In the current environment of activism, and ongoing scrutiny of company performance, governance, executive compensation and sustainability, company boards are increasingly under the spotlight.
Investors—both current and prospective—are focused on a range of board-related issues. This includes board gender and other forms of diversity, the board’s ability to effectively monitor and guide management as it executes its strategic plan and efforts to increase shareholder value, and its ability to provide effective oversight of a growing range of risks.
Increasingly, investors focus on the mix of skills and qualifications contained within the board, and whether those meet the current and foreseeable future needs of the company, given its competitive environment and evolving strategies. As the company’s business and strategies evolve, so should the board composition and skills mix. Many companies use internal matrices of skills and experiences to confirm they have the right mix of skills, to identify gaps and future needs, and an increasing number of companies disclose these (or versions of them) to their investors to highlight these skills.
Among their many responsibilities, boards of directors are expected to review CEO performance, as well as their own. Annual evaluations are an important way for boards to assess their performance and to identify when new membership, experience and skills are required. There are various processes and models for conducting these evaluations, which typically are conducted away from public eyes.
Investors understand that for these reviews to be effective, they must be conducted confidentially. What they do want to know, however, is that there are such processes in place and that they can have confidence that they will function as intended, both to help the company achieve its potential, and also to be vigilant and safeguard against risks that threaten such achievement.
This process of performance evaluation can result in constructive feedback to the reviewee, helping him or her identify and improve upon areas of weakness. It also may identify underperforming members in need of replacement, and result in an acceleration of the board refreshment process.
Having a robust and functioning evaluation process is critical to mitigating the negative impact of sub-par performance. Given the importance of these processes and their confidential nature, how can investors and other stakeholders have confidence that the process that exists at their portfolio companies is thorough and well-functioning?
As the company’s business and strategies evolve, so should the board composition and skills mix.
One way to provide assurances is through clear discussion in the annual proxy statement, as well as year-round corporate governance and investor relations messaging. In this area, there is a great divergence in company disclosure practices.
To be clear, this is not to say that the results of board evaluation reviews be made public. Rather, it is to say that the disclosure and description of the process should be sufficiently specific—and presented in clear language, not legalese or boilerplate—so that investors can have confidence in the process and that it will work as intended to mitigate downside risk. Each year we are seeing more companies focusing on and improving the clarity of these disclosures.
T-Mobile US (Figure 1) and Invesco Ltd. (Figure 2), in their most recent (2018) proxy statements, use a combination of text and visual elements to explain their board evaluation processes in such a way that the discussion is easily located, digested and understood. These and other companies are raising the bar on the important topic of board evaluation. On the other hand, companies that fail to effectively communicate what may be robust board evaluation and recruitment processes risk becoming seen as relative laggards when viewed in the context of peer company disclosures.
Ron Schneider is the Director of Corporate Governance Services for Donnelley Financial Solutions. He can be reached at ronald.m.schneider@dfsco.com.