Board and director evaluations circa 2014: although the concept of board evaluations has become widely accepted, much can be done to improve the process.

• Author: Veaco, Kristina
• Position: BOARD PRACTICES

The corporate governance pendulum continued to swing toward greater board and individual director scrutiny in 2014, in large part based on investor interest. Investors have for some time focused on board practices, but more recently the intensity of their focus has centered on whether boards have the right members to oversee the organization, director tenure, and whether boards are looking closely at their own functioning.

In 2014, the Council of Institutional Investors (CII) called on public companies to include disclosure of the board evaluation process in proxy statements, essentially taking a practice that has been seen as private into the public arena. According to CII, "Disclosures about how the board evaluates itself, identifies areas for improvement and addresses them provide a window into how robust the board's process is for introducing change" and such disclosure is "an indication that a board is willing to think critically about its own performance on a regular basis and tackle any weaknesses." Per CII, "the board evaluation--and disclosure of the evaluation process--can be a catalyst for 'refreshing the board.' " CII added that its members "value specific details that explain who does the evaluating of whom, how often each evaluation is conducted, who reviews the results and how the board decides to address the results."

In early 2015, State Street Global Advisors issued its director tenure policy containing a formula reflecting the concern that long-tenured directors on boards may reflect "a lack of refreshment of skills and perspectives on the board." The ideal composition in their view would be a third new-tenured, a third mid-tenured, and a third long-tenured directors.

Concerns over board structure

There are many reasons for the constant pressure on director and board scrutiny, not the least of which are perceived continued shortfalls in corporate performance, oversized executive pay, and investor concerns (some might even say "second guessing") that boards are not always structured for the type of oversight required to achieve high-level performance over the long-term in today's competitive environment. The calls for shorter tenures and board refreshment reflect those concerns. But term and age limits and other "objective" board refreshment practices are fairly blunt instruments for addressing performance shortfalls or for positioning the board for long-term effectiveness. In our experience, having a thoughtful process...