Value-add board evaluations: what to look for.

• Author: Shultz, Susan F.

Until Enron Corp., and more recently at organizations like American International Group Inc., Citibank and the nonprofits that invested in Bernard Madoff, corporate governance was an afterthought. Today, effective boards of directors are recognized as a mainspring of corporate success. Because our free enterprise system rests on trust and integrity, transparency is essential. And checks and balances are an imperative, which means evaluation.

Due to the financial crisis and government intervention, the traditional role of boards is threatened by an increased sentiment that directors are failing to do their jobs. Board evaluations can be a way to raise the bar to the next level and demonstrate effectiveness and a commitment to improvement.

In many cases, however, boards never receive the rigorous, independent evaluation they deserve.

The New York Stock Exchange and the U.S. Securities and Exchange Commission have mandated annual evaluations of the full board and the mandated com mittees. Directors and officers insurers, rating agencies and shareholder groups reward companies that conduct independent board evaluations. Further, the overwhelming majority of corporate board charters require annual evaluations. In 2009, 94 percent of all S&P 500 boards conducted annual performance evaluations (up from 90 percent in 2008 according to the 2009 Spencer Stuart Board Index).

Insurers, shareholder advocacy groups, institutional investors, venture capitalists public accountants, attorneys, employees, suppliers and all others with a stake in an organization's success, are seeking accountability and transparency.

The financial team is integral to the evaluation process. The board depends heavily on the financial team to provide the right information, to present risk dashboards, to accurately project future earnings and to provide actionable guidance. Often, it's the CFO or a member of the financial team who recommends the evaluation solution to the organization and/or facilitates it.

According to a recent PricewaterhouseCoopers study, only 11 percent of board members feel that their board evaluation process is "very effective," and 43 percent feel that there is significant room for improvement.

All evaluations are valuable, because they focus on board effectiveness. However, most evaluations are cobbled together in-house.

Often, the confidentiality of evaluations is compromised. Everyone knows who says what. With in-house questionnaires or in discussions...