to Board Self-Evaluations

Board self‑evaluations involve some potential drawbacks worth noting:

    • Results of Board Self-Evaluations Are Discoverable in Litigation. While the discovery of shortcomings of the board is a useful outcome of the evaluation process, information generated by the evaluation process is discoverable in litigation. Verbal interviews with directors or a discussion with the entire board, rather than written statements, may mitigate discovery risks.

    • Self-Evaluation Process Could Adversely Affect Collegiality. The composition of the board and the personal dynamics of its members affect the board's effectiveness. Board self‑evaluations have the potential to adversely affect the collegial atmosphere among directors. Some directors may fear criticism, and the practice of evaluation may discourage board service. Employing a sensitive and fair self‑evaluation approach, with strict controls for maintaining director confidentiality, and a focus on the board as a whole rather than peer evaluation, can reduce negative impacts.
Practical Tip

If Board Self-Evaluation Reveals Shortcomings, Promptly Address Them. If your company's board self‑evaluation reveals board shortcomings, be certain to take action to address these shortcomings. Follow‑up reinforces the board's commitment to an effective self‑evaluation process that helps build a stronger board. Failure to follow‑up is a clear invitation to a charge that the board is not fulfilling its duties.

How to Institute an Effective Board Self-Evaluation Program

Effective board self‑evaluation is a dynamic process that should evolve according to the results of the self‑evaluations to meet stated objectives and identify new goals. There is no one right way to conduct a board self‑evaluation. The process, objectives, and approach to results should be tailored to the varying needs and nuances of the particular company and board. An effective board self‑evaluation program may include the following elements:

    • Delegate Oversight of the Evaluation Process to an Independent Board Committee and Outside Counsel. Typically the governance committee or the nominating committee is charged with overseeing the board's self‑evaluation policy and process. The committee, working with outside counsel, develops the self‑evaluation policy and administers the process to verify that the self‑evaluations are conducted properly.

    • Adopt Objectives for the Self-Evaluation Process.  The board or an independent committee should identify a relatively small number of objectives for the board self‑evaluation process. Setting too many objectives can lead to failure or create confusion over the board's priorities. Some possible board objectives include:
      • analyzing board strengths and weaknesses;
      • defining areas in which the board believes a better contribution can be made;
      • creating a proper delineation of board and management responsibilities;
      • ensuring that the board's composition has the proper diversity of skills, backgrounds and experience;
      • fostering effective interaction among directors; and
      • promoting effective director education and development.
    • Conduct Verbal Self-Evaluations. Information for the board's self‑evaluation can be gathered verbally, through confidential interviews with directors or discussions among the board as a whole. Any written materials created by directors in the evaluation process should be destroyed as a matter of course pursuant to the company's stated document‑retention policy.
    • Involve Outside Counsel to Document Process and Results.  Outside counsel can assist by attending and taking notes during board member interviews or board discussions relating to the self‑evaluation process, and drafting any summary of results from the self‑evaluation process desired by the board. Confidentiality is important for this process, and remarks should not be attributed to individual directors.
    • Address Issues Identified by the Self-Evaluations. The board or independent committee overseeing the self‑evaluation process should identify action items to address any issues raised by the results of the self‑evaluation, and create a timeline for addressing them. The board or committee should also conduct periodic checks throughout the year to ensure that action is being taken to address the identified issues.
Practical Tips

Tell Shareholders That the Board Regularly Evaluates Its Performance.  Although the results of the self‑evaluation process should be kept confidential and communicated only to the board, companies should disclose the evaluation process to shareholders. This lets the shareholders know that the board is serious about maximizing its effectiveness.

Board Self-Evaluations Likely to Be Evolving Process. The self‑evaluation process is a dynamic process that can, and should, evolve over time to serve the board's evolving objectives. A Board that is new to the self‑evaluation process should not be surprised if the first self‑evaluation it conducts is not as fruitful as the board might have hoped. However, as the process evolves and objectives are met, the self‑evaluation process will improve.

Evaluations of Individual Directors ― Wave of the Future?

Evaluations of individual directors are not yet as common as board self‑evaluations, but may become a growing practice. Directors may be concerned about the individual evaluation process, not wanting to be singled out, or they may feel that individual evaluations implicitly occur when a director is up for nomination and election. However, individually evaluating directors provides greater director accountability and better accommodates individualized director goals and expectations for performance and contribution to the board. Furthermore, individual director evaluations and peer review allow for a formal process through which underperforming directors can be more efficiently identified and replaced. As uncomfortable as it may be for some directors to contemplate, individual director evaluations and peer review could be the wave of the future.

Additional Information

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