Board evaluation report essentials: Strengthening governance & oversight

Whether they're required or not, board self-evaluations are considered best practices for good corporate governance. Nonprofits, charitable boards and for-profit boards of every size and in every industry have much to gain from a board evaluation report. Board directors are scrutinized more carefully than ever before due to the fallout of poorly performing boards. In certain circumstances, boards can be held accountable for making bad decisions, which can affect their livelihood and finances in major ways. Recently, according to a study by PwC, 74% of directors believe that board evaluations are an effective tool to enhance board performance, but only 58% of directors made changes to various board practices following a board evaluation.

Board evaluation reports are a critical structural tool for evaluating how effective and efficient boards are. In some regions and jurisdictions, boards evaluate individual directors as well as the entire board's performance. Where individual director assessments aren't required, many boards conduct them to help improve individual performances.

In this article, we’re going to explore board evaluation reports and why they’re so important. We will cover:

• What is an evaluation report?
• How do you evaluate the performance of a board?
• Who carries out a board evaluation?
• The key components of a board evaluation report
• How reports are presented to stakeholders
• International practices for board evaluations

What is a board evaluation report?

A board evaluation report is a document that assesses the performance and effectiveness of an organization’s board of directors. It also ensures the board is doing everything by the book, fulfilling its fiduciary duties and meeting governance standards.

The report is compiled to include feedback and data from board members, executives and sometimes external stakeholders. It will look at all aspects of a board's performance, including its decision-making process, leadership style, strategies and competencies. Based on this, the board can make improvements to help secure the future of the organization.

Board evaluations are important as an organization is only as effective as its board. Regular board evaluations allow for continuous improvements, which can:

• Enhance governance
• Improve the effectiveness of the board
• Boost accountability
• Ensure strategic alignment
• Identify areas for improvement

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Key components of a board evaluation report

All boards set goals for the company or organization they serve. Board evaluations provide an opportunity for boards to assess themselves and measure their performance against the goals and objectives they've set during their strategic planning. We can easily classify the roles of boards of directors into three broad categories:

1. Providing direction: Boards should be spending the bulk of their meeting time discussing strategic direction.
2. Overseeing all aspects of the company or organization: As primary overseers, boards monitor management and all of the operations, departments, systems, and processes that they manage.
3. Providing guidance, support, and advice: Senior executives and other managers receive support from the top of the organization down.

In simplified terms, a board performance evaluation report shows how effectively the board performs its roles, along with its related duties and responsibilities.

According to a Deloitte report, boards should assess the following seven areas of performance, at a minimum:

1. Board structure and composition: This includes board composition, diversity on the board and board committees, competencies of board members, frequency of meetings, procedures, principles and board and committee charters.
2. Dynamics and functioning of the board: This includes how well the board manages its agenda and calendar, board dynamics and interactions, how well they communicate and interact with the senior executives and how cohesive and engaged they are in meetings.
3. Business strategy governance: This assesses the board's role within the company's overall strategy. The board should work with managers to ensure the overall strategic plan is implemented and working as they envisioned it.
4. Financial reporting process, internal audit and internal controls: Boards should assess how well they manage internal controls to prevent internal and external fraud, assess the quality of their audit process, and evaluate how strong their risk management program is.
5. Monitoring role: This portion of a board evaluation looks at how well the board monitors its policies and strategies and how well the managers implement policies and business strategies.
6. Supporting and advisory role: Relationships between board directors and executives can be tenuous. This section evaluates the dynamics between the board and the senior executives, which is necessary for mutual trust and respect so that boards can support management and provide advice and guidance for them.
7. The lead role: The lead role in the evaluation process may be filled by the board chair, an independent director or a third-party facilitator.

Boards may identify additional areas that they want to explore and assess. Corporations are unique because of their size, industry and business development cycle. Board evaluation reports aren't intended to be cookie-cutter copies of other companies or close replicas of board evaluation reports from previous years.

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Presenting the evaluation report to stakeholders

Once you have compiled a board evaluation report, it needs to be presented to stakeholders to ensure transparency and build trust. Even findings that aren’t particularly rosy should be included so stakeholders have a complete picture of the board’s performance and the strategies to rectify any issues.

Here are three tips for how you can effectively present your board evaluation report to stakeholders:

1. Take time to prepare

Make sure to understand your audience and tailor the content to what’s likely to resonate with them. This could involve preparing slightly different versions of a presentation. For example, stakeholders will want to know more about governance practices and finances, while employees will want to know more about culture and processes.

