Companies Often Fall Short, But Shareholders Value Details About Board Evaluation Process

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By Michael Greene

Sept. 5 — Shareholders value details that help them understand the board evaluation process, but do not expect details about individual director evaluations, according to a Sept. 4 report by the Council of Institutional Investors.

The CII report found that “[r]obust disclosure of the board evaluation process is not a common practice in the United States.” In fact, many U.S. companies only state that they have a self-assessment process for their boards, but do not include details about the process.

“Many CII members who vote proxies are eager for details about the board evaluation process at U.S. companies, too,” the report states. “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.

“The board evaluation—and disclosure of the evaluation process—can be a catalyst for ‘refreshing' the board as new needs arise.”

The report drew from a survey of CII members, designed to identify what members “consider exemplary disclosures about the board evaluation process” from 2013 and 2014 U.S. and non-U.S. proxy statements.

Best Approaches

The report highlighted two approaches to such disclosures that CII members identified as the most helpful in making decisions about directors.

The first approach discloses an “explanation of the mechanics of the evaluation process.” Companies using this approach focus on the 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.”

According to the report, this approach details the “‘nuts and bolts' of the self-assessment process to show investors how the board identifies and addresses gaps in its skills and viewpoints generally.” Although this approach focuses on the mechanic of the evaluation, it does not include findings of specific evaluations.

This is an “evergreen” approach that can remain in proxy materials every year until the evaluative process changes.

The second approach “goes beyond a detailed discussion of the board evaluation methodology to also include discussion of big-picture, board-wide findings and any steps for tackling areas identified for improvement.”

This approach, in addition to including detail about the self-evaluation process, also includes a discussion of the most recent evaluations. This approach was found to be more common in the U.K., Europe and Australia.

The report contained examples of both approaches.

CII is a nonprofit association of pension funds, other employee benefit funds, endowments and foundations. The group advocates for effective corporate governance and strong shareowner rights.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The report is available at http://www.cii.org/files/publications/governance_basics/08_18_14_Best_Disclosure_Board_Evaluation_FINAL.pdf.