This post is a guest-authored commentary piece from Eric Salmon and Partners discussing the findings of  Diligent Institute and Corporate Board Member’s 2023 What Directors Think survey and report. This is the second installment in a series of global commentary pieces analyzing board and governance trends in the US compared to other regions. This commentary piece is the first of two parts discussing board evaluations and disclosure.

What are board evaluations and why are they important?

In the 2023 edition of  What Directors Think, conducted by Diligent Institute and Corporate Board Member,  75% of directors indicated that board responsibilities will continue to expand in the next 3-5 years. How has this impacted board evaluations? Two decades ago, the same survey found just over 33 percent of directors reported having regular board evaluations. In this commentary piece, we discuss trends and evolutions in board evaluations and their importance on a global scale.

Board director evaluations are reviews performed by a company’s board of directors to determine the effectiveness and efficiency of its members. These evaluations help to ensure that the board is fulfilling its responsibilities in the best interest of the company and all its stakeholders. The results of these evaluations can also help to identify areas for improvement and provide guidance for future development. “When done properly and effectively, board evaluations can provide a vital tool for directors to review and improve board performance”, state Mark Fenwick and Erik P.M. Vermeulen (European Corporate Governance Institute). This effect has been recognized globally – the G20/OECD principles recommend the inclusion of regular board evaluations in a country’s corporate governance framework, and the World Economic Forum’s “The New Paradigm” recommends that boards evaluate their own performance, as well as that of the individual directors and board committees. 

However, when it comes to the disclosure of board director evaluations in company reports, there is often a debate about how much information should be made public. Some argue that complete transparency is necessary to build trust and credibility with stakeholders, while others believe that too much information can compromise the confidentiality of the evaluations and may even undermine the board’s effectiveness. 

Purpose and benefits of board evaluation disclosures 

Disclosures play an important role in the wider context of corporate governance as they provide stakeholders with important information about a company’s governance practices and performance. In particular, disclosures about board evaluations provide stakeholders with information about how a company’s board is being held accountable and how its performance is being assessed. This information is often useful in helping stakeholders make informed decisions about the company and its governance practices. 

In the context of corporate governance, disclosures help to promote transparency and accountability by allowing stakeholders to see how well a company is being run. This information can help stakeholders assess whether the company is acting in its best interests and may also help identify areas where the company needs to make improvements. 

Additionally, disclosures can help to improve governance practices by providing companies with information about what stakeholders expect from them. This can help companies to identify areas where they can improve their practices and ensure that they are meeting the needs and expectations of their stakeholders. 

Overall, disclosures play a critical role in the wider context of corporate governance by promoting transparency, accountability, and trust between companies and their stakeholders. Companies that provide comprehensive and accurate disclosures about their governance practices are more likely to be trusted and seen as responsible and effective stewards of their stakeholders’ interests. 

 The sensitivity of disclosure 

There are several reasons why board evaluation could be sensitive: 

1. Confidentiality: Board evaluations often involve the confidential assessment of individual directors, which raises concerns about privacy and the potential for sensitive information to be leaked.
2. Reputation: Disclosing information about board evaluations could reflect poorly on directors or the company if the evaluations reveal areas for improvement or weaknesses in governance practices.
3. Conflict of interest: There may be concerns around conflicts of interest when directors are evaluating their own performance or the performance of other directors.
4. Legal implications: There may be legal implications if sensitive information is disclosed that could be used in future legal proceedings.
5. Board dynamics: Board evaluations can have an impact on the dynamics of the board, particularly if evaluations reveal areas for improvement or if directors feel that their performance has been unfairly assessed.

Researchers Mark Fenwick and Erik P.M. Vermeulen believe that the requirement to disclose information about the board evaluation process itself does have a positive effect – but not the disclosure of the individual assessments of board members! 

This is backed by a study conducted by audit firm EY’s “Centre for Board Matters” – almost half of the Fortune 100 companies disclose that they have assessed the performance of individual directors (but not the specific results). 

Disclosure in company reports 

 Disclosure practices vary; there is no global “best practice” yet. The Council of Institutional Investors (CII), via its Research and Education Fund, published a guidebook about proper disclosure of board evaluation processes. Glenn Davis and Brandon Whitehill provide a framework which is known as the Seven Indicators of Strength. This framework describes elements of evaluation processes that boards should consider and communicate in their disclosure. 

The Toronto Stock Exchange (TSX) has reviewed the corporate governance disclosure of over 700 of its issuers and explicitly provides examples of both good and bad disclosure. The manual “Corporate governance – A guide to good disclosure”, provides very practical advice on how to respond to the 14 guidelines of its corporate governance code, with a special section on “How to communicate effectively”. 

Some companies are starting also to disclose the actual assessment topics representing stakeholder interest, for example, diversity and inclusion, ESG, purpose, crisis preparedness, culture, innovation, cyber-security, and geopolitical risk. 

“The pressure for more disclosure regarding board, committee, and individual director evaluation processes is likely to continue to increase”, says Holly Gregory of Sidley Austin, the U.S. law firm. 

Continue to Part 2