Private Company Director

Private Company Board Effectiveness Assessment

Listen to article

Know the items to assess and the best processes for determining their efficacy.

How do you make sure your board is operating as effectively as possible? Regular assessments, like those conducted for other personnel in the organization, can help keep a board operating efficiently as a key source of valuable guidance, direction and decision-making to the company it governs.

Private company governance has evolved significantly in recent years. Private company boards have  adopted most public company standards and structures, often including regular mandated board evaluations. Private companies often do a more thorough job than their publicly traded counterparts of staying true to the company purpose, serving multiple stakeholders and maintaining a long-term perspective. But every board has its challenges and dysfunctions. 

Ideally, you want to make sure your board stays on the cutting edge and uses its limited time and valuable talent efficiently to provide direction and guidance to management — and to make key decisions when they need to get made. Boards have limited time and ideally operate in a structured environment where board members’ collective talents and experience are used to maximum advantage for the benefit of the company. Yet poor process, data, structure, dynamics, and planning, and lack of appropriate context and experience, will impede a board’s ability to do its job successfully. These challenges will slow down, misdirect or derail key initiatives in the organization, or lead to poor decisions (or no decisions).

Conducting a regular health check on the board’s effectiveness can identify and solve for these challenges. Yet boards can be reluctant to assess their own effectiveness — feedback, although a “gift,” can be difficult even for the highest performers. Consider, however, that the standard board assessment process focuses less on individual effectiveness and more on the operations of the full board — board process, structure, agenda, composition, skill sets, data and information, level of review and relationship with management. Most assessments result in a series of tweaks and process improvements that board members acknowledge and appreciate as ways to make their jobs easier and allow a greater impact. 

So, exactly what is involved in a good board assessment? To answer that question, let’s take two approaches — what is being assessed and how the assessment is done. The answer to each question is a range of topics and processes that can be tailored for each board depending on the situation and what the board is looking to address or improve. The topics focus on the aspects of the board’s roles and responsibilities that are reviewed. The processes focus on the how the assessment is completed.

What Gets Reviewed

Purpose and performance. The most important — and often the most difficult — function of a private company board is to assure that the company is clear on its long-term purpose, mission, strategy and objectives, and that management is effectively leading the organization according to those key tenets. This includes assessing and providing feedback on short- and long-term performance, providing strategic direction and assessment, and adjusting course where necessary to stay true to the organization's purpose and mission. 

Stewardship and responsibility. Private company board members are stewards of the organization. As such, they are responsible for providing effective governance in five key areas: performance (financial returns), protection (risk management), people (workforce engagement), purpose (achieving the mission) and planet (impact on key constituents). Each company will have a different mix of priorities for these areas, but all should be assessed.

Board composition. The goal of the board is to have the right mix of talent, experience and perspectives to govern the company and provide insight, challenge, deep understanding, connections, ideas and direction. You need people with the requisite technical, leadership, industry, geographic, customer and community knowledge to collectively govern effectively. And we must examine whether the board has enough diversity of background, gender, ethnicity, age and experience to provide the needed range of viewpoints. More importantly, where are the gaps? Where does the board consistently come up short or lack the skills, knowledge and experience to effectively debate and decide key issues?

Board conduct, dynamics and decision-making. We also look to see that the board works well together as a team. Does it demonstrate a balance of collegiality with constructive debate? Can it collectively and individually focus on what is in the best interest of the company, its owners and its constituents? Does it focus at the right level of detail? Does it make key decisions when they need to be made? Do all viewpoints and opinions get heard and considered? Does the board know its role relative to management? No board is perfect in all of these areas. The key is identifying where and when the board functions well and where it can do better.

Board management, operations and structure. Next is evaluating the structure of the board, including committee structure and membership. Does the board and its committees address the right issues at the right level? Are all important issues addressed at the right time — or at any time? Does the board calendar make sense and use the board’s time efficiently? Are board materials useful, actionable and at the right level of detail? Does the board get proper outside legal and consulting advice? Does the board have an effective, respectful and productive relationship with management? Does management bring the right topics to the board at the right time, and with the right level of detail and urgency?

