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Improving Corporate Board Performance: Self-Evaluations

bdeval4If CEOs and senior managers are being asked to increase their commitment to ethics and compliance, and if mid-level managers and employees are being asked to increase their commitment to ethics and compliance, then it is time for corporate boards to step up and commit to improving corporate governance, and supervision and monitoring of ethics and compliance functions.

We all hear about how corporate boards are fearful of possible government enforcement actions against boards and board members. That is not the reason for corporate boards to step up to the plate. Instead, it is time for corporate boards to walk to walk, and lead others by example.

It is frustrating to see the train wrecks of malfeasance in corporate settlement after settlement for FCPA, money laundering, export controls and sections violations. It is even more frustrating to follow these enforcement actions when it is clear that corporate board oversight was either defective or non-existent.

One important way for corporate boards to improve their performance is to conduct annual self-evaluations. The New York Stock Exchange mandates that boards of listed companies undertake an annual self-evaluation.

The purpose of the self-evaluation is to determine whether the board and each of its committees are functioning effectively. NASDAQ does not impose a similar requirement but companies should conduct an annual self-evaluation as part of any good governance practice.bdeval

Boards are often reluctant to engage in a robust self-evaluation because of fear that the process could identify board weaknesses and be discovered by aggressive plaintiff’s counsel and used in class action or derivative claims. As a result, it is important that legal counsel be involved in the process to ensure that protections are maintained.

The nominating and governance committee should take responsibility for the evaluation process.   It is important to have an outside governance consultant and/or law firm conduct the evaluation.

The process should include the following elements: questionnaires; individual interviews; and possibly a group discussion. The design of the evaluation has to resolve certain issues, including whether senior management should be consulted as part of the evaluation; who will have access to the evaluation information; whether individual directors should be evaluated (by the consultant and/or peers); what documentation of the evaluation and records shall be maintained as part of board records; and whether the board evaluation will include evaluation of the board committees.

The issues for the evaluation include:

The board’s strategic planning and risk evaluation process;

The board’s relationship with the CEO and senior management;

The effectiveness of the board’s oversight and monitoring activities and improvements to the process;

The individual and collective board experience;

Whether each board member is prepared for board meetings, and making a valuable contribution to the overall board performance and whether some of the board members should be rotated off the board;

Whether the board is adequately addressing gender and race diversity;

Whether the board has adequate access to information needed to exercise its responsibilities;

Whether the board meets an appropriate number of times;

Whether the board committees are operating effectively;

bdeval3Whether the board itself is operating effectively; and

Whether the board has an adequate CEO succession plan and provides sufficient feedback to the CEO.

The results of the evaluation should be reported to the full board (without any note taking). The leader of the process should receive a preview to prepare for the process taking into account the sensitivities of the board and any individual director. The presentation and discussion should be conducted under the protection of attorney-client privilege for purposes of providing legal analysis and advice to the board.

A final issue to be resolved will be creating a follow up process o ensure that recommendations are implemented. Target dates should be set and a process for reviewing the action steps.

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