Practical Steps for Increased Board Effectiveness
January 17, 2023
Over the past year, public companies have faced an onslaught of external pressures, including an uncertain economy, an ongoing pandemic with changing rules and best practices and increasing demands from various stakeholders.
The coming year looks to continue the trend with a volatile market and economic/political conditions, increasing regulatory demands and shareholders looking for active engagement. How prepared a company is to handle these external factors depends in no small part on the strength of its board of directors. An effective board is critical for company success, even in the absence of such difficulties. Increasingly, companies and their shareholders are focusing on selecting, evaluating and maintaining an effective board.
Entering 2023, here are key issues companies and boards should consider to enhance board effectiveness.
Identifying Needs Through Meaningful Board Evaluations
Nearly all major public company boards conduct annual board evaluations, but not every company is able to glean clear, actionable feedback from those evaluations. Standard written board
evaluations may be an efficient way to comply with annual obligations to self-assess, but they may not elicit enough information to provide meaningful insights into board effectiveness and provide a path forward to increased board efficacy. Some companies are turning to alternative evaluation formats to better assess how their boards can improve.
- Consider the various formats for conducting a board evaluation (including written questionnaires, one-on-one interviews, group discussions (led by a member of the board or by a third party)) and determine whether an alternative format may elicit more or different feedback from the board.
- Board evaluations can alternate from year to year. For example, a board can opt for one-on-one interviews once every two or three years in order to more deeply explore certain themes or topics.
- Consider using advisors to assist in structuring an evaluation process that can provide more meaningful feedback. Also, depending on the particular dynamics and personalities on the board, an advisor may be best placed to facilitate the interview or discussion, as well as guide potential follow-up.
- Consider seeking feedback from senior executives as part of the board evaluation process. Senior executives may have insight on additional skills or expertise that would be helpful to have on the board.
- Board evaluations should seek feedback not only on an individual’s performance as a director but also on the performance of the board as a whole, as well as its committees.
Enhancing the Diversity of Skills and Backgrounds Through Board Refreshment
Diversity continues to be a focus of stakeholders, including at the board level. Increasing board diversity can be accomplished through either (i) expanding the board to add directors with diverse skills and backgrounds or (ii) a more comprehensive board refreshment process. For some companies, the latter option may be more appealing as a way to promote and enhance board effectiveness, as well as potentially deal with lingering issues, shareholder pressure or directors with longer tenure than desired. Management, however, may find it difficult to initiate a board refreshment process. One question we often hear is “how do I get my board on board with board refreshment?” In order to be successful in achieving a refreshed and more effective board, it is critical for board refreshment to be led by the board and particularly by key directors, which can be a long-term process.
- Consider linking a board refreshment process with the company’s long term strategic plan so board skills are aligned with where the company views its business in the future.
- Identify areas in which new directors with a diverse skillset and background can strengthen the board and contribute to a more effective board. Present a board skills matrix to showcase where there may be gaps in expertise. Be specific in what skills and backgrounds could enhance the effectiveness of the board, focusing on what can be gained in terms of diversity in background and expertise by a comprehensive board refreshment process. Elicit feedback from board members on what additional skills they would value in new directors.
- Avoid focusing on which directors may be a target for replacement in a comprehensive board refreshment process when initially discussing the concept with the board. Focus on the benefits to board diversity and effectiveness rather than on potential impacts to individual directors.
- Enlist support from the chairs of the board and nominating and governance committees, and prepare over time for them to lead conversations with individual directors.
- Plan for a long runway—the board refreshment process is oftentimes a multiyear process involving a comprehensive evaluation of the current board and multiple director searches.
Highlighting Board Effectiveness to Stakeholders
As companies prepare for their upcoming board election cycle, they should consider the importance of using enhanced disclosure to highlight the attributes of an effective board. Particularly given stakeholders’ focus on board diversity and the new rules on universal proxy cards, not to mention potential SEC rules relating to climate and cybersecurity, disclosure of director skills, expertise and qualifications is particularly important.
- Evaluate which directors have received lower support from shareholders in previous annual votes. For those directors who have received less support, consider how to enhance disclosure in the proxy statement to highlight those directors’ skills and qualifications, including what unique contributions each director has made to the board in order to generate more shareholder support.
- Directors should be encouraged to take a fresh look at their biographies and qualifications and consider emphasizing skills, qualifications and expertise that contribute to the business and strategy of the company.
- Narrowing the expertise set of each director to their deepest skill sets, rather than trying to fill the skills matrix with checks, may highlight the value of each director and indicate a cohesive and well-balanced board.
- Consider whether other forms of affirmative outreach are warranted for directors, including posting personal videos to allow shareholders to get to know the directors and their contribution to the board.