Fewer than one in 10 (7 percent) of board evaluations result in specific action plans to address opportunities, risks and weaknesses, according to findings from the Nasdaq 2023 Global Governance Pulse report, which shares insights from a global survey of more than 730 board members, executives and governance professionals across organizations and industries globally. This is despite more than 90 percent of boards conducting some form of evaluation.
‘The finding is surprising,’ says Kaley Childs Karaffa, head of board advisory for the Americas at Nasdaq and lead author of the report. ‘It seems incongruent with the purpose of conducting an evaluation if it is not going to drive any change.’
Organizations that fail to take action from their board evaluations may be missing ‘a really great opportunity to drive a greater level of board effectiveness,’ says Karaffa, adding that this is an area where boards seek support from Nasdaq Governance Solutions.
‘Often, boards work with us because their evaluation process has been viewed as perfunctory and as something that doesn’t engage directors in a meaningful way. We see that as a great opportunity for every board to ask, Do we have an evaluation process that enables us to have a deeper discussion about our structures, our composition, our processes and our practices?’
An effective evaluation process should account for dynamic themes, too. It should be about how the board is spending its time, how well it understands the business strategy, the industry, new regulatory requirements, new investor expectations and other stakeholder expectations. ‘Boards should use the evaluation process to think about all facets of how they are structured and functioning to enable corporate durability,’ Karaffa adds.
She points to reasons that may be behind the low evaluation-action rates. Based on her conversations and work with boards, she has found that ‘directors do not always feel they can be candid in the evaluation process because it is typically run by the general counsel, corporate secretary, board chair or nominating/governance committee chair. There is a natural filtering that occurs in the way directors provide feedback when evaluations are run internally.’
Karaffa also shares that an internally driven evaluation process may come with risks, such as blind spots in analyzing the feedback and coming forward with specific action points for the board to discuss and align on resultant changes and improvements. Lack of clarity around responsibility for implementing actions is seen as another challenge.
Findings from the Nasdaq 2023 Global Governance Pulse report also indicate that some best practices in driving a meaningful evaluation process are less common. Only 11 percent of survey respondents report conducting individual interviews with board members and another 11 percent report engaging third-party facilitators. Despite the low figures on boards’ current practices, the report cites a further study from Willis Towers Watson and the Nasdaq Center for Board Excellence that predicts a three-fold rise in third-party evaluations over the next three years.
Richer dialogue and a long-term view
An effective board evaluation can be impactful. Whether reassessing committee delegations, allocating more time to strategy and risks, adjusting KPIs monitored by the board or enabling board members to engage in more education and site visits, evaluations should help drive board practices forward.
‘It often results in richer dialogue in the boardroom and more confidence that the board is thoroughly and rigorously vetting issues and can reach alignment on critical decisions from major corporate events, such as M&A, or how to approach the CEO succession process,’ says Karaffa.
She also points to how investors have increased expectations regarding how public company boards disclose their evaluation process, which can be viewed as ‘a value statement for how the board approaches its responsibilities as a governing body.’
Moreover, evaluations ‘can be a strategic process through which the board is able to avoid complacency or take informed steps to evolve its structures, practices and approaches in a way that is supportive of long-term shareholder value. It can help the board foster a culture of continuous improvement’.
Don’t lose focus on the long term
‘Over the past few years, boards have had to address many short-term challenges to help ensure the organization was responding to the pandemic and economic and geopolitical events in an appropriate way,’ Karaffa says.
‘But it is important for the board to prioritize matters focused on long-term value and growth; otherwise, there is a risk of not having a long lens into what the organization is looking to achieve over the course of the next five to 10 years. The evaluation process gives the board the opportunity to assess the balance of its focus between short-term issues and long-term matters.’
Download the full Nasdaq 2023 Global Governance Pulse report to discover more insights about how boards view the board refreshment process, assess risk and oversee strategy and performance.
Plus, learn more about how the Nasdaq Board Advisory team works with boards to turn evaluations into strategic assets and achieve excellence here.