The Power of Board Assessments

by | Jul 5, 2018 | Board Dynamics, Governance

Board assessments are a powerful tool that can be used to evaluate the ongoing performance of your Board and ensure that you are following proper governance practices.

The board assessment process helps directors answer the important questions, such as:

  1. Do all directors understand the organization’s short and long-term strategies?
  2. Are directors and the executive team aligned on the organization’s strategy?
  3. Do directors understand the factors that drive the organization’s success, as well as the risk elements that can destroy value?
  4. Are there disputes or other issues between the directors and management, that impede smooth functioning of the Board?
  5. Do the Board and management understand their respective roles, so that there is clarity on both sides?

There are three types of board assessments:

Overall Board Assessments, Committee Assessments, and Peer Assessments. 98% of Boards assess their Overall Board performance, and over the past few years there has been an increase in the importance of Committee Evaluations and Peer Evaluations at 85% and 38% of Boards respectively, according to research conducted by Spencer Stuart. Organizations can also use the board assessment process to have directors reflect on their own performance, using self-evaluation questions, but this is less prevalent in the marketplace.

Board Assessments Continue to Evolve:

Evaluating your Board’s performance is a critical step in ensuring that you, as a director, are fulfilling your fiduciary duties. While this used to be done in a vacuum informally through individual one-on-one conversations between the Board Chair and individual directors, it has evolved into a much more robust process that involves post-meeting assessments, but also formal assessments of Board, Committee and Peer performance on a regular basis.

With the increased pressure and workload being placed on Boards of Directors in today’s marketplace, it is critical that you evaluate your Board’s performance on a regular basis. Regular board assessments can act as a powerful tool in identifying areas for continuous improvement to ensure that your Board is fulfilling its fiduciary obligations and ensuring the long-term sustainability of your organization.

Three Types of Board Assessments

by | Jul 5, 2018 | Board Dynamics, Governance, Leadership, Organizational Development

Board Assessments that Benefit an Organization’s Board Governance Practice

Board assessments can range in scope from simple, post Board meeting questionnaire of 5 to 10 questions on how to improve future meetings to detailed reviews at the end of the year that cover not only Board performance, but also director’s views on Committee performance and their peers’ performance. While organizations tended to conduct these types of assessments internally in the past, more and more organizations are relying on independent third parties to help them during the assessment with 45% of Boards reporting the use of consultants during their Board assessment, according to a recent Global Board survey, conducted by InterSearch and Board Network.

There are three types of Board Assessments that will benefit an organization’s board governance practices:

Overall Board Assessments

This is the most common assessment utilized by Boards and involves having directors evaluate the Board’s overall performance by asking questions relating to:

  • The Board’s overall understanding of organizational strategy
  • Director skills and competencies
  • Board Chair performance
  • The effectiveness of Board meetings
  • Board meeting materials and preparation time for meetings
  • Director relationships and collegiality
  • Director orientation

Typically, questions are provided with a 1 to 5 rating scale format and directors are given the chance to leave a  comment  where they may have evaluated performance at a low level (e.g. a rating of 1 or 2). Once the ratings from each director are consolidated, the range and average of ratings are generated for each question. From there, the Board is easily able to identify those areas where they have assessed performance as being weaker (i.e. Average Rating of 3 or lower) and is able to develop action plans to improve performance.

Committee Assessments

This is another common assessment utilized by Boards and involves having committee members evaluate the performance of the committees they participate in by asking questions relating to:

  • Committee Chair performance
  • The effectiveness of Committee meetings
  • Committee meeting materials and preparation time for meetings
  • Access to management and independent advisors

Like the Overall Board Assessment, a 1 to 5 rating scale questionnaire can be used to evaluate performance in these areas and, in turn, weaknesses can be identified and addressed through appropriate action plans to improve committee performance.

Peer Assessments

This is the least common assessment. Boards use it as a professional development exercise for directors and as part of the annual re-nomination and director selection process. Directors can evaluate their peers’ performance in several areas, including:

  • Meeting preparedness
  • Knowledge of the organization
  • Level of engagement
  • Understanding of their role
  • Collegiality and ability to work with other directors
  • Contribution to the Board

Peers can also be evaluated on a 1 to 5 rating scale using a questionnaire with directors who receive lower average ratings identified quite clearly. The evaluation can identify “problem” directors who can then be provided with the opportunity to improve their performance or resign well in advance of the re-nomination process.

Following Up on the Results of the Questionnaire

The most powerful used of the questionnaire is combing the results with individual follow-up interviews. The follow-up interviews can help the directors identify why they rated certain areas higher or lower and explore specific ways for the Board, Committees, and Peers to improve their performance. The feedback from these interviews must be kept confidential, with only the high-level themes of the interviews summarized. After the questionnaires and interviews are completed, boards can use the results to develop strong action plans that will establish specific ways in which performance can be improved.

