Best Practices inBoard Evaluation and

Individual Director Evaluation

The Canadian Society of Corporate Secretaries11th Annual Corporate

Governance Conference

August 23 – 26, 2009St. John’s, Newfoundland and Labrador

Beverly A. BehanColumnist: “The Boardroom”, BusinessWeek.com

President: Board Advisor, LLC - New York

Date: August 25, 2009

What Is an Effective Board?

• When you think of a “high- performing” or “world-class” Board:– What is this Board particularly good at? – If you walked into this boardroom, how

would it feel?– How would you describes the

relationship between this Board and the CEO?

High-Performing Boards……• Are comprised of the right people

• Portfolio of skills/experience• Engaged/make a meaningful contribution• Representative factors

Agendas

Information

Composition

• Get the right information• Director orientation/education• Pre-reading materials• Board presentations• Updates between board meetings

• Make the best use of their time•Focus on the most important issues•Balance of presentation/discussion time•Engage at an oversight level, not management level

High-Performing Boards……• Have effective processes, especially

with respect to:• Corporate strategy• CEO succession planning• Board evaluation/Director evaluation• CEO evaluation• Risk management

Board Committees

Key Processes

• Have effective committees•Board/committee interface is critical•Committee membership and leadership•Resources that support the committee’s work

High-Performing Boards……• Have effective leadership

• Draw out different perspectives• Keep meetings focused on critical issues

CEO Relationship

Dynamics

Leadership

• Work together well as a team• Respect different perspectives• Reach consensus/make decisions• Have positive energy/engagement

• Work constructively with the CEO•“Constructive tension” between support/critique of management• Raise tough, challenging issues• Motivate and reward strong performance

In the US, High-Performing Boards are Rare

% Who Rated Their Board

Private Companies

(329 Directors)

Public Companies

(703 Directors)

Highly Effective 16.2% 20.2%

Effective 46.7% 60.1%

Somewhat Effective 29.6% 15.6%

Ineffective 7.6%

According to the National Association of Corporate Directors (NACD) 2008:

“Certifies” to shareholders that: CEO is doing what Board expects; management is capable of taking corrective action when needed

Emphasizes outside/ independent directors; meets independently without the CEO

Stays informed of current performance; designates external Board membersto evaluate CEO

Establishes an orderly succession process

Is willing and able to change management to be credible to shareholders

The “Engaged”

Board

The “Passive”

Board

The “Operating”

Board

The“Intervening”

Board

The “Certifying”

Board

Functions at discretion of CEO

Limited activity and participation of Board

Limited accountability Ratifying management

preferences

“Partners” with CEOto provide insight, advice,and support to CEO and management team on key decisions and implementation

Also recognizes ultimate responsibility to overseeCEO and company performance; dual roleof guiding/supporting as well as judging the CEO

Board meetings characterized by useful, two-way discussions of key issues/decisions facing the company

Board members need sufficient industry and other expertise to add value to decisions

Typical mode during a “crisis” situation

Board becomes intensely involvedin discussions of key decisions facing the organization and in decision-making

Frequent and intenseBoard meetings, often called on short notice

Board makes key decisions; management implements

Not uncommon in early “start-ups” where Board members are selected to “fill gaps” in management experience

Degree of Board Engagement

Source: Building Better Boards, Jossey-Boss 2006

Board-Building Model

Taking Stock of the Board

Taking Stock of the Board

Board Roles, Expectations and

Level of Engagement

Board Roles, Expectations and

Level of Engagement

Board Composition

Board Composition

Board Agendas & Meetings

Board Agendas & Meetings

Board StructureBoard Structure

Board Climate/Dynamics

Board Climate/Dynamics

CreateValue-Added Engagement

CreateValue-Added Engagement

Assess Quality of Engagement

Assess Quality of Engagement

Source: Building Better Boards, Jossey-Boss 2006

Board InformationBoard Information

Board ProcessesBoard Processes

Board LeadershipBoard Leadership

Board Evaluation

Board Evaluation: A Best Practice Around the World

-1992: Cadbury Report (UK) first recommended conducting an annual assessment of the board’s performance as a “best practice” in governance

-Conducting an annual board assessment is one of the guidelines in the modern UK Combined Code

-OECD Corporate Governance Guidelines noted that regular evaluation of the board’s performance was one of the board’s key responsibilities

-2003: New York Stock Exchange (NYSE) requires that all listed companies conduct an annual assessment of the performance of the board and its committees

