Board Evaluation Disclosure

Glenn Davis is Director of Research and Brandon Whitehill is a Research Analyst at the Council of Institutional Investors. This post is based on their CII Research and Education Fund memorandum.

Strengthening board effectiveness is a high priority for many companies and their shareholders. Whether independently or with the help of outside advisors, many boards regularly conduct evaluations to assess their strengths and identify areas for improvement. Robust evaluation processes provide an important conduit for change as companies require new skills, perspectives and strategies over time. For this reason, investors increasingly regard the review process and its disclosure as key opportunities to enhance board effectiveness and shareholder value.

Proxy statements do not always fully convey the rigor or results of these processes. In 2014, CII published a report highlighting best practices in board evaluation disclosure with examples from predominantly foreign companies. [1] At that time, the prevalence and quality of board evaluation disclosure abroad, particularly in Canada and Europe, surpassed the United States. “While most major U.S. companies have a self-assessment process for the board in place,” the 2014 report explained, “their proxy materials often merely state this fact without elaborating on what the process entails.”

Since then, 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. [2] But there remains room for improvement of the quality of those processes and their disclosure. 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.

To be clear, investors generally do not expect the board to reveal the specific details of any board or individual director evaluations. Rather, they want to understand the process by which the board approaches the task of continually improving itself. This report focuses on the board evaluation process as a topic discrete from board qualification disclosure and other general corporate governance matters.

Drawing on a CII-REF review of the proxy statements of more than 100 prominent companies, this report discusses some aspects of strong disclosure and features the proxy statements of U.S. companies that investors, including CII members, find especially effective in communicating the board evaluation process and outcomes. [3] The next section describes seven indicators of strength and the subsequent section highlights 10 companies’ disclosure.

Seven Indicators of Strength

The following seven indicators describe elements of evaluation processes that boards should consider and communicate in their disclosure. They are not intended to be prescriptive recommendations, but rather descriptive observations of companies’ disclosure that is particularly effective at building investor confidence that a robust process exists. Investors should accommodate, and boards should exercise, flexibility to adopt processes that fit their unique strengths and circumstances.

The 10 companies whose proxy statements are quoted in this section and featured in the next section are Allstate, Bank of America, ConocoPhillips, Exelon, Intercontinental Exchange, McDonald’s, Regions Financial, Splunk, Unum Group and W.W. Grainger. They are not intended as a “top 10” list or a comprehensive set of all publicly traded companies providing high-quality disclosure; rather, they provide a point of reference for formulating a strong message to investors on how the company approaches board evaluation.

1. Three-Tiered Review

Effective board evaluation processes assess performance at three levels: the board, the committees and individual directors. Thoughtful disclosure conveys the degree of rigidity or flexibility of the evaluation at different levels of review. For instance, the board and committee level assessments might involve more formal practices, such as written questionnaires, while leaving some flexibility in gathering individual feedback, such as conversational interviews. All 10 companies included some discussion of review on multiple levels in their proxy statements, with the vast majority conducting evaluations on all three of the board, committee and individual director levels.

Example: W.W. Grainger

Each year, the Board conducts a three-part evaluation process coordinated by the Lead Director and the Committee Chairs: full Board evaluation, Committee evaluations, and director self-assessment.

Example: Allstate

Allstate’s Board evaluation processes include multiple layers performed throughout the year at the board, committee and individual director levels…They include discussions after every meeting, an annual Board assessment and individual director evaluations.

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. Individual director assessments and, if deemed appropriate for a given company, peer reviews can help ensure that each individual director is accountable to shareholders and enhances the board’s desired qualifications and composition. Some companies ultimately decide not to incorporate peer reviews in their processes while others see them as a key fixture of their approach or adopt them over time after strengthening their evaluation processes.

Example: Exelon

The process for individual director performance assessments was recently strengthened to include peer and senior management input on the contributions and performance of…the independent 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. The format of evaluations, through both formal and informal mechanisms, is also a key consideration. To avoid falling into a perfunctory process, boards should actively consider how to improve their evaluation

timing and format from year to year. Disclosure should communicate how the board sets the timing of evaluations and balances the use of written questionnaires, oral interviews, group discussions and other methods to most effectively gather feedback.

Example: Bank of America

In addition to the formal annual Board and committee evaluation process, our Lead Independent Director speaks with each Board member at least quarterly, and receives input regarding Board and committee practices and management oversight…

The formal self-evaluation may be in the form of written or oral questionnaires, administered by Board members, management, or third parties. Each year, our Corporate Governance Committee discusses and considers the appropriate approach, and approves the form of the evaluation.