GGA notes that communicating the results of the assessment (specifically peer evaluations) is a sensitive issue and typically is handled by either the Board Chair, Governance Committee Chair or an independent third party. Typically, the summary results are provided to the full Board, along with any action plans required to improve performance moving forward. Peer Assessment results are typically discussed individually with each director. Conversations with directors on their own performance are sensitive matters, so effective and diplomatic communication is required by whoever is delivering the feedback. They must identify existing areas of strength and contributions, so that they understand where they are already effective. When raising shortcomings, they must provide specific examples and keep comments constructive by avoiding personality-related comments. Most importantly, they cannot dodge the sensitive issues. Sensitive issues must be addressed for improvements to be made.

Defining Board and Management Responsibilities

by | Jul 5, 2018 | Board Dynamics, Governance, Leadership, Meeting Effectiveness

Making Sense of Your Role

To ensure good governance practices, Board members must acknowledge and adhere to three primary fiduciary duties, which was the message that I recently delivered in education sessions to public pension plan trustees and board members for not-for-profit organizations.

  1. Duty of Loyalty;
  2. Duty of Prudence; and
  3. Duty of Impartiality.

Part of making sure that you are fulfilling your primary fiduciary duties is to make sure that you and your Board are following proper operating processes. As has been said many times by governance and legal experts, you cannot be sued for the decisions you make as a Board, but you can be sued for not following proper processes in making your decisions.

One key problem area for boards of all sizes, in all industries, is the separation of roles between the Board and management. Often boards get too far down into the weeds on operational issues that can be better delegated to management and, as a result, do not spend the necessary time focusing on the important strategic issues facing the organization. This pattern of behavior can lead to several negative outcomes, including:

  • The loss of influence of your Top Executive over implementation and operational decisions, which can ultimately hurt them in commanding the respect of other senior staff members.
  • Friction between the Top Executive and the Board that ultimately leads to a lack of trust on both sides.
  • Potential loss of key talent due to the dysfunction between the Board and management.

The common mantra in governance circles is for boards to have their “nose in and fingers out,” which refers to a board’s obligation to be on top of all governance matters, but to not stray down into trying to manage the day-to-day operations of the organization. In recent years, a new term: “nose in and fingers on the pulse” has emerged. This describes a board that succeeds by playing a role in overseeing the execution of the strategic vision, while simultaneously keeping on top of strategic developments that will affect the organization. In either case, it is important that Board and management have a clear understanding of their responsibilities, which starts with identifying situations where the Board is being over-active and straying too far down into management issues.

Signs of an Over-Active Board

Four ways to spot an over-active board

  1. Too much time is spent in Board meetings discussing operational issues.
  2. Board meetings are constantly running behind schedule.
  3. Your Top Executive’s relationship with the Board is strained.
  4. You find yourself, as a Board confused, over your responsibilities vs. management’s.

If you spot any of these situations you need to discuss your concerns with your fellow Board members, as well as management, to see how you can improve.

Starting points to consider when delineating between Board and management responsibilities

Common Board Responsibilities

  1. Review and approve annual and long-term objectives for the organization.
  2. Review and approve policies and procedures that govern the organization.
  3. Review and approve strategic plan and annual operating budget.
  4. Hiring, firing and compensation for the Top Executive.
  5. Provide direction and strategic input to the Top Executive and management.
  6. Monitoring performance and risk of the organization.
  7. Setting and approving the organization’s overall Board governance framework.
  8. Review and approve required public disclosure documents.

Common Management Responsibilities

  1. Initial formulation of annual and long-term objectives for the organization.
  2. Initial formulation of policies and procedures that govern the organization.
  3. Prepare Board reports and draft annual operating budget.
  4. Provide continuous input into the strategic plan of the organization.
  5. Hiring, firing and compensation for staff below the Top Executive.
  6. Managing risk and monitoring performance of the organization.
  7. Preparation of required public disclosure documents for the Board’s review.
  8. Run the day-to-day operations of the organization.

Real-World Application

Let us consider the responsibilities of the Board and management as it relates to setting the annual operating budget. In this case, it is management’s role to develop the budget by considering all the potential areas to allocate funds on while balancing that with consideration of the fiscal constraints that the organization faces. Management must also draft the budget quickly enough so that the Board has adequate time to review and ask questions about the budget before it needs to be finalized. Once the budget is drafted and presented to the Board, by management, it is the Board’s role to ask management good questions about the assumptions, omissions and estimates used to draft the budget.

The following are types of questions that the Board should ask at a strategic, not granular, level to better understand the budget and ultimately be able to approve it. Please note that the Board should not be asking questions on every single line item of the budget.

  • What did management consider including, but ultimately decide to exclude from the budget and what was their rationale?
  • What is the impact on the budget if a certain estimate is missed?
  • What are the key variables that will impact the organization’s ability to meet the budget?

Ultimately, better defined roles lead to a positive working relationship between the Board and management, which should lead to better decision-making, a collaborative approach to solving issues, candor in speaking about difficult issues and a high level of trust on both sides.

We all desire clarity in our day-to-day lives, why shouldn’t we ask for it in the Boardroom as well?