Rusty O’Kelley is Global Leader of the Board Advisory & Effectiveness Practice at Russell Reynolds Associates and Matteo Tonello is Managing Director of ESG Research at The Conference Board, Inc. This post is based on their article, recently published in Directors & Boards.
Individual director assessments in the United States need an overhaul.
The annual board performance assessment, when conducted, tends to rely on director surveys and other self-evaluation tools. But more importantly, companies continue to forgo, or at least forgo reporting, a systematic process that extends beyond the collective performance of the board or its committees to also evaluate the contribution of individual directors, according to a a recent review of disclosure documents filed by companies in the Russell 3000 index.
Only 14.2% of the Russell 3000 companies report having instituted such an annual process at the individual director level, a share that has barely grown since 2016 (13.2%); in the S&P 500, the percentage remains shy of 30%.
That’s a problem, especially in an ever-changing, business-risk environment.
Performance assessment is an indispensable human capital management tool for today’s business organizations. It fosters accountability, encourages self-improvement, informs the talent development process, and ultimately ensures the alignment of skills with the company’s long-term strategy. And it’s just as critical at the top leadership level, including the leadership of the board of directors.
Comment Letter Regarding Earnings Releases and Quarterly Reports
More from: Ariel Babcock, Sarah Keohane Williamson, FCLTGlobal
Ariel Fromer Babcock is Managing Director and Sarah Keohane Williamson is the Chief Executive Officer of FCLTGlobal. This post is based on a comment letter submitted by FCLTGlobal to the Securities and Exchange Commission. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); The Uneasy Case for Favoring Long-Term Shareholders by Jesse Fried (discussed on the Forum here); and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here).
By some accounts, public markets are out of fashion.
Detractors point to the long-term trend towards fewer initial public offerings (IPOs) in developed economies, especially the U.S., and the growth of private pools of capital over the past decade, which has largely deprived retail investors of the most significant growth investment opportunities of the past decade. But public markets continue to be essential to wealth creation, innovation and capital stability, and ensuring they remain an attractive venue is essential to our economic growth.
Investment managers and executive teams too often cite quarterly reporting and quarterly earnings guidance as a key source of short-term pressure in the public market and a principal reason many companies opt not to list.
Transitioning away from the quarterly treadmill toward conversations centered on long term capital deployment and growth can simplify investor communications and reduce the reporting burden on corporations while simultaneously strengthening companies’ longer-term shareholder bases by giving investors the relevant information they need to make their investment decisions in a format that is digestible while also alleviating one source of short-term pressure, improving the accuracy of valuations, and ensuring public markets remain a compelling option for growing corporations in need of stable capital.
Quarterly guidance leads to short-term business decisions which ultimately cause long-term harm.
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