Someone once told me that, “Feedback is the breakfast of champions.” We have all seen how constructive feedback improves performance and helps employees to avoid mistakes. The challenge is getting actionable feedback to people early enough for them to use it effectively. In a private company, designing effective board evaluations can be an efficient way to support healthy company growth.
This approach applies to the company’s board of directors as well as employees. Board evaluations started as an academic research topic in the 1990s. In 2003, the NYSE required listed companies to conduct annual board appraisals. Since then, most public companies have some type of annual board evaluation. Over the last 10 years, a small industry of board evaluation consultants has emerged. While they service both public and private companies, most of their revenue is derived from public companies.
As a broad generalization, the best practices of public companies trickle down to private companies, but slowly and selectively. While better private boards conduct regular evaluations, my observation is that most private boards have not matured to the point where they have a disciplined and consistent self-appraisal process. Designing board evaluations with intention will bring focus and purpose to the assessment process.
Many private companies use a non-fiduciary Board of Advisors as the primary governance body. So, the fiduciary board becomes a subset of the Board of Advisors. Owners want to add the skills and experience they lack, but only to the extent they desire. This is a natural step in the evolution of a private company’s governance. It is also one of the benefits of private ownership: You can do what you want, so long as you can afford it.
There are four key questions to address when considering a board evaluation.
Just because it is considered a best practice does not mean that it is right for every situation, or that one size fits all. The process should be geared for the specific needs of your organization.
A new board needs time to evolve to achieve full effectiveness, and feedback is a quick way to see where it needs to grow in regards to basic governance responsibilities. A mature board will likely want to dive deeper into assessing how well it deals with succession planning, capital allocation and risk management, as well as keeping the board itself vibrant via term limits.
As with management and staff, 360-degree reviews often give the best feedback. That means the board performance evaluation should include board members, key non-board executives and ownership representation. This can be tricky, depending on how healthy the working relationships are.
So, who is best qualified to handle this task? It usually falls to the chairman, outside counsel or a consultant. The facilitator must be trusted by all participants so they can get candid responses. The leader also needs to have the tact and gravitas to deliver feedback so it is accepted. This is why an outsider may have to be considered.
The two most popular methods are questionnaires and personal interviews. The design and use of each is critical, but there are ample tools available in the public domain to get a start. If this is something new for the organization, an informal approach may make it easier for people to be candid and fully engaged.
The cottage industry of consultants has well-developed tools for public companies. Private companies should consider a modification of these methods to meet their individual needs and budgets.
There are a handful of qualified surveys of private company director compensation. There is little to no reviewed data on private companies’ board evaluations.
Based on hearsay, I estimate that less than 15% of private company boards use a formal evaluation process on a routine basis. This is more a function of how long the board has been functioning, rather than the size of the company.
However, there always seems to be time to do this, on an ad hoc basis, after a crisis (e.g., death/resignation of a director, global pandemic, management shake-up). This is consistent with the maxim that owners are good at working “in” the business, but most are not as good at working “on” the business.
The decision to conduct an evaluation, and how it is used, is really a measure of the quality of the ownership of the business. Good owners will drive continuous improvement at all levels of the business, including the board. They want to know the IRR, or internal rate of return, of their investment in the board, as much as they would any other investment.
Based on data from PwC, which surveyed public company directors, the need for continuous feedback is a top concern for many directors. In 2019, 49% of listed company directors stated that at least one director on their board should be replaced due to underperformance—though the ability to provide honest and anonymous feedback is also lacking for many directors. With only 44% of S&P 500 boards using some form of individual director assessment, it’s clear that even fewer private companies are catching these performance problems cited by director surveys.
All of the tools and personnel for conducting a board evaluation are readily available; it is a matter of priority. How important is designing board evaluations to the owners? Since there is no preset protocol, the process can be sized to budget constraints. Just because it may be sensitive, awkward or a confidential matter does not mean it should not be dealt with proactively; the board is managing the most important business of the firm. It needs to be held accountable.
As an outside director, this should be an important part of your diligence process when considering joining a board. If there is no board evaluation process, why not? Has the board not evolved to that point yet, are the owners unwilling to invest in designing board evaluations, or is this an issue for a new director to lead on?
You should understand this in your assessment of your fit for a new board. Feedback is the breakfast of champions, even in the boardroom.
©All Rights Reserved. October, 2020. DailyDACTM, LLC d/b/a/ Financial PoiseTM
Bruce Werner is the Managing Director of Kona Advisors LLC, which provides advisory services to owners and investors of private and family-owned companies. With exceptional experience in finance, strategy, M&A, governance, and succession planning, Kona Advisors creates practical solutions to the most challenging corporate problems. Mr. Werner is an experienced Corporate Director, leading businesses through…
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