Board Evaluations and Getting Aligned

Report prepared by:

Byron Loflin, Stephen Giove, and

Matthew Healy / June 2017

BUSINESS.NASDAQ.COM 2

BOARD EVALUATIONS AND GETTING ALIGNED

Board Evaluations and Getting Aligned

Over 20 years ago, very few companies conducted an

evaluation of their leadership. Prior to 2000, the notion of

Board and CEO alignment generally meant that the Board

executed on the CEO’s vision. In a post-Enron environment,

regulations including Sarbanes-Oxley and Dodd-Frank in

the United States, and the Governance Code in the UK, have

impacted board analysis and led to an increase in companies

conducting annual evaluations, as well as an increase in the

depth of these evaluations.

This has also been a heightened focus for shareholders as

institutional investors now expect boards to pursue better

alignment. Conducting evaluations has become a signal to the

market that a leadership team considers the impact of long-

term issues, including ESG matters and sustainable business

practices.

Annual evaluations assist the board with keeping the following

top priorities:

1. Selection and retention of top leadership talent

2. Board composition and refreshment

3. Approval and support for corporate strategy

4. Oversight of the company’s risk profile

5. Allocating time to key issues

So how does a company consider and evaluate its alignment?

Alignment begins with leadership. Board and CEO evaluations

are catalysts for measuring board peer group and CEO

alignment, and for extracting action points to achieve better

performance.

Firms that are not measuring CEO and Board performance and

alignment utilizing evaluations could be missing an opportunity

for significant improvement. Consider your CEO and your

board. Is there room for improvement? Few would answer with

a “no.” But, since there is no industry standard for measuring

board performance, how does a board know when it’s operating

at the optimal level?

Arguably, business leadership effectiveness and corporate

governance importance are on a natural progression path, but

the many governance failures of the late 1990s accelerated

their confluence to become integral elements of leadership

excellence and strategy. Technically, most power rests with

the board of directors as it hires and fires the chief executive

officer and approves all major changes in capitalization.

An important role that strategic board members can play

is providing insightful counsel that assists management in

“looking around the corner” and “down the road” in hopes

of avoiding unnecessary risk and staying ahead of the

competition. Strategic insight requires diverse board members

who work as leadership with management to lead and message

the vision and mission of the company well. And since all

employees, including the CEO, expect an annual evaluation,

a board who volunteers the same, will send a supportive

message throughout the organization.

Boards and CEOs that are undertaking robust evaluation

processes find that they are more confident in their

relationship and respective roles.

How can corporate boards of directors, in the dynamic business environment of

2017, drive their corporate vision with success? Board and CEO evaluations are two

underutilized tools readily available to promote leadership alignment.

BY BYRON LOFLIN, STEPHEN GIOVE, AND MATTHEW HEALY

BUSINESS.NASDAQ.COM 3

BOARD EVALUATIONS AND GETTING ALIGNED

Successful Alignment

Keeping a vehicle aligned requires watchful, regular

maintenance, such as rotating the tires, checking the steering

and the suspension. If we are technical in our examination,

alignment is a dynamic process or activity, not a destination. A

dysfunctional board and management relationship is distrustful,

destructively challenging, or worse. Historically, and too often,

public perception has been that boards are misaligned and that

too many individual board members are not performing up to

their potential. Misalignment has arguably been at the core of

several epic corporate failures in recent history. Misalignment

means that the board does not understand the company’s

strategy, that the strategy is not in the best interest of the

investor, and that it will not achieve or maintain competitive

advantage. An aligned board and CEO relationship could be

used to describe a business’ attitude towards competitive

advantage. A misaligned relationship indicates that leadership

is possibly ineffective and headed for trouble. Most boards,

like a vehicle, need annual maintenance – or in a business

instance, education – and alignment. Some need only minor

correction, while others are completely dysfunctional and need

refreshment or rebuilding.

Today more board directors consider their board memberships

an honor and a duty to the shareholder. Board composition is

less about the director’s resume, and more about what the

board as a whole is lacking in terms of gender, age and other

aspects of diversity. Diversity in the boardroom is gaining

significant momentum, and rightfully so. A robust board

evaluation should support this perspective and promote

analysis of the following:

• Mission & Vision

• Ethics and Accountability

• Board Composition and Culture

• Board Meetings and Administration

• Strategy and Performance Measures

• Board’s Relationship to Management

• Board’s role in Shareholder | Stakeholder engagement

© Copyright 2017. All rights reserved Nasdaq, Inc. 1145-Q17.

Byron Loflin is CEO of the Center for Board Excellence; Stephen Giove is a partner in the Capital Markets Group at Shearman & Sterling LLP; and Matthew Healy is Vice President of Governance Solutions at Nasdaq Corporate Solutions.

Boards of directors today should be dynamic and comprised of

leaders who have been elected to the position because she or

he has been identified as having skills that will contribute to

the success of the organization. Gone are the days when board

membership was a retirement program. “We firmly believe

that empowered boards and shareholders, both providing

meaningful oversight, are critical to the long-term success of

public companies.” (Open Letter: Commonsense Principles of

Corporate Governance, July 2016).

Board and CEO evaluations are often most effective when

conducted at a time that complements the board’s strategic

discussions, and less around meetings that focus on tactical

issues like audit and compliance. For a company whose fiscal

year end is December, the best timing may be late spring or

summer. Too often, a lengthy board agenda prevents

sufficient allocation of time for strategic planning. Strategy

and alignment, being the most important accomplishments

that a board and management team can achieve together,

should be prioritized on the agenda, which is typically laden

with the tactical responsibilities of the board.

An aligned board and management team promotes deeper

interaction, sets a tone that builds stakeholder confidence and

promotes diversity of opinion, providing opportunity for better

insight and the probability for both seeing around the corner

and down the road.

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