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As if the difficulties of assessing a group are not enough there is the absence of a clear connection between that process and its results and the reasons for the continued existence of the organization behind the board. To be blunt, we need to understand a great more about the links between good governance and the ability of the organization to achieve its goals. Otherwise, the annual evaluation of the board and its directors is supportive but not conclusive; necessary but not sufficient.

Snow White’s step-mother and directors share a predilection for gazing into a supposedly prescient mirror to seek reassurance. The wicked step-mother is always second best, which vexes her mightily, but boards and their directors are less concerned about the “fairest of them all” than getting the task out of the way. For those with childhood memories of the confessional, when sins had to be confessed regardless of their relevance or even their reality, board assessment may conjure a surrealistic parallel. Let us take a look at it.

In the autumn North Americans are stirred by a burst of energy and many boards of directors turn resolutely to marking their scorecard before the end of the year. Although board evaluation can and does happen at other times the final quarter of the calendar year will see most regulated entities plus some private companies and non-share organizations agonizing over their annual summaries. Those that are public have no choice, since not only are they expected to partake of this ritual but much of it has been preordained by a securities watchdog, i.e. National Instrument 58-201 and its cousins. For example, the board must have either a written mandate or be prepared to describe how it delineates its role and responsibilities. As a result, most organizations have such a document and can safely check a box in the affirmative and pass on to the next question. The rest of the issues or attributes to be assessed are familiar to most readers so a list is unnecessary but one should note that the process is meant to address each of the board as a whole, standing committees as sub-units, and directors as individuals, especially the chair of the board. All are to be assessed on multiple, pre-determined dimensions. This is of course quite laudable for who could ever disagree with assessing performance and seeking continuous improvement?

Many consider that individual performance appraisals are in the realm just beyond the edge of old maps, the world where dragons live. An artefact of modern management, performance appraisals address one person doing a (presumably) well-defined job. However, with a modest few exceptions they are not done very well and managers avoid them like the plague, yet the techniques and processes of board evaluation are direct descendants of typical performance reviews. Unlike an individual employee, a board is a group of people numbering from a few to many, a body politic with responsibilities understood at the board charter level but with day-to-day activities to fulfill those responsibilities that are rarely specified in a way that makes evaluation easy. Unlike the typical job holder directors are at some distance from day-to-day operations, yet organizational performance has to be the major part of their evaluation, since it is why they exist. Further, governance is a team sport and group dynamics is an unpredictable catalyst, so assessment of the board as a whole is a very tricky proposition. Finally, there are the metrics, i.e. should the board and its directors be judged on the basis of achieving goals consonant with the plans they approved, or should they be evaluated on measures imposed by external stakeholders, who may or may not share the organization’s longer term vision?

Many reporting issuers, particularly those led by a “compliance board” [1], have opted for checking the boxes on a scorecard contrived by those who have little to do with their company. All such devices got a boost by the post-Enron anxiety to do something, anything, to avoid future calamities. This is not all bad, for there are a few scorecards that grew out of some serious thinking by very experienced people, such as the Canadian Council on Good Governance version. It has 32 questions, each with a five-point, Likert-scale answer and ample opportunity to add open commentary. One issue with such schematics is that they are forced to be one-size-fits-all and organizations are simply not that uniform. Such instruments provide valuable comparisons but it would be a mistake to assume that pencil-and-paper methods are not severely limited. All impersonal instruments and processes struggle with the “soft” issues of personalities, the mix of people at a given moment, individual attributes, the constant shift of external pressures and the inevitable combinations of all these. Putting a structure in place may bring a sense of accomplishment but - will it bring more than compliance with tenets perhaps remote from the interests of the organization?

Beyond the evaluation process lies the issue of what to do with the findings. Most boards compile the results and circulate them but beyond the odd question it is an unusual board that allocates time to talk about the results and react to their messages. Evaluation has been done; check the box. Obvious issues, such as absenteeism or bad manners, have no doubt been observed before now and a competent chair will have done something about them, but what about an unexpected outcome? In one example, a lengthy questionnaire asks directors for ratings or opinions by choosing from among five possible answers plus a fall-back box labelled “DK”, meaning “don’t know”. While this covers the gamut of possibilities, what would you conclude if a director answered “DK” on issues of CEO compensation, or reviewing strategy, or the practical application of the code of ethics? More to the point, does any of this sound familiar and what does your board do with the results from its assessment?

It is public knowledge that the board of AIG was revamped only a few years ago because of shareholder pressure for greater transparency about certain doubtful assets. It became a model of compliance, at least on paper, so how could one explain the fact that a small, but toxic, portion of its holdings brought the company to its knees? Those very investments were identified years ago and were the subject of actions to improve transparency, so the board certainly knew about them. A “conspiracy of fools” redux - but they had a solid process for board assessment!

Still more recently a major life insurer admitted that the extent of the market turmoil was a surprise and that it had sought a $3-billion bank loan to shore up its capital base. Executives admitted that the chunky loan plus ongoing exposure threaten the insurer’s gold-plated credit rating. The board of sixteen is a Canadian who’s who, each director carrying a formidable resume of experience, skills and knowledge. Every aspect of that company’s governance process is admirable, yet the chief executive was quoted as saying, “We clearly did not appreciate that markets would fall as sharply as they did and expose us to the level of risk that they have.” A prominent analyst has said there had been a “breakdown” in risk controls at the insurer, after a fall in the value of equity investments slashed the company’s profits. The company will scrap a slate of investment products that it has promoted heavily in recent years and it will redesign a generation of so-called segregated funds or variable annuities after the risks associated with the guarantees behind the funds threatened insurers.

To the point: sometimes the issue is simply too complex to forecast all the possibilities and even a world-class board can miss a trick or two. Performance driven concepts and ideas have proven their worth, no argument, but we must understand their limitations and set our expectations accordingly. The reaction to preceding crises has been a rush to regulate, and certainly there is merit in well conceived rules of the road. Those directed at board evaluation processes have, to date, borrowed much from performance assessment for individuals without recognizing that gauging the effectiveness of a group or its parts is much more complex than it appears. To date we are not doing it very well.

As if the difficulties of assessing a group are not enough there is the absence of a clear connection between that process and its results and the reasons for the continued existence of the organization behind the board. To be blunt, we need to understand a great more about the links between good governance and the ability of the organization to achieve its goals. Otherwise, the annual evaluation of the board and its directors is supportive but not conclusive; necessary but not sufficient.

[1]See “The Compliance Board” by Tom Perkins, Wall Street Journal, March 2nd 2007