Key Points
- Board self-assessment processes aimed at improving board performance, composition, culture and processes are common but vary widely in how they are conducted and who is assessed.
- Most S&P 500 companies assess both the full board and committees, and an increasing number evaluate individual directors as well, despite concerns that that might be seen as a way of easing out particular directors.
- Assessments can be conducted via questionnaires, interviews or group discussions, and can be overseen by the governance committee, a lead independent director, or outside counsel or other advisers to ensure anonymity and objectivity.
Most public company boards conduct some type of annual self-assessment. For directors who have served on multiple boards, that is where the commonality ends. Board self-assessment processes can vary widely from company to company in methods, who is being assessed, who is conducting or facilitating the assessment, what is being measured and what (if any) follow up takes place.
At the end of the day, there is no single right approach. A board or a governance committee should, from time to time, consider the many options and determine what self-assessment approach makes sense for a particular board at that particular point in time.
Why conduct a board self-assessment?
For NYSE-listed companies, it’s a requirement. The exchange’s listing standards provide that the “board should conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively.” But virtually all Nasdaq-listed companies also conduct an annual board self-assessment, suggesting that boards see value in the process and do not regard it as a mere compliance exercise.
In fact, most directors (and many institutional investors) view the board self-assessment process as an important component in driving improvements in board performance. Those improvements might relate to board composition (skills and experiences in the boardroom), board culture (improving the exchange of viewpoints and collaboration) or board processes (for example, improving board materials or using meeting time more effectively).
As described by one non-executive chair interviewed for The Informed Board in 2023, “Boards expect management teams to evidence accountability for their actions, evaluate outcomes and implement improvements. If we require that of management, then as directors we should model those same behaviors and engage in self-reflection and self-improvement.”
Who gets assessed?
The possibilities are the full board, board committees and individual directors. Perhaps obviously, every company that conducts a board self-assessment assesses the board as a whole. According to the 2024 SpencerStuart Board Index (2024 SSBI), 95% of S&P 500 boards also assess the functioning and performance of board committees.
Where practice differs significantly is on the topic of individual director assessments. According to 2024 SSBI, approximately 48% of companies utilized individual director assessments, up from 38% a decade ago. Historically, some boards were hesitant to engage in individual director self-assessments, fearing those might hurt board collegiality because they were viewed as a way to identify and weed out underperforming directors. (Some institutional investors may view individual director evaluations as desirable precisely because of that assumption.)
In reality, as the non-executive chair mentioned above said, “[t]hese reviews work best when they are understood as a method of realizing the full potential of every director.” At many companies, individual director assessments may take place once every two to three years rather than annually.
How is the self-assessment conducted?
Common self-assessment methods include written questionnaires/surveys, group discussions and individual interviews, or some combination of those. Questionnaires and surveys may allow directors a greater sense of anonymity and result in more candid responses. In addition, surveys allow for greater year-over-year comparability. That said, completing a substantially similar questionnaire every year for a number of years can, over time, appear to be a “check-the-box” exercise.
One-on-one interviews (with a lead independent director, governance committee chair or an external party) can allow the interviewer to probe responses to get greater context, but they do take more time to complete. These interviews can also be done in conjunction with questionnaires/surveys, either to further explore the particular director’s written response or score, or to probe an area that other directors may have identified as an area for potential change.
A group discussion allows for the potential of a robust dialogue and exchange of viewpoints among board members. Typically a list of questions or topics would be distributed in advance to provide some structure and allow directors to consider their views in advance of he discussion. Even when questionnaires/surveys or one-on-one interviews are conducted, those results should be shared with the board or applicable committee so that the full board or relevant committee has an opportunity to discuss the findings and decide on next steps.
Who conducts/leads the self-assessment process?
Typically, the process is overseen by the board’s governance committee. As a practical matter, that means the committee will decide on things like whether to utilize a questionnaire, interviews or group discussions, approve the questionnaire if one is being used and decide other process questions.
In terms of leading the process once those decisions are made, it would typically be one or more members of board leadership — an independent chair or the lead independent director and/or the governance committee chair — potentially assisted by the corporate secretary, outside counsel and/or another external advisor/consultant. For example, to preserve director anonymity, completed questionnaires/surveys might go to outside counsel or another external adviser to be aggregated and compiled. One-on-one interviews might be conducted by the independent chair/lead independent director or the governance committee chair — someone who understands the board culture and dynamics — or by an external party to further preserve anonymity. (Even when conducted by another director, typically any comments or views reported back to the board are done without attribution). Where an external party is used, that is generally done on an every two-to- three-year basis rather than annually.
A thoughtfully designed process using outside or inside counsel can help mitigate issues that might arise in subsequent litigation or shareholder books and records demands in the event that critical comments are made about particular board processes or individuals.
Does management participate in the board self-assessment?
Some companies take a “360-degree” approach and elicit management’s views the board. For example, do members of the management team think the board asks the right questions, or does the board strike the right balance in exercising its oversight function and being informed versus getting too deep into the weeds? Do members of the management team believe they have sufficient access to board members, or do they have views on how the board could be more helpful or provide greater strategic advice?
What happens after the self-assessment?
It would be the rare board self-assessment that concludes that everything is perfect and nothing should change. Whether it is a conclusion that the board needs to add a director with a particular skillset or experience, needs to change the frequency or length of board meetings, or needs to change some other board or committee process, there is typically something where directors agree a change is necessary. The key is to have an action plan to address those items and then follow up to confirm whether the desired changes were implemented, and whether directors feel the changes addressed the issue or are otherwise working to their satisfaction.
The ultimate goal of the entire self-assessment process, including the implementation of any changes arising out of that process, is for the board to feel that it is a more effective and better performing board of directors.
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