As boards seek to strengthen their effectiveness and composition, the evaluation acts as an increasingly important tool for improvement.
Investors, regulators, other company stakeholders and governance experts are continuing to challenge boards to examine and explain board performance and composition. Indeed, many stakeholders note board effectiveness and composition as a top priority and foundation for long-term value creation and sustainability.
Boards are listening. They are enhancing their evaluation practices, addressing the need for increased board diversity, expertise and effectiveness, and better communicating their work to investors and other stakeholders. Continuous improvement is the new mantra — for boards, and also management, talent and companies themselves. Boards should embody — and their disclosures should reflect — this mantra.
Effective board evaluations can drive better board performance. So how are today’s leading boards evolving their evaluations to enhance effectiveness, and what are their companies communicating to stakeholders about their board evaluation processes?
Last year we reviewed proxy statements filed by Fortune 100 companies to identify disclosures on notable board evaluation practices and to outline elements in designing an effective evaluation process.
Download the full report here.
When we compare the data to this year, we find that Fortune 100 companies are enhancing disclosures about their board evaluation processes — with some substantial differences in disclosure year over year. Boards are taking concrete steps to make their evaluations more effective, including individual director evaluations, peer evaluations and use of third parties to facilitate the evaluation, and expanding disclosures around evaluation topics and resulting actions.
Leading the evaluation process
Leadership is key in designing and implementing an effective evaluation process that objectively elicits valuable and candid director feedback about board dynamics, operations, structure, performance and composition.
A strong majority, 73%, of 2019 Fortune 100 proxy filers disclosed that their corporate governance and nominating committee performed the evaluation process either alone or together with the lead independent director or chair — a modest increase from 69% in 2018. These companies also disclosed that evaluation leaders did or could involve others in the evaluation process, including third parties, internal advisors and external legal counsel.
Evaluation of individual directors and peers
Board and committee evaluations have long been required of all public companies listed on the New York Stock Exchange. Today, board and committee evaluations are standard practice for all public companies.
Boards are continuing to expand their evaluation process to include individual director self- and peer evaluations.
Approximately 40% of 2019 Fortune 100 proxy filers disclosed that they included individual director self-evaluation along with board and committee evaluation, up from 24% in 2018. Twenty-five percent of 2019 Fortune 100 proxy filers disclosed that they conducted peer evaluations, more than double the 10% in 2018.