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Unlocking The Value Of Board Evaluations

The text was first published in The US magazine The Corporate Board, November/December 2023, pp. 16-20.

While board evaluation is increasingly a part of good corporate governance (and often mandated), directors themselves often are displeased with the process and results. In this article, the pitfalls of current practices are highlighted. The author spells out what to watch out for to unlock the value of board evaluations and offers a model that details the variables that are proven to matter and are crucial for building more effective boards.

Boards are highly complex constructs and full of ambiguous power relationships. Appointment to a senior leadership team or governing board is often perceived as the crowning achievement of a distinguished executive career, particularly if the organization is listed on the Dow, Nasdaq or other leading index, or is backed by a prestigious venture capital or private equity firm.

It is the ultimate challenge to be effective in these complex environments. You may be the chair who orchestrates the board, the CEO who has to ensure that the numbers add up and are in line with expectations, or the member of a board aiming to make a mark and have a positive impact on the business and within the industry.

Increasing risks and scrutiny from investors and the media put boards to the test. Boards are so much more than a place to whinge, look backward, and revisit old ways of doing things. Boards are challenged to learn, evolve and increase their performance and effectiveness continuously. The billion-dollar question is: How can this best be facilitated?

Regular board effectiveness evaluations, if applied correctly and skillfully conducted, are a tool to create awareness, support learning, and increase performance and effectiveness. Fully facilitated external and internal effectiveness evaluations are an integral part of annual board calendars in many countries around the globe. They help members gain insights on how they can become better in how they fulfill their duties on a board, increase their performance, and, become more effective.

Although board effectiveness evaluations are integral to the annual board calendar, they are not loved. It is fair to say that most members of boards dread evaluations. Negative experiences, low-value reports, and confrontational questions by reviewers eager to identify what is wrong with the board and where the gaps are have conditioned board members to answer politely without engaging in the process.

In practice, the means of collecting data has evolved from interview- and observation-based approaches to simple, static, and inflexible digital questionnaires, to a hybrid version where advisors combine interviews with members of boards and crucial stakeholder groups, and observation of board and committee meetings with digital questionnaires that are more flexible and sophisticated. It has become easier to adapt a questionnaire to the specific needs of a company and provide data, benchmarks and comparisons.

Directors, particularly younger ones, find the whole practice of how board effectiveness evaluations are conducted an unsatisfactory “black box.”

However, the old-fashioned way to conduct evaluations prevails in the offerings of many professional service firms. Advisors rely on the relationships that they have nourished over many years, if not decades, to sell their “special expertise.” The advisors who are entrusted with board assignments have a high status within their firms. Digitally enabled board evaluations are perceived with skepticism, a threat, and ultimately dismissed. This is particularly the case where consulting firms try to sell time rather than solutions.

It is no surprise that directors, particularly younger ones, find the whole practice of how board effectiveness evaluations are conducted unsatisfactory. In their view, these evaluations are often a “black box.” There is a lack of transparency, and they miss answers to questions like: Why are these questions being asked? What levers can I/we pull to become more effective? What do all the questions have to do with developing an effective board?

Reports are often perceived to be “subjective.” Some of our clients thought that appointing an advisor for a board evaluation could be “like playing Russian roulette” as they believed that advisors “do not care about your career and reputation. All they are after is to please the person or organization with whom they have the relationship.” They also thought that “it all depends on which consultant you get”—their ability to write reports and conduct feedback conversations. It is an open secret that work is divided in many firms where the advisors are client-facing, but other (often more junior) colleagues write the actual evaluation reports.

PowerPoint presentations with a few anodyne comments are a common “shortcut” for evaluations. A good report should convey learnings in a neutral, non-judgmental way.

