Judge Me, Judge Me Not

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By: Peter Lauria

Board directors are under more scrutiny than ever from investors, analysts, and stakeholders. But from the companies on whose boards they serve? Not so much.

Although investor groups and activists continue to push for closer scrutiny of director performance, the latest data suggests the results have been mixed. In all, 97 percent of S&P 500 companies now disclose details about their board-evaluation process in their proxy statement, according to Korn Ferry research. But only 48 percent of these board directors are subject to a performance evaluation, down from 59 percent a year earlier.

Those figures—combined with data showing that at least half of current board directors think one or more of their peers should be replaced—suggest to skeptics that board evaluations are still more of a compliance exercise for companies than a strategic imperative. “The problem is sort of obvious,” says David Larcker, a professor at the Stanford Graduate School of Business who specializes in corporate governance. “Directors don’t have much taste for telling other directors they aren’t doing a good job,” he says.

Third-party scrutiny appears to be scant as well: Only one-third of firms brought in outside evaluators. In other words, most boards evaluate performance—their own and that of individual directors—themselves. Fifty-three percent of the time, the method of assessment they use is a written questionnaire and survey. “Paper surveys miss all the nuances and context that could create real value from board assessments,” says Larcker. He says that director interviews, which are part of the evaluation process at 49 percent of companies, offer much more valuable insights.

Meanwhile, Anthony Goodman, head of the Board Effectiveness practice at Korn Ferry, says the decline in director interviews might not represent a trend; rather, it could be a function of the fact that 30 percent of companies vary their evaluation process from one year to another. This approach, he says, is emerging as a best practice for keeping directors engaged in the process. “Making evaluations different from year to year could help generate more insight and reflection from directors,” Goodman says. Still, if the goal is to generate more candor, eliminating the survey altogether and delegating the process to a third party “are more effective ways to vary evaluations,” he says.

More important than the process, says Goodman, is what topics are covered—including everything from the meeting agenda’s quality and appropriateness to committee structure to board dynamics. While more boards are disclosing information on the topics they’re evaluating, for stakeholders it’s more important to know what changes are being made.

The trouble is that only 24 percent of boards disclosed those changes, and most of those disclosures related to board responsibilities, committee structures, and succession planning. That’s partly because boards have only a limited ability to disclose non-proprietary information. But Goodman suggests that being more forthcoming could be valuable for investors and other stakeholders. “Finding a way to highlight how the board is thinking about issues like AI, for instance, is important for investors,” he says.