A Best Practice in Canada - and a TSX Guideline-In Canada, the Dey Report in 1994

recommended that boards conduct an annual self-assessment of the Board

-TSX Guidelines recommend Board and individual director self-assessment

-There is no prescribed format for

conducting the assessments

-Assessment results are not filed or published anywhere

% Who Rated Their Board & Director

Evaluations

Private Companies

(329 Directors)

Public Companies

(703 Directors)

Highly Effective 9.3% 15.6%

Effective 25.4% 42.1%

Somewhat Effective 36.9% 33.9%

Ineffective 28.4% 8.4%

According to the National Association of Corporate Directors (NACD) 2008:

Most Board & Director Evaluations are Ineffective

How to Avoid This Happening to YOU• As Corporate Secretary, you need to be in a

position to inform your Chairman/ Chair of Nom/Gov Committee of practices that avoid the board evaluation becoming a waste of board members’ time

• Use the right methodology

• Ask open-ended rather than closed-ended questions:

– BAD: Our board has the right composition– GOOD: If we were going to add one new board

member, what background/skill set should that person bring?

• The outcome should be an “Action Plan” of 2-5 items that will enhance the board; getting a “high score” isn’t the point

Choosing a Methodology/DesignWhat are your objectives for the board evaluation?

If it is primarily to achieve compliance with stock exchange requirements or “best practices”, choose a survey

If you want to use the process to significantly enhance board performance, invest in an interview process with an experienced third party – and include management feedback.

If you want maximum impact but have a small budget or a large board that make interviews cost prohibitive, consider a survey supplemented by a focus group

There is no need to use the same process each year. Innovative boards use different methodologies to see the board’s

performance through different lenses.

Surveys

On a scale of 1 - 5 indicate the extent to which you agree with each statement:

• There are the right people on the Board.

• Everyone pulls his/her weight.

• Meetings are held with enough frequency.

1= strongly disagree 5 = strongly agree

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

Interviews

• Confidential, structured interviews typically conducted by a third party but sometimes conducted by the Chairman, the Chair of the Nominating/Governance Committee or the corporate secretary; this methodology is used by 43% of UK boards

What was the most significant decision this board made in the past year?

If you could change one thing about this board, what would you change – and why?

What do you see as the board’s most important priorities over the next 6, 12, 18 months?

How would youdescribe the working relationship between the board and the CEO?

What are the major risks facing this company?

Focus Groups -Subgroups of board members (4-5

directors) participate in focus groups to discuss key elements in board effectiveness

-Most commonly used with large boards, such as not-for-profits where cost of individual interviews is prohibitive

-Can be a useful team-building exercise for the board

-Board members are often more reluctant to raise sensitive or difficult issues in a focus group than in one-on-one interviews

Other Design Factors to Consider -Feedback from senior executives who regularly

interface with the board

-Individual director evaluation

-Board observation Some directors “play to the camera”

-Review of Board minutes

-Crown corporations (or similar bodies where a stakeholder has the right to appoint directors) Feedback from the appointing government body on their

perceptions of board performance

What do you do with the feedback?1) Analyze It

Analyze the key themes surfaced from the board assessment to help you determine: Strengths of the Board Areas for Potential Improvement

2) Talk about it Schedule at least 2 hours (preferably half a

day) for the board to discuss the results of the board assessment

Discuss the top 2-5 areas for improvement and develop strategies to effectively address these

3) Create an Action Plan (2-5 items)– A roadmap for the board to use over the next 12

months to address possible improvements

“We Had No Issues”

-“We had no issues” in our board evaluation is a big red flag. It implies either that:The Board evaluation is very poorly designed; orThe Board is “checked out” and doesn’t care

-Good Boards are made up of accomplished business leaders who value continuous improvementThese people always surface good issues and

try to make good Boards even better

True Case Study2006• CFO interviewed during board

evaluation said:– “The Board is ok; they don’t

get in my way. But I’d kill for someone to ask me a question about global corporate finance in a board meeting that made me really think.”

• Board Evaluation Action Plan– 4 new directors to be added– Changed board pre-reading

information dramatically– Created “expectations” for board

members

2008• Same CFO interviewed during

the board evaluation said:– “This board is night and day

from the board we had 2 years ago. They’re fantastic – a true corporate asset.”

– “I ask only one thing from this year’s board evaluation – 45 minutes on the agenda when I can just have “open discussion” with the board from time to time on key strategic issues. This board is better than McKinsey.”

