ArticlePDF Available

How Should Board Directors Evaluate Themselves?

Authors:
  • Stybel Peabody Associates

Abstract

In a recent survey, 72% of board directors indicated that their performance ought to be evaluated. Yet only 21% of the boards of public companies actually conduct such assessments. Part of the problem is that organizations often don't know how best to implement a board self-evaluation procedure, so many simply avoid the practice. Others have implemented the process only to become frustrated because it took so much time and produced so few results. To investigate the different self-evaluation practices used, the authors studied eight boards that have engaged in the process for at least two annual cycles. They found two high-level variables in the protocol for self-evaluations: the structure of the data-collection methodology (low versus high) and the confidentiality of data (unimportant versus important). These dimensions define quadrants of four different approaches to self-evaluation: informal, legalistic, trusting and systematic. Each approach has important implications for a company's board rating, directors and officers insurance and various other issues.
A preview of the PDF is not available
... Despite the importance of the adoption of self-assessment practices, only 21% of boards of public firms implement such procedures (Peabody and Stybel, 2005). Among the 21%, assessments are commonly misused and the resulting outcomes depend on the data collection methodology and the respect of anonymity. ...
... Board self-assessment practices have been demonstrated to be associated with higher firm valuations for a number of reasons (Peabody and Stybel, 2005). First, self-assessment practices increase board members' awareness of their own behaviours. ...
Article
Full-text available
This study examines the relationships between the management control strength of target and acquiring firms, and takeover premiums. It uses a scorecard system, which aggregates the scores of twelve variables reflecting corporate governance quality and ownership structure characteristics, to define management control strength. Using descriptive statistics and regression analysis, a sample of eighty-one North American publicly traded companies that were in involved in M&A transactions between 2010 and 2013 is examined. Acquirers were found to have paid significantly higher premiums when at least half of the directors sitting on target boards held multiple directorships. Additionally, when at least half of the directors sitting on acquirers’ boards held multiple directorships, acquirers paid significantly lower premiums. The study also found that when an acquirer’s management control is strong and a target’s management control is weak, the size of the premium is significantly lower than the sample average. This could be explained by the acquirer’s greater ability to negotiate deal premiums when its management control is strong and by a lower perceived value of the target firm when target management control is weak. When a target management control is strong and acquirer management control is weak, and when both target and acquirer’s management control is either strong or weak, the premiums paid are not significantly different from the sample mean. These results provide the first step towards developing an investment screening tool for companies involved in M&A transactions.
... The performance evaluation of directors may be assumed by either an internal or an external evaluator. Stybel (2005) argues that the evaluation process structure and the degree of confidentiality associated with the gathered information may influence the decision of choosing an external versus an internal evaluator. An external evaluator is more likely to be chosen when the process of performance evaluation is structured and the level of confidentiality is essential whereas an internal evaluator tends to be chosen when the evaluation process is rather informal and the need for confidentiality not very important. ...
... The confidentiality throughout the process of directors' performance evaluation is a critical issue as it raises two important concerns: the risk of liability suits brought by shareholders when the outcome of performance evaluation is negative and the risk of hindering the well established reputation of directors who have served boards for a long period of time. These concerns may lead directors to refuse to serve on certain boards as well as resigning from the boards they are serving (Stybel, 2005). Minichilli et al. (2007) propose a framework for performance evaluation processes based on the determination of four essential components: the evaluator (an external consultant or an insider), the recipient of the evaluation (for whom the evaluation is intended), the object of the evaluation and its content (existing procedures, individual evaluation of directors, evaluations according to specific criteria, etc.) and the method of evaluation used (open discussions, surveys, etc.) ...
