Post on 06-Jul-2020
Board Evaluations and Getting Aligned
Report prepared by:
Byron Loflin, Stephen Giove, and
Matthew Healy / June 2017
BUSINESS.NASDAQ.COM 2
BOARD EVALUATIONS AND GETTING ALIGNED
Board Evaluations and Getting Aligned
Over 20 years ago, very few companies conducted an
evaluation of their leadership. Prior to 2000, the notion of
Board and CEO alignment generally meant that the Board
executed on the CEO’s vision. In a post-Enron environment,
regulations including Sarbanes-Oxley and Dodd-Frank in
the United States, and the Governance Code in the UK, have
impacted board analysis and led to an increase in companies
conducting annual evaluations, as well as an increase in the
depth of these evaluations.
This has also been a heightened focus for shareholders as
institutional investors now expect boards to pursue better
alignment. Conducting evaluations has become a signal to the
market that a leadership team considers the impact of long-
term issues, including ESG matters and sustainable business
practices.
Annual evaluations assist the board with keeping the following
top priorities:
1. Selection and retention of top leadership talent
2. Board composition and refreshment
3. Approval and support for corporate strategy
4. Oversight of the company’s risk profile
5. Allocating time to key issues
So how does a company consider and evaluate its alignment?
Alignment begins with leadership. Board and CEO evaluations
are catalysts for measuring board peer group and CEO
alignment, and for extracting action points to achieve better
performance.
Firms that are not measuring CEO and Board performance and
alignment utilizing evaluations could be missing an opportunity
for significant improvement. Consider your CEO and your
board. Is there room for improvement? Few would answer with
a “no.” But, since there is no industry standard for measuring
board performance, how does a board know when it’s operating
at the optimal level?
Arguably, business leadership effectiveness and corporate
governance importance are on a natural progression path, but
the many governance failures of the late 1990s accelerated
their confluence to become integral elements of leadership
excellence and strategy. Technically, most power rests with
the board of directors as it hires and fires the chief executive
officer and approves all major changes in capitalization.
An important role that strategic board members can play
is providing insightful counsel that assists management in
“looking around the corner” and “down the road” in hopes
of avoiding unnecessary risk and staying ahead of the
competition. Strategic insight requires diverse board members
who work as leadership with management to lead and message
the vision and mission of the company well. And since all
employees, including the CEO, expect an annual evaluation,
a board who volunteers the same, will send a supportive
message throughout the organization.
Boards and CEOs that are undertaking robust evaluation
processes find that they are more confident in their
relationship and respective roles.
How can corporate boards of directors, in the dynamic business environment of
2017, drive their corporate vision with success? Board and CEO evaluations are two
underutilized tools readily available to promote leadership alignment.
BY BYRON LOFLIN, STEPHEN GIOVE, AND MATTHEW HEALY
BUSINESS.NASDAQ.COM 3
BOARD EVALUATIONS AND GETTING ALIGNED
Successful Alignment
Keeping a vehicle aligned requires watchful, regular
maintenance, such as rotating the tires, checking the steering
and the suspension. If we are technical in our examination,
alignment is a dynamic process or activity, not a destination. A
dysfunctional board and management relationship is distrustful,
destructively challenging, or worse. Historically, and too often,
public perception has been that boards are misaligned and that
too many individual board members are not performing up to
their potential. Misalignment has arguably been at the core of
several epic corporate failures in recent history. Misalignment
means that the board does not understand the company’s
strategy, that the strategy is not in the best interest of the
investor, and that it will not achieve or maintain competitive
advantage. An aligned board and CEO relationship could be
used to describe a business’ attitude towards competitive
advantage. A misaligned relationship indicates that leadership
is possibly ineffective and headed for trouble. Most boards,
like a vehicle, need annual maintenance – or in a business
instance, education – and alignment. Some need only minor
correction, while others are completely dysfunctional and need
refreshment or rebuilding.
Today more board directors consider their board memberships
an honor and a duty to the shareholder. Board composition is
less about the director’s resume, and more about what the
board as a whole is lacking in terms of gender, age and other
aspects of diversity. Diversity in the boardroom is gaining
significant momentum, and rightfully so. A robust board
evaluation should support this perspective and promote
analysis of the following:
• Mission & Vision
• Ethics and Accountability
• Board Composition and Culture
• Board Meetings and Administration
• Strategy and Performance Measures
• Board’s Relationship to Management
• Board’s role in Shareholder | Stakeholder engagement
© Copyright 2017. All rights reserved Nasdaq, Inc. 1145-Q17.
Byron Loflin is CEO of the Center for Board Excellence; Stephen Giove is a partner in the Capital Markets Group at Shearman & Sterling LLP; and Matthew Healy is Vice President of Governance Solutions at Nasdaq Corporate Solutions.
Boards of directors today should be dynamic and comprised of
leaders who have been elected to the position because she or
he has been identified as having skills that will contribute to
the success of the organization. Gone are the days when board
membership was a retirement program. “We firmly believe
that empowered boards and shareholders, both providing
meaningful oversight, are critical to the long-term success of
public companies.” (Open Letter: Commonsense Principles of
Corporate Governance, July 2016).
Board and CEO evaluations are often most effective when
conducted at a time that complements the board’s strategic
discussions, and less around meetings that focus on tactical
issues like audit and compliance. For a company whose fiscal
year end is December, the best timing may be late spring or
summer. Too often, a lengthy board agenda prevents
sufficient allocation of time for strategic planning. Strategy
and alignment, being the most important accomplishments
that a board and management team can achieve together,
should be prioritized on the agenda, which is typically laden
with the tactical responsibilities of the board.
An aligned board and management team promotes deeper
interaction, sets a tone that builds stakeholder confidence and
promotes diversity of opinion, providing opportunity for better
insight and the probability for both seeing around the corner
and down the road.
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