Clients also shared PowerPoint presentations where their advisors identified a topic, put a couple of quotes on a slide, and talked around it. It is hard work and time-consuming to write good reports. PowerPoint presentations with a few anodyne comments are a common “shortcut” for completing an evaluation fast. A good report should convey learnings from the interviews in a neutral, non-judgmental way, reflecting all the different perspectives of the directors. The thoughts of the advisors and recommendations should be clearly marked as such.

Another widespread mistake we have seen in evaluation reports is that outlier views receive disproportionate attention. An advisor might have positive intentions in the quest to report something “interesting.” However, by elaborating on outlier views, the whole picture about a board can get distorted. Chairs and directors then risk drawing the wrong conclusions.

Boards that have operated as a group for some time and have been through several board evaluation cycles see very little or no additional value from yet another evaluation.

You might agree with the reservations and preconceptions of directors towards board evaluations or not. It is important to be aware of them as they impact the degree to which board members engage in the process.

You cannot generate a positive impact from a board effectiveness evaluation if directors keep an advisor at arm’s length during interviews and provide socially desired answers on questionnaires. Low engagement in interviews and questionnaires will result in a lack of interest in working with the results. Engagement in the whole process matters, and has received scant attention to date.

So, how can you ensure that boards really engage in the whole process of a board effectiveness evaluation? We researched carefully and listened to clients. It has to do with trust, transparency, what you ask, how you ask, and in what order you ask.

We believe that boards have every right to be skeptical of advisors who treat board evaluations as a black box and overly rely on their “experience and expertise.” It is right to ask:

  • What is the reason for asking these questions?
  • How do they actually help us to become more effective and increase our performance?
  • What insights do I need as a chair, CEO, and director to become more effective?
  • What type of data is helpful?

Following, we provide insights into our research and practice of working with the boards of industry-leading organizations globally.

Advisors can ask directors many “interesting questions” in a board effectiveness evaluation. This is sadly what appears to happen, and has contributed to the resistance of boards to engage with effectiveness reviews. Many advisors have created a large number

of categories from which they draw their questions. A good argument for why certain categories are included and others are not is often missing.

Instead of asking “interesting questions,” we focus on those variables where there is evidence that they are linked to effective boards. To identify these, we looked into the Anglo-Saxon and German-speaking literature and conducted more than 100 interviews with chairs, members of boards, and operating partners of private equity firms. The research resulted in the “7 Hallmarks of Effective Boards” which provide a sound foundation for the questions we ask as part of board effectiveness reviews. Let us take a closer look at the seven hallmarks.

 

Rather than looking to identify what is not working for the board, it is far more effective to focus on what is working.

 

1. The strengths of the board. Research is clear that, rather than looking to identify what is not working, it is far more effective to focus on what is working. This is exactly where we start in our board effectiveness evaluations. Board members are nothing short of being surprised. They almost expect to get “beaten up,” but instead, we engage them right from the start and ask them to talk about their collective and individual strengths.

For an effective board it is vital that members understand what their strengths are in the specific context of the board and how members can best leverage each other’s strengths.

The days of elaborate board dinners with large amounts of wine and cognac are all gone. The pandemic years did not help. New members who came on board may not have had a chance to meet face-to-face. At present, members of boards have become used to the virtual world. Participating in board meetings via Zoom or Teams is cost-effective and convenient. However, it comes at a price. Members of boards know less about each other and do not understand how they can best leverage each other’s strengths.

 

2. Composition of the board. Talking about gender and women on boards has overshadowed the discussion about board composition in many countries around the globe. However, the questions are more complex, and require profound insights to generate effective boards.

We must look beyond the labels and understand the presence and development status of know-how areas and behaviors of individuals in a group setting.

It is crucial to understand how different knowledge areas, preferred roles in a group setting, and personality styles complement each other and fit with the company’s specific situation. That is, the development cycle of the organization, its strategy, and its value creation plan.

Our evaluations show that know-how related to “newer topics” like digital, cyber, transformation, climate, and ESG are not as well developed as discussion of their importance would suggest. The question boards have to answer is if they want to see specific subject matter expertise on their board, or if they want to appoint advisors. Opinions on this differ. Some executive search consultants clearly look for well-rounded board members and advise clients to select and appoint advisors if they seek specific knowledge.

