Who Predicted the Financial Crisis - Economic ... - CEO Magazine

How to Evaluate the
Board of Directors?
The Board of Directors Scorecard
One of the by-products of the global financial
crisis is that more attention is being directed
toward the board of directors. There is a significant
rise in investors’ dissatisfaction, class-action
lawsuits and shareholder activism. Shareholders’
complaints include issues such as excessive
executive compensation, conflict of interest, lack of
governance, and passive participation of the board
members.
President Barack Obama’s reform of financial
regulations brings more focus to prompt corrective
actions by federal banking agencies including one
or more of the following;
• Improving management
• Ordering a new election for the institution’s board
of directors; and/or
• Dismissing directors or senior executive officers.
While the target of the new regulations is the
financial sector, the influence of these regulations
will also impact publicly traded companies.
Wall Street financial analysts, news media and
internet blogs are paying more attention to executive
compensation in relationship to the performance of
the company.
There are several infamous examples where
some boards compensated their CEOs with
hundreds of millions of dollars even though the
company lost money during their leadership. The
boards are accused, in these cases, as either
lacking the competence or the will to govern CEO
compensation.
In these tough economic times, investors are
becoming more proactive; they cannot afford to leave
the governance of their investments to unqualified
10 www.ceoqmagazine.com | Q4 / 2010
directors or to special interest groups.
Boards are given more power to govern and control
the performance of the CEO and the corporation.
Investors are starting to ask the following
questions:
• Are the interests of the board members aligned
with the shareholders or the CEO?
• Are the board members qualified to govern on
behalf of the shareholders?
• How does the board evaluate the company’s
direction?
• Is the board of directors required to direct the
company or just govern the CEO?
• Does the board have the right skill-set, decisionmaking
processes, and tools?
The two questions that board members must ask
themselves are:
• Do we have the right information and tools to
manage and improve our own performance as a
governing board?
• Do we have the power, knowledge and tools
to conduct a comprehensive and fair CEO
evaluation?
Few organizations have come up with formal
solutions to help investors evaluate both their CEOs
and their board of directors. A number of leading
experts suggest board self-assessments. This
solution involves the use of management evaluation
frameworks that only need to be applied once or
twice a year. These formal evaluation frameworks
not only define and clarify the overall standards
of performance for the board, they also serve as
educational, collaborative and consensus-building
tools.
The International Institute of Management created
a board of directors scorecard as an effective selfassessment
tool. The scorecard covers the essential
elements of the board’s duties and qualifications and
is therefore a good starting point for an evaluation. In
addition, the scorecard covers the board’s structure,
culture, performance standards, quality of meetings,
and strategic planning processes.
Top 12 Board Questions
The following partial list provides a sample of the
evaluation questions:
1.
2.
3.
4.
5.
6.
7.
8.
Is there a formal policy document that defines the
standards and procedures for the qualification,
duties, nomination and selection of the board of
directors?
What is the qualification of the chairperson of
the board?
• His/her independence?
• What is his/her educational and industry
background?
• His/her board leadership and networking
skills?
What is the optimal size of the board?
• The number of board members can range
from 3-33 depending on the company’s size.
The average number is 9 members. How
does the size and the geographic location
help or limit board communications?
What is the composition of the board?
• What knowledge and qualifications does
each member bring to the board?
• What value added networks do they bring to
the board?
How independent is the board?
• The compensation and the audit committees
must be made up of independent members.
What percentage are insiders vs. outsiders?
• What special interest groups do they
represent?
• Is their compensation aligned with the
company’s performance?
• Do the members have a conflict of
interest? Are they declared, monitored and
managed?
Are the board members fully aware of their legal
and ethical duties?
Is most of the CEO’s compensation performancebased?
Are the inside directors qualified to review
and approve high-level budgets prepared by
upper management? Are they qualified for
monitoring business strategy and core corporate
initiatives?
9. Are the outside directors qualified to review and
approve the strategic direction and key corporate
policies?
10. Does the board evaluate their own performance
on a regular basis?
11. How often and how well does the board
communicate with investors?
12. How often and how well does the board
communicate with the CEO and the executive
team? Is the communication style active or
passive? Political or cooperative?
Every board must be able to provide clear answers
to the preceding questions. If the board is not able
to answer all of the preceding questions, then the
board members suffer from governance blind spots
or a potential weakness. IIM created strategic
board retreats and development programs to help
the board and their CEOs in answering these
questions. In addition to developing board-level
governance competencies, the goal of the strategic
retreat programs is to improve the board and CEO
collaboration, ensure a 360 degree business view
and develop proper governance action plans.
The strategic retreat sessions are facilitated by
leadership and governance experts. The role of
the experts is to facilitate the planning sessions
and provide an external point of view to objectively
validate the answers to each question.
These formal evaluation frameworks
not only define and clarify the overall
standards of performance for the
board, they also serve as educational,
collaborative and consensus-building
tools.
About the Author
International Institute of Management is a
management best practices research and education
institute. IIM provides board and executive support
services, strategic planning retreats and custom
corporate training courses for the Global Fortune
1000 companies and governments. To learn more,
please visit: www.iim-edu.org
Q4 / 2010 | www.ceoqmagazine.com 11