Investor focus on board performance has reached new levels
of intensity. The chairman and CEO of Vanguard, one of the largest
mutual fund companies in the world, recently sent letters to the
independent directors of its biggest holdings in which he outlined
six principles of governance. “In the past, some have mistakenly
assumed that our predominantly passive management style suggests
a passive attitude with respect to corporate governance,” he wrote,
“Nothing could be further from the truth.”
We have come to expect that kind of perspective from activist investors, who have long
been assertive about board governance and composition. Now, large institutional investors
are joining the chorus. Firms such as State Street, BlackRock and Vanguard are
calling for greater transparency about how candidly boards are addressing their own
performance and the suitability of individual directors. As the Council of Institutional
Investors sums up, disclosure about assessment “is an indication that a board is willing
to think critically about its own performance on a regular basis and tackle any weaknesses
… and can be a catalyst for ‘refreshing’ the board as new needs arise.”
Annual board assessments have become ubiquitous, but are boards truly using
them to ensure they are as effective as their shareholders expect them to be?
Some evidence suggests the answer to that question is no. For example, 39 percent of
U.S. directors in the 2015 PricewaterhouseCoopers’ Annual Corporate Directors
Survey thought that someone on their board should be replaced. The primary impediments
to replacing an underperforming director is board leadership’s discomfort in
addressing the issue and the lack of individual director assessments, previous
research has found. The best boards are holding themselves to higher standards.
Boards that are committed to improving their effectiveness use the assessment process to get at six key questions:
- How effectively do we engage with management on the company’s strategy?
- How healthy is the relationship between our CEO and board?
- What is our board succession plan?
- What is our mechanism for providing individual director feedback?
- What is our board culture and how well does it align with our strategy?
- What processes are in place for engaging with shareholders?
Improving board effectiveness
When done effectively, board assessments provide the
board with an opportunity to identify and remove obstacles
to better performance and to highlight what works
well. They give directors a forum to review and reinforce
appropriate board and management roles, ensure that
the board has the right perspectives around the table
and bring to light issues brewing below the surface. A
robust assessment can help ensure that the board is
well-equipped to address the issues that drive shareholder
value by focusing on the following questions.
How effectively do we engage with management on the company’s strategy?
Oversight of the business strategy always has been a
core responsibility of the board. But, today, the threats
and opportunities facing companies are more dynamic.
Digital transformation, business model shifts, the rise
of new competitors and the impact of doing business
globally require many businesses to change faster than
in the past. So, regular strategic discussions have
assumed greater urgency. The board should ensure
that the management team is responding to emerging
developments most effectively.
The CEO and his or her team “own” the strategy, but
the board provides critical oversight. Directors should
challenge assumptions and the soundness of the
strategy, fine-tuning where needed, and measure
performance against a set of agreed-upon objectives.
The best boards ensure that the articulated strategy
provides a forward-looking roadmap for the organization,
including the specific levers to improve performance.
A clear, sound strategy should serve as the
foundation for all of the board’s work, and high-performing
boards are disciplined about making sure that
The board conversation has increasingly drifted toward
reviews of historical data — compliance reviews, financial
reviews, safety reviews — that have less impact on
business results, many directors report. This backward-
looking review can come at the expense of forwardlooking
strategic matters where directors’ expertise can
be valuable in shaping future results. High-performing
boards make time to focus on what matters, striking the
right balance between important oversight responsibilities
and forward-looking conversations.
How healthy is the “balance of power” that
exists between our CEO and board?
The relationship between the board and the CEO
requires balance. The board is ultimately responsible for
selecting the CEO, reviewing his or her performance,
aligning CEO compensation with the performance of the
business, and planning for the succession of the CEO. At
the same time, the CEO is a close partner in many of
these endeavors, sometimes taking the lead. For
example, in succession planning, the CEO drives
management succession at senior levels and serves as
counsel the board. The CEO’s role diminishes as a transition
nears, and the board moves toward selecting the
next CEO. To minimize confusion about the respective
roles of the board and CEO, it’s helpful to have an open
channel for communication. Effective use of executive
sessions is part of the answer. Regularly meeting in executive
session, both with and without the CEO, helps
reduce the awkwardness that can arise when the board
has executive sessions only on an as-needed basis.
