Conducting a committee assessment: as more work is given to board committees, comprehensive committee assessments are growing in importance.

• Author: Shultz, Susan F.
• Position: PERFORMANCE EVALUATION

It's IRONIC THAT the one group with the power to decide the fate of a company--the board of directors--is the one group in an organization that is often randomly selected, rarely evaluated, and almost never held accountable. But that is changing.

One key manifestation of the power shift to the board is the move to transparency and accountability. Thus, board and committee assessment is increasingly appreciated--and required--as an essential element of best practices. The New York Stock Exchange requires its issuers to conduct annual assessments of the full board and each of the mandated committees--audit, compensation, and governance. As of January 2006, the Securities and Exchange Commission will require mutual funds to assess their boards and committees. And D & O liability insurance providers are rewarding organizations that conduct assessments with preferred client status.

As the responsibilities of boards escalate, more is expected of committees. So, separate, comprehensive committee assessments are increasingly important. All directors must be confident that their committees are effective and focused. Audit committees in particular, responding to the enormous compliance mandates of Section 404 of Sarbanes-Oxley, have undergone tremendous reform and scrutiny. Costs are huge. Intel and Cisco each spent some $20 million to comply last year. Smaller companies likewise are spending millions for compliance. Committees meet for longer periods and more often. An extreme is the approximately 80 audit committee meetings that PeopleSoft held during its 18-month takeover battle with Oracle.

Compensation committees are next. Consider the situation at the NYSE. If the compensation committee members had conducted a substantive evaluation, would the scale of the executive pay packages been revealed and understood? Could the board have taken action in time to avoid the crisis it confronted?

A specific focus

Committee assessments are similar to overall board assessments, but their focus is specific to committee mandates and to the committee's effectiveness in serving the requirements of the full board. The accompanying exhibit displays the elements that an assessment approach, and the specific tool used to conduct the assessment, should provide.

The Board Institute--committed to the belief that the only people who can assess a board's effectiveness are those in that boardroom--has developed an approach to respond to the recommended assessment criteria...