John P. Beavers
Partner, Bricker & Eckler LLP
March 2001

Involving boards in evaluating their own performance or composition is rarely successful unless the evaluation is structured as a component of a larger program focusing on the company as a whole. First, evaluating performance or composition on a standalone basis without any frame of reference typically results in directors’ critiquing each other which is not only awkward, but also uncomfortable for those involved. Second, evaluating performance or composition focuses on the past, diverting attention away from the future. Third, without a larger program as a frame of reference, the process becomes purely subjective and too often is driven by personalities. And finally, the process often results in hard feelings.

Evaluating past performance, especially of individual directors, probably is not necessary. A better course is to determine competencies needed in the future and then address acquiring those competencies. This is best accomplished by first involving the board with management in developing the company’s strategic direction. After the board and management determine a strategic direction, the board and management can then determine what competencies are needed among the board and management in the future to achieve the strategic direction. In this way, changes or additions can be made to the board as well as to management to reflect future strategic direction rather than as an evaluation of past performance or personalities.

Involving boards jointly with management in determining strategic direction generally results in stronger bonds between both groups. Disagreements between boards and CEOs over strategy often result in short tenure for the board or abrupt departures by the CEO.

Here are some steps to consider in involving boards in strategic direction that also includes determining competencies needed in the future:

• Explain to the board the need to be constructively involved in determining strategic direction. The goal is to build long-term stockholder value for the benefit of all stakeholders.

• Urge the board to do this as a whole rather than through a committee. Determining direction requires the view of every perspective available to the company.

• Clarify that the process is a joint role of both the board and management. Both should both participate jointly in establishing the process as well as determining the direction.

• Agree upon the elements that are going to be considered in the process. One of the key considerations is the background, experience and expertise needed among management and the board to achieve the strategic direction.

• Direct management to propose strategies for discussion. The board’s function is to discuss and question management’s proposals, requiring management where appropriate to reformulate strategy consistent with guidelines instructed by the board.

• Schedule as one of the later considerations the background, experience and expertise needed among management and the board to achieve the strategy.

• Require the board and management jointly to map out the changes or additions necessary to management and the board to acquire the needed background, experience and expertise.

• Direct a nominating or similar committee of the board to implement the change in composition.

Involving the board first in determining the strategic direction of the company as a whole facilitates a board’s evaluation of its own composition. Doing so not only gives the board a frame of reference for evaluating its composition, but also focuses the board’s attention on future needs rather than past performance, avoiding the hard feelings that may come if the evaluation is perceived as purely subjective or driven by personality.