CII Guide to Disclosure of Board Evaluation Processes

The CII Research and Education Fund (CII-REF), a Council of Institutional Investors (CII) subsidiary, issued a Guide to Disclosure of Board Evaluation Processes highlighting best practices.

Authors Glenn Davis and Brandon Whitehill found:

Evolving practices in board evaluation, combined with high-profile failures of board oversight, are driving investors’ desire for stronger disclosure of their portfolio companies’ approaches to board assessment.

The report on Disclosure of Board Evaluation Processes focuses on seven aspects of disclosure that investors highly value.

Disclosure of Board Evaluation Processes: Seven Common Indicators

1. Three-Tiered Review. Effective board evaluation processes assess performance at three levels: the board, the committees and individual directors.
2. Consideration of Peer Review. Effective disclosure indicates that the board at least considered whether to augment its process for evaluating individual directors with the ability to anonymously peer review fellow directors.
3. Appropriate Timing and Format. Most companies conduct a formal evaluation annually, and some employ an additional process to solicit feedback from directors throughout the year, such as informal, periodic conversations between individual directors and the board’s leadership.
4. Evidence of Follow-Through. Effective disclosure lists examples of specific actions taken and changes made internally in direct response to previous evaluations.
5. Linkage to Succession Planning. Robust disclosure communicates why the board decided that a director should retire and what skills the board seeks in a new nominee.
6. Strong Independent Director Leadership. Evaluation processes benefit when the independent chairman or lead independent director plays a prominent role.
7. Prudent Use of Third Parties and Technology. Disclosure should indicate whether the board considered the costs and benefits of leveraging independent third parties or technology platforms to enhance the evaluation process.

Disclosure of Board Evaluation Processes: Ten Examples

The previous 2014 guide drew from Canadian and Australian company disclosures, since few U.S. public companies revealed much about their approach to board evaluation back at that time. Today, many U.S. companies have caught up. An EY study found that 93% of Fortune 100 companies that filed proxy statements in 2018 provided at least some substantive disclosure about their board evaluation processes.

The new report provides examples of the best practices indicators from the 2018 proxy statements of 10 companies: Allstate, Bank of America, ConocoPhillips, Exelon, Intercontinental Exchange, McDonald’s, Regions Financial, Splunk, Unum Group and W.W. Grainger.

About CII-REF

The Council of Institutional Investors established the CII Research and Education Fund (CII-REF) in 2012 to support and publish research and reports on a wide range of topics of interest to long-term investors. As a nonpartisan, tax-exempt organization under Section 501(c)(3) of the Internal Revenue Service code, CII-REF is an ideal candidate for residual funds from securities class action lawsuits.