In our discussions with CEOs and board members around the world, we are often asked the question: what is the one thing we can do to get more value from our board? The complexities of a board mean that there is rarely one simple answer that will help achieve this outcome. But based on our data, we have identified a common factor that many high impact boards have that other less impactful boards do not.
One common trait of most high impact boards is that they conduct formal evaluations of the board, and in some cases the individual independent board members. We are not implying causation from this one data point, as we feel this is one of a number of common traits that, when combined, yield the greatest board value. But the correlation is compelling and we believe this is an important component of an high impact board, as demonstrated in the following chart.
This chart demonstrates that the high impact boards that were surveyed (boards with a strategic impact score above 4.5 on a 1-5 scale) had a percentage (in orange) of these different impact points. As you can see, 76% of these boards conducted evaluations. This is the second-most common factor, only topped by the number of board meetings per year.
Another interesting statistic revealed by our survey of private companies considering building a board in 2015 is that 71% of them were planning on implementing a board evaluation process. In addition, 80% of those companies were planning on conducting board evaluations annually.
However, once these companies build their boards the odds are that they will not follow through on implementing a board evaluation process. This is shown in the data collected in 2015 from directors and CEOs of private companies:
We have some theories as to why these boards do not follow through on the seemingly logical idea of evaluating the board’s impact on the organization. For example, it can be difficult and time-consuming to set up an objective board evaluation process if the company has not had a system like this in the past. It can also be difficult to initiate a board evaluation system from a cultural perspective in different parts of the world or for certain types of companies.
Why is a formalized board evaluation process beneficial?
Regardless of why it may be difficult to implement this initiative, evaluations may greatly enhance a board’s impact. While an evaluation system may not be the sole reason that these boards outperform their counterparts, we see an average 43% increase in the strategic value of boards that do conduct evaluations. And there are other benefits beyond the potential of greater strategic value. For example, our first-hand experience working with boards around the world has provided some of the following qualitative benefits:
- For many family-owned businesses, a board evaluation process provides a level of objective analysis to the value that the independent board members bring to the organization. This can create greater family harmony and less conflict with some executive teams when the objective value of the board is assessed and communicated.
- This process often aligns the board members and the executive team with the strategic initiatives that are most important to the organization, which is often the basis of the board evaluation system. This alignment results in more engaging board and committee meetings because the board members are more focused on supporting the executive team in achieving the defined strategic goals.
- Boards are costly. By analyzing the value (return) that the board is generating for an organization, it is easier to understand and justify the cost of the board. This would be normal for any capital expenditure of a company.
These are only a few of the subjective benefits that companies that have implemented evaluation processes have realized. There are many more, and when combined with our objective data of the impact that has been realized by those companies, this is a powerful component of high impact boards.
Types of evaluation systems
Not all boards are created equal, and a board’s structure and the cultural nuances of an organization will dictate the type of evaluation system that would be most beneficial to a company. Listed below are some of the common evaluation systems used by hundreds of boards around the world.
- No evaluation
- Self assessment
- Peer assessment
- 360 evaluation
We have learned that board evaluation systems that are more objectively based, such as 360-degree evaluations, are far more effective than other evaluation processes. However, even the most subjective board evaluation system can generate a higher board impact than no evaluation process at all.
Regardless of the evaluation system that is used, cultural aspects need to be considered. We are not suggesting that culture should prohibit the implementation of an evaluation process, since not having an evaluation process can greatly increase the probability of dysfunction within the board and the organization. On the contrary, we suggest that an evaluation process might need to be a phased approach that becomes more objective over time.
Our data, and other data collected on boards, shows that companies rarely apply the same rigor to the evaluation of board performance as they do to the rest of the organization. It is common practice for many boards to objectively evaluate the impact of the CEO, so why not evaluate the impact of the board and the value it generates for your organization? Given that the board is directly responsible for driving shareholder value, it seems only logical.
Alan Hepburn is the Managing Partner of ABA Asia based in Singapore.
ABA is a global firm that works with companies to create greater strategic impact from their boards.