 

3. Clarification of roles and responsibilities. The transition from an executive to a non-executive career is not easy; for some, it can take years to fully adjust to their role on a board. We find that the greater the pressure on an organization and operational performance, the more likely the lines between executives and non-executives get blurred and conflicts arise. Clarity of roles and responsibilities is a vital hallmark of any effective board.

 

We often see different opinions around the board table about what the company vision means in practice.

 

4. Vision, goals, and focus of the board. The vision for a company can become one of the most hotly debated topics on any board. Are all members aligned? Does everyone around the table have the same understanding of the vision? Does everyone interpret the words in the same way?

Once a vision is set, all board members must have the same understanding of the vision, speak with one voice, and agree on the goals and focus. We often see that, although lip service is often paid to a vision, there are different opinions around the table about what the vision means in practice, the goals, and the focus areas of the company.

 

5. The structure and organization of the work of the board. The organization of the board’s work depends critically on the company secretary and the interplay of the chair and CEO.

The company secretary profession is nowhere more advanced than in the United Kingdom. We work globally and can see vast differences in the structures and organizations of the work of the board. Company secretaries can make a big difference, but the profession is not advanced or does not exist in some countries.

Effective boards need support to organize their work and run their meetings. We found that private equity-backed, young, and growth companies often struggle with the structures and organization of the work. The issues are even more pronounced in venture capital-backed firms.

 

6. Ability to resolve conflicts. Effective boards and their members understand how to resolve conflicts amongst themselves on the board and between the board and the next management level. Not everyone is skilled in resolving conflicts and disputes, and it is not always necessary. However, effective boards understand who in the group is best placed to resolve conflicts and how to leverage the board members.

 

We see a move away from a single assessment report to the board, to individualized reports for every director.

7. Regular reviews and reflections on the work of the board. Regular time-outs, where board members can connect and deepen relationships, leave the daily work behind and reflect on how they work together is a good habit, with evidence in the academic literature. There is a strong and clear correlation between the time taken to reflect on how a board works together and its effectiveness. Although there is solid evidence, few boards take the time in our fast-paced world.

Concerns about requesting time from directors and costs for a facilitator and venue appear to be the main issues. However, if put in context, these costs are negligible.

Last but not least, there are leadership behaviors to be considered. The role of executives and non-executive directors on a board is different. Therefore, different questions need to be asked. Executive search firms that conduct board effectiveness reviews often complement their interviews with standard psychometric tests.

One has to bear in mind that these tests were developed for different purposes. We can ask many interesting questions in a board effectiveness evaluation, however, what matters is to ask questions specific to the context. Is this group of people acting together in the boardroom, and linked to the board’s effectiveness?

As a final point it is worth mentioning that we see a move away from a single report to the board to individualized reports for every director. Directors often shrug their shoulders when they see the report of a board effectiveness evaluation. They handed us reports of previous effectiveness reviews and asked: What am I supposed to do with this? Often they would conclude “there is nothing in it for me.” Individualized reports provide a personal benefit, and contribute to ensuring the engagement of directors in the process of board effectiveness evaluations.

The practice of conducting board effectiveness reviews is evolving. As pressure increases on boards to learn, adapt, and become effective, so does the pressure on those conducting these evaluations.

Reservations and preconceptions about board evaluation must be taken seriously, and advisors challenged to find solutions so that directors engage in the process.

The seven hallmarks of effective boards provide a sound foundation for board effectiveness evaluations, and have proven to positively impact the performance and effectiveness of boards around the globe. The hallmarks are based on research, and point towards areas where neutral and non-confrontational questions must be asked to increase performance and create more effective boards.

 

The text was first published in The US magazine The Corporate Board, November/December 2023, pp. 16-20.

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