Board Assessment

Definition
A systematic process that evaluates the capabilities, experience, and attitudes of potential board member candidates to determine their qualification for board membership.

Current Context

• Director assessment is no longer a discretionary activity
• NYSE requires annual assessments of boards, directors and mandated committees (including Governance, Audit and Compensation)
• SEC requires mutual funds to assess their boards and committees
• D&O liability insurance companies are providing “preferred status” to boards conducting assessments

Morningstar now includes a Fiduciary Grade in its Mutual fund rating system. Criteria include:

1. Board quality (i.e. has the board taken action in cases where the fund has not served investors well?)
2. Corporate culture (i.e. how strong are the company’s communications? Has it done a good job of retaining key personnel?)

Recommendations

• Before proceeding with assessment design, determine how it will be used (e.g. for overall board or individual director development, as a performance measure to determine re-election, as a screen for candidates)
• Draw up a simple plan for communicating assessment results including timing, who will deliver the results and who will be privy to the results
• Develop a confidentiality code of conduct for assessment results
• Design/use an assessment tool for the full board that links to the organization’s strategic objectives, its code of conduct, shareholder relations and reputation risk.
• Design/use an assessment tool for individual directors that links to fiduciary responsibilities, governance processes, knowledge of the company’s strategy and reputation risk
• Develop a list of personal traits for all board members (e.g. common sense, good instincts, candor, backbone, stamina, leadership)