Article
Full-text available
The object of this study is to examine how board members' performance is evaluated and how they are compensated. In the last decade, the board of directors of publicly traded firms has been under strict surveillance by market participants and regulatory bodies. However, although market regulators require the full disclosure of executive and directors' compensation plans, very few guidelines exist as to how directors should be evaluated. Hence, by thoroughly examining the information disclosed in management proxies, this study shows that publicly traded Canadian firms do indeed evaluate board members' performance. However, the information disclosed regarding the evaluation of board members is parsimonious and mostly generic. Based on a sample of 173 Canadian firms, our findings also indicate that equity based incentive plans through differed share units (DSUs) are most often used as means to compensate directors.
... In this article we focus on board self-assessment, where the agents of the evaluation are members of family businesses boards. Self-evaluation is the most common practice in evaluating boards (Conger, Finegold, & Lawler, 1998;Kazanjian, 2000;Stybel & Peabody, 2005). ...
... As stated by Stybel and Peabody (2005) board self-evaluation requires careful design and preparation to be effective. Self-evaluation can guarantee that agents acquire an in-depth understanding of board activities and can significantly improve the ability to carry out a successful decision-making process (Davis, 2006a(Davis, , 2006bFerguson, 2001). ...
Article
This article aims at defining a tool to measure board effectiveness in family businesses. After reviewing the literature on family business and on corporate governance, a list of board tasks (items) is defined. This list is submitted to 84 Italian family business directors for board self-evaluation. In order to validate this self-evaluation tool, the directors are asked to assess the board effectiveness referring to each of the tasks mentioned in the list and the responses are analysed by means of the Rasch model. The Rasch model is a psychometric method used in social sciences to measure a latent trait. In this study the latent trait is board effectiveness and the Rasch analysis indicates that the data fit the model. This shows that the tool proposed for measuring board effectiveness is statistically validated. The results allow us to provide family business boards with an effectiveness self-assessment tool. We also contribute to the literature by providing a definition of what the board tasks in family businesses are. Methodological issues emerge during the analysis and some important comments are provided both on how to measure this latent trait and on the weaknesses of corporate governance in family businesses.
... They see boards evolving from the informal toward the systematic as they gain familiarity with and shed anxiety about the process. 28 Other studies, however, cast a critical eye on how board evaluations will be seen and used. Jauncey and Moseley-Greatwich worry that evaluation processes may lead to categorization of directors in ways that will inhibit their participation, arguing for evaluations of individuals' behavior to be assessed by keeping definitions fluid. ...
... First, evaluation procedures are often viewed as overly burdensome and time-consuming (Long, 2008). Second, companies fear that evaluation results could contain evidence of improper conduct and could be subsequently used in civil or criminal proceedings (Stybel and Peabody, 2005). Third, if boards fail to respond appropriately when problems are discovered, key stakeholders may be dissatisfied. ...
Article
Purpose Although board expertise has been identified as an important determinant of board performance, some surveys are still reporting that the overall level of board expertise is insufficient to carry out current and emerging roles. Consequently, companies must ensure that board members have the required skills and knowledge. This study aims to examine three board processes aimed at developing and improving board expertise. Design/methodology/approach Based on disclosures in the corporate governance guidelines of 100 leading US companies, the study focuses on three board processes, i.e. director nominations, orientation and education programs, and board performance evaluations. Findings Based on the initial findings, it is found that most companies in the sample were in compliance with stock exchange requirements and provided information on director nominations, orientation and education programs and board performance evaluations. All too often, however, the companies disclosed generic, non‐specific information; this provides little reassurance that the proper processes are in place to promote companies' long‐term interests. Research limitations/implications By examining these key board processes, the paper contributes to the governance literature by providing empirical evidence on this important topic and offering guidance to companies examining board processes aimed at improving directors' overall expertise. Originality/value By focusing on disclosures in corporate governance guidelines, the authors also gain insight into decisions made by companies under increased pressure from securities regulators and other stakeholders to provide increased transparency on governance issues.
... The evaluation is commonly implemented by the Chair, an external consultant, or a designated board member (Anderson, 2006). Stybel and Peabody (2005) try to identify the most effective way to evaluate the board. ...