• Board recognized for progressive governance

Two Top Issues that Arise in Most Board Evaluations:CEO Succession PlanningBoard Engagement in Strategy

1. CEO Succession Planning

CEO Succession Planning

% Who Rated Their Board on CEO

Succession Planning

Private Companies

(329 Directors)

Public Companies

(703 Directors)

Highly Effective 8.9% 11.3%

Effective 30.2% 37.7%

Somewhat Effective 31.3% 35.3%

Ineffective 29.5% 15.7%

According to the National Association of Corporate Directors (NACD) 2008:

Emergency CEO Succession Planning• -Every board should have an emergency succession

plan in place for the unexpected loss of:Chief Executive OfficerOther top officers (eg. CFO, COO)Loss of all three top officers at once (the

“company plane crash” or “scandal” scenario)

-Emergency succession plans should be reviewed:On an annual basis with the full boardWhenever a material change in company or board

leadership occurs that could impact the plan

CEO Succession Planning ModelCorporate Strategy

Develop Future CEO Criteria

Assess Internal Candidates Against CEO Role Profile

Select New CEO

Develop CEO Transition Plan

Develop Plans for Internal Candidates

Assess Internal vs. External Candidates

Corporate CultureBusiness Model

2. Board Engagement in Strategy

Board Engagement in Strategy

SWOT(Strengths,Weaknesses,Opportunities,Threats)

Strategic Alternatives

Strategic Choice

StrategyImplementation

Where most CEOs

Engage their Boards

On Strategy

Optimal Point to

Engage Board

On Strategy

Individual Director Performance and Evaluation

The Best Directors Play Two Distinct Roles Watchdog Role

– Focus is on corporate

oversight

– Approval of management’s

decisions and actions

– Challenges management’s

assumptions

– Raises challenging and

sometimes difficult issues

Sounding Board Role

– Focus is on “partnering”

with management to benefit

the corporation

– Provides advice, counsel,

guidance, and mentoring

to the CEO and senior

management

– Facilitates business

introductions

Source: Building Better Boards, Jossey-Boss 2006

Types of Problem Directors -Pitbull -Pet Rock -Deer in the headlights -CEO Wanna-Be -Management lapdog -“Wowed” by prestige

of being on this Board -Super-director

Individual Director Evaluation: Methodologies• Director Self-Assessment: Board members rate themselves against a set

of criteria (eg/ “I ask good questions in board meetings”)

– This can be useful for consciousness-raising with a new board or as a means of introducing this process

– It has limited utility, however. Inevitably some of the lowest performing directors give themselves the highest scores.

• Chairman Phone Calls/Meetings: The Chairman calls up board members and asks them if they feel anyone should not be re-nominated.

– This is not a true director evaluation process.

– No useful feedback is elicited on strengths and contributions of the high-performing directors

– This tends to be solely decision-making and not developmental

– Feedback is provided “too late” and typically with insufficient detail to be genuinely useful.

•

Individual Director Evaluation: Methodologies• Conversation in the Nominating/Governance Committee

– “Once a year, our Governance Committee talks about the performance of everyone on the board”

– This creates a two-tiered board dynamic and limits non-committee members from providing feedback.

• Director Peer Evaluation is far more progressive and useful than other methodologies. It is typically conducted using either:– Surveys: Directors rate each other on a 1-5 point scale with write-in comments– Confidential Interviews: May be conducted by a third party or the Chairman:– Key interview questions:

• What is Director X’s most significant contribution to the board?• What, if anything, could Director X do to be even more effective as a Board

member?• Should Director X be re-nominated to the board?

Individual Director Evaluation: Key Questions-Will this process be used:

Solely for directors’ professional development?

Part of the re-nomination process?

-MethodologiesInterviewsSurveys

-Who will deliver the feedback?Non-Executive Chair?Chair of Nom/Gov CommitteeThird party?

Individual Director Evaluation: The Key

• Keep it constructive– Emphasize strengths and contributions so

that directors understand where they are particularly effective;

– When raising shortcomings try to provide specific examples and keep comments constructive.

– Avoid personality-related comments that only create bad feelings

• The skill of the interviewer is critical: – Third party vs. Chairman/board

member??? Corporate secretary??

:

Questions and Answers/Discussion

Beverly A. Behan • Has worked with more than 85 boards in Canada,

the U.S. and internationally over the past 12 years.• Conducted the board and director evaluation for the

board of the Bank of Montreal from1997-2000; first major North American board to do an individual director evaluation

• Co-author: “Building Better Boards: A Blueprint for Effective Governance”, Jossey-Bass, 2005

• Columnist, “The Boardroom”, for BusinessWeek.com since 2007

• For more information, see www.boardadvisor.net