Board Of Director Evaluations: A Good Governance Tool

 


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Upper Saddle River, N. J. - October 16, 2006 - Business ethics, corporate leadership, good governance. These are today’s buzzwords; “good as gold” standards that few can argue with. As we unfortunately know from the seemingly unending corporate scandals, these buzzwords that should be the standards for corporate management have not been uniformly applied. Recognizing that the starting point for good governance starts with the boards of directors, the Securities and Exchange Commission has mandated that tighter controls be placed on the boards themselves. Part of this requirement is that the boards conduct and report on their own performance. In addition, the New York Stock Exchange, Standard & Poor's, and other agencies have added their weight to the requirement for boards to conduct self-evaluations.

As many organizations approach the end of their fiscal years and thus need to report on this review process, what are the requirements and options open to boards for conducting these performance reviews? Unfortunately, the requirements only specify that performance reviews be conducted; they do not answer the important related issues. Among the many unanswered questions are:

  • Who will actually conduct the evaluation - the board, the company’s internal auditors, an independent third party, or outside legal counsel?

  • How often will these evaluations be conducted? There is an inference that twice a year is appropriate, but this is not specified.

  • What issues and metrics will be used to evaluate the board and its committees?

  • What governance areas should be addressed?

  • What methodology should be used for actually conducting the review?

    As would be expected, because of the void created by the lack of definition in the regulations, and the large number of unanswered questions, there are an ever-increasing number of “ready made” solutions available. Whether the board uses an off-the-shelf review process, or creates its own system, there are certain issues that they must address. These include, but are not limited to:

  • A review of procedural issues

  • Completeness of documentation

  • Adherence to board by-laws and committee charters

  • Reliance upon appropriate and qualified outside counsel

  • Evaluation of individual members’ contribution and involvement

  • The effectiveness at advancing the organization and the interests of its shareholders

    The bottom line is to determine how effective the board is at protecting and enhancing the shareholders’ value, and, to what extent, how individual board members contribute to the achievement of the organization's goals.

    Paul R. Dorf is the Managing Director of Compensation Resources, Inc. He is responsible for directing consulting services in all areas of executive compensation, short and long-term incentives, sales compensation, performance management systems, and pay-for-performance salary administration. He has over 40 years of Human Resource and Compensation experience and has held various executive positions with a number of large corporate organizations. He also has over 20 years of direct consulting experience as head of the Executive Compensation Consulting Practices for major accounting and actuarial/benefit consulting firms, including KPMG, Deloitte Touche Tohmatsu (formerly Touche Ross), and Kwasha Lipton.

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