The Power of an Effective Board Evaluation
Knowing board strengths and weaknesses adds company value.
Private company governance continues to evolve as boards look to public company board practices and discuss whether they need to make changes of their own. This includes creating a clear committee structure, bringing independent directors onto the board and, increasingly, evaluating the board annually to assess factors such as company culture, board processes and functions, and individual director performance.
“Board culture should be driven by continuous improvement and servant leadership,” says Meghan Juday, who chairs the board of Ideal Industries. “A board evaluation allows you to learn more about what’s working and what could be done better, and helps you consider how you’re adding value. If a board is taking itself seriously in being a fiduciary and providing strategic value back to the company, I would say a board evaluation is an absolute must.”
Allen Bettis, a longtime family business advisor and director for several private family trust companies, agrees. “Boards should evaluate how effectively they are looking out for the future of the business, both in an emergency and for its future. They should be asking, ‘Are we engaging in rigorous dialogue about key challenges the business will face over the next three years?’”
Such insights can improve the performance of any board but can be make-or-break when it comes to a major strategic shift in the business, like a corporate transformation, an acquisition or anything else that will be a game-changer for the business.
Lynn Clarke, a longtime private company director who currently serves on the boards of The Vollrath Company, A. Duie Pyle, Basic American Foods, Jelly Belly Sparkling Waters and Nielsen-Massey Vanillas, has seen the impact firsthand. “One of the company boards I serve went through a series of divestitures that completely changed the organization. It was a lot of heavy lifting for the board. Making those strategic, long-term decisions meant deep, soul-searching family discussions. The insights we had from the evaluation process helped us understand each of the roles that we play and allowed us to better respect each other’s points of view. It helped make our ultimate decision much more effective than if we didn’t know our individual strengths, as well as our collective strengths, as a board.”
D’Anne Hurd, who serves on the boards of Martin Engineering and Peckham Industries and as an independent trustee for Pax World Funds, says the evaluation process helped one of her boards embrace key governance changes ahead of recruiting an outside CEO, including naming a lead independent director and instituting executive sessions as a regular part of board discussion. “It helped the board realize that we didn’t have all the necessary skills to carry forth what the board needed to do when we had the new CEO in place. As a result of the evaluation, we increased the size of the board to add additional expertise. It allowed the board to truly serve the needs of the company.”
That focus, says Hurd, was critical when her board ultimately hired the new CEO, the first nonfamily leader for the company. “The board was really the bridge, not only when we interviewed for the role, but after we chose the person and when we onboarded him. We had put the right people around the table, and the board understood the things that should be inherent in the new CEO both from a personality standpoint and a culture standpoint.”
A board evaluation not only is key when considering a change in company leadership but also can help ensure the right CEO is recruited, as Bettis points out. “In order to attract the right caliber of professional, you need to have a board in place that can reassure the people you might want to have that this is a good place to commit your career, and that this is a board that will balance the needs of shareholders with the needs of growing the company and making it competitive.”
Bettis recalls talking with a former Target CEO who had taken charge at a time when the founding Dayton family still played a significant role on the board. “I asked him what about the board made him comfortable saying, ‘I can commit my career here’? And he said, ‘I am willing to be accountable to knowledgeable people.’ In other words, he was saying, ‘I have confidence that this board is going to help me make this company thrive, help me achieve the targets that our public investors and private owners want.’”
More than just the evaluation
While directors like Hurd, Juday, Bettis and Clarke believe strongly in the need for, and impact of, a good board evaluation, they also caution that there are several factors that constitute a process that can most effectively uncover actionable insights or lead to tangible results.
Tenure as a group is one critical aspect. “I would ask, ‘Have most board members been together for two years or about eight meetings?’” says Clarke. That amount of time, she says, gives the board enough experience to draw from when evaluating both individual director performance and how the group functions collectively. Hurd points to basic governance structures as another key enabler of an effective evaluation. “Committee structure is especially important to include in an evaluation so you can ask questions about it like, ‘Do you think that the right people are on the committees? Do you think that committee leadership should be rotated? Do you think that committee membership should be rotated?’ All of those factors make for a better board.”
Clarke agrees. “As our board has evolved to be a strategic asset, we’ve been doing more heavy lifting in committees,” she says. “The evaluation process helped us understand what was working with the committees and what needed tweaking.”
Different avenues to the ideal evaluation
There are many ways to approach a board evaluation, including a mix of written survey and individual director interviews. As nominating and governance chair, Clarke worked with the CEO to design the process internally. “I talked to a couple of my public company board friends and got some examples of their evaluations. Some of it was way more than we needed as a private company, but there were a lot of good questions that we used to craft our own. The two most important questions that we all decided on after we went through the process were, ‘Do you enjoy working with this director?’ and ‘Would you recommend this director for another board?’ Those questions were key to understanding both board culture and alignment of skill sets.”
Other directors swear by an outside administrator who is not personally invested in the results as an important part of getting to that most objective — and actionable — feedback. Juday recognized the advantages of a third-party evaluator after one of her boards first engaged in the process. “We did an internal evaluation where the board graded itself. We were nines or tens in all the questions we asked, and there wasn’t a lot of feedback. There was almost nothing to talk about.” Next time around, the company hired an outside evaluator, and the results were much more robust, with more opportunity to identify areas for improvement.
Third-party assessments are usually designed in conjunction with the board or nominating and governance chair. They can either be interview-based or start with an anonymous survey that the administrator can use as a cue to where to dig deeper, especially in areas board members have flagged as needing improvement. If you engage a third party to administer your evaluations, look for someone who is credible, experienced and capable of balancing expertise with high emotional intelligence. “There are good people that administer board evaluations, and there are not-so-good people,” says Hurd. “If you don’t have a skilled third party, it can blow up in your face. You need someone who knows how to listen incredibly carefully, who knows how to probe gently but firmly and who knows when to back off.”
Many boards have had better outcomes when they include select members of the management team in the evaluation process. “Ask your management to complete a survey on board effectiveness to frankly evaluate how productive and helpful the board is for them in doing their job better,” advises Juday. “If the board is just evaluating themselves, they could say, ‘We’re awesome. We have it all down. Great conversation.’ But if you ask management how much value the board brings to them, they could say, ‘Eh, I get one or two tidbits.’ When you are paying upward of a million dollars per year for the care and feeding of your board, one or two tidbits is not a great ROI.”
Begin with the end in mind. One of the most important parts of an effective evaluation is what happens after the fact. “Be clear on what you’ll do with the feedback afterward,” says Juday. “Take the feedback seriously. Be clear about the action item list that comes from the evaluation and ask, ‘How are we tracking and reporting progress against the feedback?’”
Despite the value that evaluations can bring to the board, some directors remain unconvinced that it’s a worthwhile investment or are wary of instituting the process for fear of what it might find. If you’re on a board and want to institute an evaluation process but are meeting resistance, what is the best way to win over the skeptics? “I would say, ‘Knowledge is power,’” says Hurd. “And I would ask, ‘What are you afraid of?’” In many cases, whatever is at the heart of the resistance is likely part of why the board would benefit from an evaluation in the first place.
“The evaluation process gives you knowledge to become a better board. If you have a skilled administrator, it will not be personal. It can only be additive,” says Juday.
Ultimately, says Clarke, having the feedback, and acting on it, is critical to ensuring continuous improvement — something all leaders should be focused on.
“Every good director should want to get better. If you’re there for the right reasons, you should welcome the evaluation process.”