When the board meets without the CEO, it is best practice
to debrief with the CEO immediately. The CEO evaluation
also provides an opportunity for the board to
assess aspects of the CEO’s performance — including
succession planning — that the board is ultimately
accountable for overseeing.
What is our board succession plan?
In the words of Vanguard’s McNabb, having the right
directors on the board “is the single most important
factor in good governance. … Who they are, how they
interact and the skills they bring to the table are critical
from a long-term value standpoint.” Boards should
continually consider whether they have the optimum
composition, given the company’s strategic direction
and the current business context. Boards should also
establish mechanisms to identify the expertise that will
be valuable as the context and strategy change. For
example, in an industry that is rapidly consolidating, a
board will want to consider whether it has the capability
it needs to best oversee multiple acquisitions or the
sale of the business in shareholders’ best interests. The
board of a company with a new first-time CEO may
decide it needs someone to serve in a mentoring
capacity to the CEO. Regularly reviewing the current
composition and any gaps positions the board to take
advantage of natural attrition from director departures
and retirements. The best boards also forge agreement
about the right degree of turnover and the mechanisms
to promote board refreshment, including appropriate
What is our mechanism for evaluating the
contributions of individual directors and
providing director feedback?
On many boards, the elephant in the room is the performance
(or lack of) of an individual director. Consensus
is growing in support of conducting individual director
assessments as part of the board effectiveness assessment
— not to grade directors, but to provide constructive
feedback that can improve performance. It can be
difficult or uncomfortable to raise individual director
performance issues, but high-performing boards expect
directors to stay engaged and to contribute fully, and are
willing to address under-performance. They establish a
mechanism for surfacing and addressing issues and use
director succession planning to encourage healthy turnover
and accountability. They also create an environment
that encourages individual directors to think critically
about their contributions and the relevance of their skills
to the company strategy.
The 8 Biggest Contributors to
1. Too much time spent on compliance and other
backward-looking reviews at the expense of strategy
2. Lack of trust between the board and CEO
3. Weak or non-existent CEO succession plan
4. Lack of board succession planning
5. Disruptive or disengaged directors
6. Poor decision-making processes
7. Lack of a direct channel to shareholders
8. Too much board information and material
What is our board culture and how does
it contribute to our ability to advise
A really good board understands its own culture and
how it impacts its decision-making and relationship
with management. Despite the growing appreciation
for the importance of culture, few directors are able to
describe their board culture beyond “collegial” or
“engaged.” A deeper understanding of the culture of
the board — how directors make decisions, handle
disagreements, share information and the spirit in
which they do these things — can improve the board’s
ability to advise management and provide appropriate
oversight. In a fast-moving, highly dynamic industry, for
example, the board needs to learn fast, remain open to
alternatives and needs at least some directors with a
more agile orientation. Culture can be shaped by influential
figures, such as the chair, the CEO, the founder
or long-serving directors; structural elements such as
the format and conduct of meetings; selection and
onboarding of new directors; or external events and the
board’s response to them. High-performing boards are
willing to examine their culture more closely and assess
its alignment with the needs of the business.
What processes are in place for engaging
Management is responsible for communicating with
investors about the business, but shareholders increasingly
want to engage with the board on a range of
governance issues, including succession, compensation,
risk oversight and other concerns. Often, it’s not
until after a board has experienced a challenge from
shareholders — losing a say-on-pay vote, for example
— that it concludes it needs to improve communication
with shareholders. The most effective boards stay
abreast of how the company is perceived by investors.
They identify in advance who should take the lead from
the board (whether a committee or individual board
leader) in dialogue with shareholders and in
responding to investor inquiries. Robust relationships
with investors can help the board understand how the
company is viewed externally versus competitors and
can reduce the chance that the company will be
surprised by activists or proxy votes. And when challenges
do arise, the board is more likely to have built
up a reservoir of understanding and support among
large long-term shareholders.
The bar continues to rise for boards, which not only face
pressure from shareholders but also want to hold themselves
to higher standards of performance. Boards can use
robust board assessments to ensure that they measure up
to the evolving standards of corporate governance and
have the composition, practices and healthy dynamics to
be effective stewards of the business.