Board self-evaluations: striking the right balance: a miscalibrated evaluation can threaten collegiality among directors or cause counter-productive participation.

• Author: Rubenstein, David A.

Annual self-evaluations are powerful tools for increasing board effectiveness. However, they have inherent risks and a significant legal aspect. A key to getting the most out of a board self-evaluation is structuring the evaluation to strike the right balance of benefits and risks.

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Annual self-evaluations are a recognized governance best practice. According to Spencer Stuart's 2009 Board Index, 94% of S&P 500 companies annually conduct some form of board evaluation (half of which also conduct committee evaluations), and over 70% of US public company boards conduct self-evaluations, according to a recent survey. The NYSE's listing rules require annual self-evaluations for boards and annual evaluations for key committees. RiskMetrics' new governance risk evaluation tool (Governance Risk Indicators[TM]) identifies annual board evaluations as a governance best practice.

There are, however, risks. A miscalibrated evaluation can threaten collegiality among directors or cause counter-productive participation. There is also the risk that evaluation materials could fall into the wrong hands or be discoverable in litigation. Effectively structuring the evaluation process can alleviate these risks.

Structuring Board Self-evaluations

A practitioner must "see the whole field" when structuring an evaluation, understanding the board's objectives, but also being sensitive to other factors, including the directors' personalities and the legal landscape. The evaluation type, methodology, questionnaire, and summary and presentation of results should support the evaluation's organizational benefits and contemplate organizational and legal risks. The evaluation should also be designed and conducted to provide some basic procedural safeguards.

Key Factors. The practitioner must comprehend key factors, such as the evaluation's purposes and objectives, directors' personalities, and whether there is litigation that could be compromised by the evaluation process. Input from general counsel and directors with governance responsibilities is especially important.

Types of Evaluations. Generally, there are two types of board self-evaluations: full board self-evaluations and director self-evaluations.

* Full Board Self-Evaluation. Full board self-evaluations assess the effectiveness of the entire board or committee, without focusing on individual directors. They therefore effectively evaluate whether board or committee...