Executive White Paper
By Med Jones
International Institute of Management
How to Evaluate the Board of Directors?
The Board of Directors
Scorecard
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One of the byproducts of the global financial crisis
is that more attention is being directed toward the board of directors.
There is a significant rise in investors dissatisfaction, class-action
lawsuits and shareholder activism. Shareholders' complaints include
issues such as excessive executive compensation, conflict of interest,
lack of governance, and passive participation of the board members.
President Barack Obama's reform of financial
regulations brings more focus to prompt corrective actions by
federal banking agencies including one or more of the following:
While the target of the new regulations is on the
financial sector, the influence of such regulation will also impact
publically traded companies.
Wall Street financial analysts, news media and blogs
are paying more attention to the executive compensation in relation to
the performance of the company. There are several famous examples where
some boards compensated their CEOs with hundreds of millions of dollars
even though the company lost money during their leadership. The boards
are accused, in these cases, as either lacking the competence or the
will to govern CEO compensation.
During the tenure of Henry McKinnell, the CEO of
Pfizer from 2001-2006, the company lost more than $137 billion in market
value. Yet, when he stepped down, he took an additional $213 million as
a retirement package that included an $82 million pension, stock and
other benefits.
According to a Forbes article, "Michael Eisner: Mouse
in a Gilded Mansion". During the five years between 1996 and 2001,
Disney's net income went from $1.2 million to a loss of $158,000. Yet
Eisner received $737 million in compensation.
In these tough economic times, investors are becoming
more proactive; they cannot afford to leave the governance of their
investments to unqualified directors or to special interest groups.
Boards are given more power to govern and control the performance of the
CEO and the corporation.
Investors are starting to ask the following
questions:
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Are the interests of the board members aligned
with the shareholders or the CEO's?
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Are the board members qualified to govern on
behalf of the shareholders?
-
How does the board evaluate the company's
direction?
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Is the board of directors required to direct the
company or just govern the CEO?
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Does the board have the right skill-set,
decision-making processes, and tools?
The two questions that board members must ask
themselves are:
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Do we have the right information and tools to
manage and improve our own performance as a governing board?
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Do we have the power, knowledge and tools to
conduct a comprehensive and fair CEO evaluation?
Few organizations have come up with formal solutions
to help investors evaluate both their CEOs and their board of directors.
A number of leading experts suggest board self-assessments. This
solution involves the use of management evaluation frameworks that only
need to be applied once or twice a year. These formal evaluation
frameworks not only define and clarify the overall standards of
performance for the board, they also serve as educational, collaborative
and consensus-building tools.
The International Institute of Management created a
board of directors scorecard as an effective self-assessment tool. The
scorecard covers the essential elements of the board s duties and
qualifications and is therefore a good starting point for an evaluation.
In addition, the BoD scorecard covers the board s structure, culture,
performance standards, quality of meetings, and strategic planning
processes. The following partial list provides a sample of the
evaluation elements:
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Is there a formal policy document that defines
the standards and procedures for the qualification, duties,
nomination and selection of the board of directors?
-
What is the qualification of the chairperson of
the board?
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What is the optimal size of the board?
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What is the composition of the board?
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How independent is the board?
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The compensation and the audit committees
must be made up of independent members. What percentage are
insiders vs. outsiders?
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What special interest groups do they
represent?
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Is their compensation aligned with the
company s performance?
-
Do the members have a conflict of interest?
Are they declared, monitored and managed?
-
Are the board members fully aware of their legal
and ethical duties?
-
Is most of the CEO s compensation
performance-based?
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Are the inside directors qualified to review and
approve high-level budgets prepared by upper management? Are they
qualified for monitoring business strategy and core corporate
initiatives?
-
Are the outside directors qualified to review and
approve the strategic direction and key corporate policies?
-
Does the board evaluate their own performance on
a regular basis?
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How often and how well does the board communicate
with investors?
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How often and how well does the board communicate
with the CEO and the executive team? Is the communication style
active or passive? Political or cooperative?
These formal evaluation frameworks not only
define and clarify the overall standards of performance for the board,
they also serve as educational, collaborative and consensus-building
tools.
Every board must be able to provide clear answers to
the preceding questions. If the board is not able to answer all of the
preceding questions, then the board members suffer from governance blind
spots or a potential weakness. IIM created strategic board retreats and
development programs to help the board and their CEOs in answering these
questions. In addition to developing board-level governance
competencies, the goal of the strategic retreat programs is to improve
the board and CEO collaboration, ensure a 360 degree business view and
develop proper governance action plans. The strategic retreat sessions
are facilitated by executive leadership and governance experts. The role
of the experts is to facilitate the planning sessions and provide an
external point of view to objectively validate the answers to each
question.
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About the Author
Med Jones is the
president of the
International Institute of Management - A best practices research
and executive education
institute. IIM provides CEO and executive support services,
strategic planning
retreats and custom
corporate training courses for the global Fortune 1000 companies and
governments.
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