Legal and regulatory compliance. This area is less critical for private companies than for public companies. However, it includes making sure the board is providing effective oversight of core items like financial reporting, audit, tax, legal oversight, basic risk management and insurance, bank covenants, patents, leases, and customer and supplier agreements.

In planning an effectiveness assessment, boards typically choose from the above topics to determine what they would like to review. Most boards have a sense of where they are strong, where they can improve and where they are really challenged. No board is perfect and every board is different, so effectiveness assessments are customized.

How the Assessment Is Conducted

Boards and third-party assessors use the following approaches in evaluating effectiveness. Each can be used separately or in combination, depending on time commitment, level of review, budget and urgency or need for change.

Board effectiveness questionnaire. This is the most common form of board and committee assessment. It is common for boards to use a standardized form from a governance group or association and self-administer the questionnaire. This typically provides fairly rudimentary feedback but is good at establishing a baseline and identifying areas for improvement. A better approach is to customize the questionnaire based on key issues the company and board are facing. A third party skilled at questionnaire design can often tease out useful information and opinions, especially on controversial topics. Additionally, a third-party assessment brings confidentiality to the process, thus promoting greater candor of responses, and will also survey both board members and management to obtain a holistic perspective.

Board member interviews. The next most common approach usually involves a third party who meets one-on-one with each board member and key members of the management team, covers all key areas of governance, explores any challenging areas more deeply, and summarizes the findings and reports back to the board. Individual responses are kept confidential, and overall themes are presented for discussion. This approach can be powerful as board members and key executives are given at least an hour to think out loud and express their observations and concerns openly. Interviews can be conducted along with, or after, administering a questionnaire.

Board process review. Typically conducted by a third party, this process involves review of board structure and committees; board and committee charters; board and committee agendas and minutes; meeting materials for two years of meetings; number, frequency and length of meetings; key decisions and level of review. 

Board composition and diversity review. This can be done internally or by a third party. The process involves a spreadsheet analysis of board members relative to a set of criteria, including gender, ethnicity, age and experience, along with industry, technical, leadership, M&A, organization life cycle and other relevant experience. The criteria are typically customized for each company. Findings are compared to ideal structure and peers. Gaps are identified and summarized with recommendations for closing gaps over time and attrition.

Stewardship and governance style assessment. Board charter, agenda and materials are reviewed relative to the Five Ps in the board stewardship model to assure all key areas are covered at the appropriate level and depth. Additionally, individual board members complete an assessment of their individual governance style with feedback to enhance their individual contributions. The board also receives the collective governance style profile of the full board to understand where they may be over- or under-indexed.

Board dynamics assessment. This assessment is always conducted by a third party who sits in and observes board and committee meetings, assessing board dynamics, group process, quality of discussion and debate, decision process and outcomes. It is typically conducted after some combination of questionnaire, interviews and process review.

Action planning workshop. After conducting some combination of the above assessments, the third party meets with the full board to review and discuss findings and develop priorities and a roadmap for change. Management is typically involved in all or part of the workshop.

Effective boards can make a huge difference in how a private company operates and performs. They can bring together differing views and expertise, foster cooperation among various constituents and guide the long-term sustainability of the company. But this requires hard work, critical assessment and constant improvement. Customized assessments are part of that process. The items (the what) and processes (the how) summarized above are a good place to start planning your board’s next effectiveness assessment.

Don Delves, EdD, MBA, CPA, is managing director and practice leader, executive compensation and board advisory, at WTW.

Becky Huddleston, MBA, is managing director, executive compensation and board advisory, at WTW. 

Marie Holmstrom, Ph.D., is senior director, employee experience and work & rewards, at WTW.


Directors Record