An Overview of Board Performance Evaluation: At Dusk Threaten

Abstract

To improve overall governance, everyday practices and the dynamics in the boardroom, it is necessary to invest in an assessment process of the board of directors deeper than compliance requirements. Evaluation processes have become common in the boardroom; it appears that 94% of S&P 500 companies regularly conduct an evaluation as found in the PwC’s 2011 Annual Corporate Directors Study. According to PwC’s 2013 survey in Russia, 65% of boards (among listed companies - over 70% of boards) carry out their performance evaluation annually, while 7% do this once every two to three years, and another 7% do this even less frequently. Yet, 22% of boards have never conducted board performance evaluations, versus 6% of UK companies and 2% of S&P 500 companies. Moreover, 43% of companies disclose the results of the board evaluation in their annual report and 34% disclose the results at their general meeting of shareholders. According to the BoardSource Nonprofit Governance Index 2010, boards that have conducted a self-assessment are rated more effective by their chief executives than those that have not (66 percent vs 42 percent).

The global economy is going through a difficult period and good governance requires that the performance of the board is evaluated at least once a year. The evaluation process is a constructive mechanism for improving board effectiveness, maximizing strengths and tackling weaknesses. At times of such challenge, it is even more critical than normal, that boards of directors can plan effectively and take tough and strategic decisions are required proper board procedures in place, with all directors fully understanding their role and having the special skills that directors need.

Independent directors are now confronted with complex oversight, accountability, corporate performance and they might also have to endure greater personal risks and liability. Investors, regulators, stakeholders and the society at large are increasingly demanding that boards demonstrate leadership, control and deliver on their responsibilities and their company’s results so the expectation of the board is to go beyond compliance. Besides, large institutional investors are becoming far more demanding in the growing belief that good governance enhances corporate outcomes.