Over the past few decades, the role of the board of directors has come under fire at various times due to corporate scandals ranging from Enron to WorldCom and tragedies such as the recent Boeing crashes. The Sarbanes-Oxley Act of 2002 was put into place to make corporations more accountable, and directors must be accountable, too.

In January 2018, EY reported that 89% of the companies in the Standard & Poor’s 500 Index have annual elections for all directors so that shareholders can vote against a director, and even an entire Board, each year at most major companies if they so desire. Notwithstanding the company’s performance, which can be driven by many variables, how can shareholders make an informed decision on director elections?

While Board evaluations are required by the New York Stock Exchange and the NASDAQ, most Boards conduct performance reviews of the board and committees, not each member of the board. Individual evaluations are often viewed as potentially disruptive. Directors and CEOs can fear that they will make people uncomfortable and harm working relationships. They also worry about potential litigation if difficult issues are documented.

But evaluations of individual directors, albeit by their peers as just their peers are consistently in the boardroom, could help directors be more accountable to the shareholders and other constituencies whom they represent. A director should not be evaluated by his or her resume or skill-set but, rather, by effectiveness. Individual director reviews that are complete and honest can help determine effectiveness.

To help provide an effective performance review for each director, they have to overcome any discomfort they believe that the evaluation process may generate. The CEO and the chair of the governance committee need to engage the board in discussions that will show the advantages of an evaluation.

Once the board is committed to the process, the governance committee should design a process that covers the essential responsibilities of an effective director that can be observed by both the director and his or her peers. Ideally, before any evaluation takes place, the evaluation form should be presented to the full board and CEO for discussion, debate, and review.

Formal board evaluations allow for improvements to be made to a company’s governance practices. Shareholders and other constituencies can benefit from more information on the directors’ effectiveness. In addition, the importance of term limits and retirement ages would be substantially reduced with individual director evaluations. There is no reason to wait until retirement age for an ineffective director to be dealt with, and, if a director is effective, why insist on forced retirement at a somewhat random age?

Evaluations of individual directors, like reviews of individual members of management, can help generate a continued focus on excellence and shareholder value. If done well, this is a way for the board to hold each other accountable and keep everyone focused on their responsibilities.

Jonathan F. Foster
Founder & Managing Director – Current Capital Partners LLC