CII Issues “Best-in-Class” Board Evaluation Disclosure

Board EvaluationThis recently released CII report highlights two suggested alternative approaches to company disclosure of the board evaluation process. The suggestions are based on CII’s informal survey of its members for “best-in-class” disclosure from 2013 and 2014 proxy statements. CII acknowledges that most companies have a board self-evaluation process and disclose that fact in their proxy statements, but indicates that investors are seeking more robust disclosure.

CII’s two suggested approaches are:

1. Explanation of the mechanics of the evaluation process

This approach focuses on the mechanics of how the board evaluation process is conducted and analyzed. According to CII members, investors value 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. This type of disclosure does not discuss the findings of specific evaluations, either in an individual or a holistic way, nor does it explain the takeaways the board has drawn from its recent self-evaluations. Instead, it 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. This kind of disclosure can be an “evergreen” approach that remains the same in proxy materials from year to year, assuming the board’s evaluation process does not change. CII

2. Discussion of the most recent evaluation

The second type of best-practice disclosure highlighted by CII members 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. Where the first approach includes charts and explanations that can be reused with little alteration from year to year, this second approach to disclosure focuses on the most recent evaluation. It recaps the key takeaways from the board’s review of its own performance, including areas where the board feels it functions effectively, areas where it thinks it can improve and a plan of action to address these points in the coming year. Such evaluation-specific disclosures are most common in the United Kingdom, Europe and Australia.

From a lawyer’s perspective, I can’t support an approach that discusses the specifics of the board’s recent evaluation (i.e., the second suggested approach). However, the report itself affirms that investors aren’t expecting that type of information, noting: “To be clear, shareholders generally do not expect the board to reveal the details of individual director evaluations; rather, they want to understand the process by which the board approaches the task of continually improving itself.” The first suggested approach appears to fulfill that quest. 

GE is included among the three strong examples of the “nuts and bolts” (first) approach.GE’s disclosures about its board self-evaluation processes are included in its proxy statement, Governance Principles and Governance and Public Affairs Committee Key Practices.

GE Board Evaluation Disclosures

2014 Proxy Statement

Board and Committee Evaluations

Each year, an independent, third-party governance expert interviews each director to obtain his or her assessment of the effectiveness of the Board and committees, as well as director performance and Board dynamics, and then, after discussion with the chair of the GPAC and the lead director, organizes and summarizes the individual assessments for discussion with the Board and committees. In 2013, we enhanced this process by adding a written committee evaluation that precedes the director interviews to focus the third-party expert on the most important matters. For more information on this evaluation process, see the Board’s Governance Principles and the GPAC’s Key Practices (see “Helpful Resources” on page 55).

Governance Principles  GEgreen

Self-Evaluation

As described more fully in the key practices of the governance and public affairs committee, the board and each of the committees will perform an annual self-evaluation. Each October, each director will provide to an independent governance expert his or her assessment of the effectiveness of the board and its committees, as well as director performance and board dynamics. The individual assessments will be organized and summarized by this independent governance expert for discussion with the board and the committees in November.

Governance and Public Affairs Committee Key Practices

Method of Evaluating Board and Committee Effectiveness. The committee will oversee the following self-evaluation process, which will be used by the board and by each committee of the board to determine their effectiveness and opportunities for improvement. All of the board and committee self-evaluations should be done annually at the November board and committee meetings. Every October, an independent expert in corporate governance will contact each director soliciting comments with respect to both the full board and any committee on which the director serves, as well as director performance and board dynamics. These comments will relate to the large question of how the board can improve its key functions of overseeing personnel development, financials, other major issues of strategy, risk, integrity, reputation and governance. In particular, for both the board and the relevant committee, the process will solicit ideas from directors about:

a. improving prioritization of issues;

b. improving quality of written, chart and oral presentations from management;

c. improving quality of board or committee discussions on these key matters;

d. identifying how specific issues in the past year could have been handled better;

e. identifying specific issues which should be discussed in the future; and

f. identifying any other matter of importance to board functioning.

The independent expert in corporate governance will then work with the committee chairs and the lead director to organize the comments received around options for changes at either board or committee level. At the November board and committee meetings, time will be allocated to a discussion of – and decisions relating to – the actionable items.

Note that NYSE-listed companies are required to address annual board evaluations in their corporate governance guidelines. Nasdaq doesn’t require its listed companies to adopt corporate governance guidelines or otherwise address board evaluations, but many voluntarily adopt guidelines and address this topic as a best practice.

See additional memos, checklists, samples and other resources in our Board & Director Evaluations” Practice Area.

 

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