Practice presenting the report and try to anticipate questions. It’s important to have answers so you can address even the most difficult topics.

Visualizations and graphics can help your audience digest what you’re presenting. Present in a structured manner, a little like telling a story, to keep your audience invested and engaged.

2. Take note of feedback

Presenting your report isn’t one way, so encourage your audience to ask questions, make comments and share their thoughts. Open, honest communication is vital, and you also have to actively listen to feedback and respond thoughtfully. You must show stakeholders that you value their input.

You also need to bear in mind that stakeholders will have a wide range of opinions, expectations and ideas, but it’s usually possible to find common ground. Record all feedback and share follow-up communication with stakeholders to show that you take it seriously.

3. Take action

Following the presentation, there are likely to be a lot of questions around “What’s next?” which could be influenced by the feedback you received. It’s important to ensure stakeholders know what the board intends to do and by when by establishing measurable goals.

Provide stakeholders with regular updates so they’re kept in the loop. You may also want to schedule further presentations and encourage a constant flow of communication from both sides.

Utilizing the board evaluation report for continuous improvement

The biggest positive you can take from a board evaluation is identifying how to make improvements to the way your board of directors operates. You’ll gain actionable insights to make changes to board governance and performance. Here’s how to utilize your report to ensure continuous improvement:

• Develop an action plan that addresses areas for improvement in priority order. Establish goals, responsibilities and deadlines to ensure accountability.
• Implement training and development programs to address skills gaps and ensure board members are equipped with the right skills and knowledge to adapt to an evolving industry.
• Make changes to the way the board works to streamline operations and make them more effective. This could be anything from making meetings more succinct to outlining a decision-making process.
• Highlight the benefits of fostering a culture of continuous improvement so board members see that making changes can have a positive impact on the board, stakeholder trust and the organization as a whole.

International practices for board evaluations

United Kingdom

The U.K. Corporate Governance Code Annual recommends that boards evaluate boards, committees and individual directors annually. FTSE 350 companies should have evaluations done by a third party at least every three years on a comply-or-explain basis.

United States

The U.S. National Association of Corporate Directors (NACD) recommends that boards assign the responsibility for board evaluations to their governance committees. NACD recommends full board, committee and individual director evaluations on a regular basis.

Brazil

The IBGC Code of Best Practices recommends annual evaluations of the board, individual directors, and the CEO and that the board chair conducts the evaluation. Outside facilitators are welcome, and boards should disclose results to shareholders.

Argentina

CNV recommends annual board evaluations.

Mexico

Mexico expects boards to do board self-evaluations as a matter of their fiduciary duties.

Japan

Evaluations in Japan are rooted in traditional values and culture. They generally focus on processes and compliance and follow guidelines outlined in the Japan Corporate Governance Code.

Australia

Evaluations in Australia are influenced by the ASX Corporate Governance Principles and Recommendations. The guidelines state that evaluations should be annual and should include individual and board evaluations.

France

French organizations conduct evaluations according to the AFEP-MEDEF Code, which focuses on improving governance and board effectiveness.

Germany

The GCGC recommends that organizations conduct regular evaluations that focus on efficiency, transparency and accountability.

Canada

Evaluations are influenced by the Canadian Coalition for Good Governance (CCGG), which states that organizations should conduct evaluations each year.

OECD Members

OECD members recommend that the boards of listed companies conduct annual evaluations of the board and individual directors.

Board management software systems streamline board evaluation reports

While board directors acknowledge the value and importance of completing their board evaluation questions, it's not a favorite task because it takes time away from other duties. Diligent created a software program that takes the pain out of board assessments. With the Diligent Boards questionnaire feature, facilitators can customize assessments with multiple user-tested question types, incorporate glossaries and supplemental reference information, monitor submissions and finalize questionnaires with e-signatures. It couldn't be easier to get accurate, custom reports. Boards can easily export results and graphs within a few clicks, removing the frustration of time-consuming manual processes.

Diligent Boards, part of the Diligent One Platform, , is a fully integrated board portal system for a total enterprise governance management system. Try it today and experience just how efficient it can be to produce a board evaluation report at your organization. Download our buyer’s guide to see exactly what Diligent can do to streamline your reporting process.