4. Evidence of Follow-Through

Effective disclosure lists examples of specific actions taken and changes made internally in direct response to previous evaluations. The more specific actions taken, without revealing confidential or proprietary information, the more confidence investors have that feedback from evaluations translates into concrete action. Especially strong disclosure draws connections between changes implemented as a result of evaluations and the company’s overall strategic objectives. Boards should also disclose whether there is a role for shareholder engagement in assessing board effectiveness and enhancing procedures in the evaluation process.

Example: Regions Financial

As a direct result of the 2017 evaluations, the Board: created a board refreshment and recruitment plan to ensure the Board has the necessary skills to support the Company’s strategy; instructed management to enhance Board and Committee materials…; began scheduling regular joint meetings of the Board’s Risk Committee and Audit Committee…; and suggested enhancements to the Director orientation and ongoing education program.

5. Linkage to Succession Planning

Investors use board evaluation disclosure to help inform their voting decisions in director elections. Effective disclosure indicates ongoing attention to board composition and expresses a willingness to change if the process reveals that new skills or insights are necessary. The evaluation process should allow for difficult, candid conversations to take place, as occasion may require, at any of the individual, committee or board levels. For instance, the evaluation process may prompt the decision not to re-nominate an incumbent director. In these cases, robust disclosure communicates why the board decided that a director should retire and what skills the board seeks in a new nominee.

Example: Splunk

The process has also informed Board and Committee composition, which includes evolution of the director skills and experience qualifications criteria to meet the current and anticipated needs of the business.

Example: Intercontinental Exchange

Our board is committed to effective board succession planning and refreshment, including having honest and difficult conversations with individual directors as may be deemed necessary… [I]n the past, directors have decided (for personal or professional reasons) or have been asked (for reasons related to their ongoing contributions to the Board and Company) not to stand for re-election at the next annual meeting of stockholders.

6. Strong Independent Director Leadership

Evaluation processes benefit when the independent chairman or lead independent director plays a prominent role. Many companies’ disclosure explains how the lead independent director (or equivalent) filters information and insights across multiple levels and facilitates one-on-one discussions with individual directors. Independent director leadership particularly strengthens committee evaluation and function since board committees generally have majority-independent directors. The chair and members of the nominating and corporate governance committee also play a role in structuring the evaluation process and connecting it to director nominating decisions.

Example: Unum Group

The Governance Committee establishes and oversees the evaluation process…This past year, the evaluation process was conducted in two phases. The first phase focused on the performance of each committee and the Board as a whole. The second phase focused on the evaluation of each director’s performance, and was led by the Chairman of the Board in advance and in anticipation of the director nomination process.

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. These supplemental methods may not work well for every company in every year. For instance, companies with smaller boards or those in industries requiring highly technical expertise may not find an external third party useful. Boards of course should also remain mindful of the discoverability of records related to the evaluation in litigation. Many boards, however, do find that employing these methods helps keep director responses anonymous and feedback candid.

Example: ConocoPhillips

The Committee on Directors’ Affairs periodically retains an independent third party to manage the evaluation process to ensure it remains as thorough and transparent as possible.

Example: McDonald’s

To protect anonymity and the integrity of the Board and peer evaluation process, an independent third party compiles responses to these evaluations into a report for the Chair of the Governance Committee.

10 Examples of Effective Disclosure

The complete publication (available here) features the board evaluation section of each company’s 2018 proxy statement. [4] These examples show various approaches to addressing some or all of the indicators of strength. While these selections are not intended as a “top 10 list,” they effectively communicate to investors how the boards evaluate themselves, what processes their approach entails and what actionable outcomes arise from their evaluations for continued improvement.

The complete publication is available here.


1Best Disclosure: Board Evaluation,” Council of Institutional Investors, September 2014.(go back)

2Improving Board Performance through Effective Evaluation,” EY Center for Board Matters, October 2018.(go back)

3CII-REF acknowledges the input of several CII members, in particular New York City Pension Funds, in the development of this post.(go back)

4Full proxy statements are available through SEC EDGAR: The Allstate Corporation (March 28, 2018), Bank of America Corporation (March 12, 2018), ConocoPhillips (April 2, 2018), Exelon Corporation (March 21, 2018), Intercontinental Exchange, Inc. (March 29, 2018), McDonald’s Corporation (April 12, 2018), Regions Financial Corporation (March 9, 2018), Splunk Inc. (April 26, 2018) , Unum Group (April 12, 2018) and W.W. Grainger, Inc. (March 15, 2018).(go back)

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