Article
In this paper, the effect board evaluation has on the board’s composition and work is studied. Board evaluation is considered vital for the development of the board’s work, which in turn is essential for the development of the company. The study is performed on companies listed on the NASDAQ OMX Nordic list and the Oslo Stock Exchange as a questionnaire study, where the chairperson was asked to grade (on a scale from 1 to 5) how satisfied she/he was with the different aspects of the board’s composition and work. Of the 157 responding chairmen, 120 (76%) were chairing companies that employ a board evaluation process. The chairperson was often the key person in these evaluation and most of the evaluations are delivered verbally to the nomination committee. Of the 120 companies with board evaluation, 20 companies use only informal discussions as the evaluation method. The remaining 100 use at least one of the methods: individual open/anonymous questionnaire or interviews. Furthermore, the responses were tested with ordered probit model for the effect of board evaluation on the board’s composition and work. The results show that board evaluation affect positively, according to the chairperson perception in all asked aspect (with one exception) of board’s composition and work, with significant results in four aspects: first, better decision-making; two, better discussion of short-term development; three, more actively discussion of business strategy; and four, better understanding of non-financial objectives. Last, the results of the study do not show that board evaluation affect the company’s financial performance (proxy with Tobin’s Q, ROA or ROE).
Chapter
In 2013, De Nederlandsche Bank will focus more clearly on board evaluations in its financial supervision. This chapter summarizes the pros and cons of board evaluations for financial supervision. In addition, it is examined what constitutes ‘good supervision’ when it comes to board evaluations and what can reasonably be expected of DNB in this regard. DNB will publish a set of Best Practices regarding the process of board evaluations in order to give financial institutions some guidance on how to set up the process.
Chapter
In the last decade performance evaluation of the Board of Directors has become a best practice at national and international level. Italy is an interesting area of analysis given the high concentration of ownership that characterizes companies, including listed companies. In this context the choices of governance that affect the level of disclosure, for which the expectation is to have a low level of disclosure on the practice of BE (Board Evaluation).The first purpose of this paper is to present a résumé on the state of the art in terms of BE for Italian listed companies at 31st December 2012, in terms of presence/absence of the practice of disclosure and its more or less extensive disclosure. The second objective is to highlight the modality of adoption of BE and the third is to analyze the relationship between the quality of BE (measured using as a proxy the disclosure on its setting up) and corporate governance. The results reveal there are few companies that use board evaluation and that there is a relationship between BE adoption and good governance and between the quality of BE and good governance.
Article
Purpose This paper aims to develop a model to assess the effectiveness and compliance of bank boards, taking into account their unique characteristics, financial industry standards and regulations. Design/methodology/approach The literature on the roles and effectiveness of boards and directors in the financial industry is reviewed. Findings The main finding in the literature suggests that evaluating the effectiveness of a board must include characteristics of the entire board as well as individual contributions of directors. Practical implications Banking boards, more than in the past, must proactively evaluate their effectiveness and compliance with existing rules. Originality/value The paper proposes a model for assessing the effectiveness and compliance of boards and directors of banking organizations, considering their characteristics, financial industry standards and regulations.
The Fall of the House of Grasso
  • P Elkind
P. Elkind, "The Fall of the House of Grasso," Fortune, Oct. 18, 2004, 284.
Finnish Corporate Governance Reprint 47113 For ordering information, see page 1. Copyright © Massachusetts Institute of Technology All rights reserved. Some companies are better off starting with an informal, legalistic or trusting approach, later evolving that into a more systematic practice
  • J Erma
  • J Kivinen
J. Erma and J. Kivinen, “Finnish Corporate Governance,” European Lawyer (April 2004): 58. Reprint 47113. For ordering information, see page 1. Copyright © Massachusetts Institute of Technology, 2005. All rights reserved. Some companies are better off starting with an informal, legalistic or trusting approach, later evolving that into a more systematic practice.