Evaluating Boards of Directors

Article by Herb Rubenstein

Introduction

It is often said that we learn from failure and mistakes. However, the question remains, "What do we learn?” If all we learn is not to make that mistake again, that is not a really powerful “learning.” The way we ultimately learn from mistakes and failures is that we set new standards as a result of analyzing mistakes and failures. Boards of Directors today obviously need new standards.

Current Failures – New Standards

The failures of Enron and Anderson Consulting, and the mistakes of United Way, MicroStrategy, The Washington Teachers Union, Ullico, Tyco, Chesapeake Energy, and other modern day business and non-profit tragedies have much to teach us. One lesson is clear. In each one of these situations, a big part of the problem was a failing of the Board of Directors. This article sets a new direction in the literature on Boards of Directors.

Rather than discuss board of directors’ philosophy (Carver, Boards that Make a Difference, 2nd Edition, Josey Bass, 1997), best practices (Robinson, Nonprofit Boards that Work, Wiley, 2001), board of directors selection processes (Rubenstein and Grundy, Breakthrough, Inc.: High Growth Strategies for Entrepreneurial Organizations, Prentice Hall/Financial Times, 1999) or individual characteristics of non-profit leaders (Nanus and Dobbs, Leaders Who Make a Difference: Essential Strategies for Meeting the NonProfit Challenge, Josey Bass, 1999), this article begins to delineate a new standard, consisting of twelve elements for Boards of Directors. There is much detailed work behind each of the twelve elements of the Board of Directors Standard plus a thorough evaluation framework for Boards of Directors that formalizes this standard. This article is designed to give Boards of Directors of businesses and non-profits a new, clear standard -- a north star -- to guide their creation and operation. The standards are:

Standard Number 1

Every business and non-profit organization shall have a duly elected Board of Directors with written role descriptions for each board position (member), for the board as a whole, and the board shall set and ensure compliance with all key standards, goals and values which define the organization’s identity.

Standard Number 2

The Board of Directors shall have an election/selection process that guarantees that every skill, competency and aspect of human capital that the organization requires to be successful is present at all times on the Board of Directors.

Standard Number 3

The Board of Directors shall on a regular basis (no less than annually) evaluate each of their members, the Board’s processes, operations and actual, measurable contributions to the organization and replace board members and change their processes and operations that are not contributing significantly to the success of the organization.

Standard Number 4

The Board of Directors shall be supported by organizational processes, including a board book distributed to the board of directors one week in advance of a board meeting. The board book will give board members timely, accurate information plus a clear and cogent analysis so that the board can make intelligent decisions free of undue influence.

Standard Number 5

The Board of Directors, each year, shall make at least ten decisions and take ten distinct actions that contribute significantly to improving the quality and ultimate success of the organization each year.

Standard Number 6

Each board member shall, each quarter, originate or sponsor at least one major action or idea that contributes significantly to improving the quality and ultimate success of the organization.

Standard Number 7

Every board member shall be allocated sufficient resources, including financial resources, access to research, independent advisors and industry/competitive intelligence, necessary to perform their job admirably.

Standard Number 8

Each board member shall take forceful action to discover, eliminate and permanently eliminate any lack of integrity, ethical violation or failure by the organization to follow the laws and highest ethical standards of the society (ies) in which the organization operates.

Standard Number 9

The Board of Directors shall guarantee that the historical and contemporary financial books and records of the organization are accurate, and kept in accordance with the highest accounting standards. Further, the Board of Directors shall guarantee that the financial projections of the organization are well informed and serve as a excellent roadmap for the future of the organization.

Standard Number 10

The Board of Directors shall be responsible for providing input into and approving an annually updated business plan and budget, monitoring financial and programmatic performance of the organization and providing input the long-range (3-5 year) strategic plan for the organization.

Standard Number 11

Each board member shall take at least one action monthly to enhance the reputation of the organization. The Board of Directors shall develop an annual plan to improve the reputation of the organization in the community and to insure that actions of the organization consistently enhance the reputation of the organization.

Standard Number 12

The Board of Directors shall be actively involved in bringing substantial resources to the organization and in creating, supporting and sustaining strategic alliances for the organization. Each board member shall take at least one action quarterly that brings in new or additional resources or creates a new strategic alliance for the organization.

From Standards to Clusters of Factors

These standards must be translated into measurable factors in order to evaluate a board’s performance. The ten clusters of factors represent aggregated scores which if measured accurately can shed great light on the past performance and the performance potential of a board of directors. The clusters include:

Cluster 1 – Human Capital Factors

1. Does organization know what competencies are needed for Board members

2. Does board currently have right people with right competencies

3. Does organization have system for identifying when new competencies are needed

4. Does organization have ability to add/subtract board members based on fit, competencies and performance

5. Does the board have a nominating committee that takes competencies into account

6. Does the board have a resume file or waiting list for board positions

7. Is the board willing to increase the size of the board to accommodate the need for new competencies

Cluster 2 – Organizational/Leadership Factors

1. Are board rules in place and enforced

2. Is board structure appropriate

3. Does board have evaluation system for board as a whole plus individual members

4. Does board have someone responsible for ethics oversight

5. Do board members have written agreements with the organization that identifies their roles and responsibilities

6. Are the CEO and Chairman different people

7. Are board member expectations consistently realized

8. Are all past board records accessible and well organized

Cluster 3 – Process Factors

1. Does the board meet as often as appropriate (at least quarterly)

2. Is a board book prepared and distributed at least 10 days in advance of a board meeting

3. Do board members meet regularly without management

4. Is board attendance 80% or higher at every meeting

5. Does the board have a system for collecting information on best practices of other boards

6. Does the board have a system for recommending best practices to the organization and following up to see if they are implemented

Cluster 4 – Resource Factors

1. Is there a person who is the director of board relations

2. Is there an adequate budget for the board

3. Do board members actively participate in bringing new resources to the organization, (i.e. money, strategic alliances, professional services, customers, etc.)

Cluster 5 – Accountability/Financial Oversight Factors

1. Are board minutes, votes and action items identified all in order

2. Is there a procedure where a board member can question the actions of the organization

3. Is the board meeting run by the Board Chair

4. Are there sufficient outside directors

5. Is the board exercising informed reviews and making key financial decisions for the organization

6. Do board members sit on too many other boards, have other conflicts of interest or are family members of other board members

7. Is the board exercising informed reviews and making key financial decisions for the organization

8. Does the board assist on a regular basis in developing a strategy for the organization

9. Is the board compensated in any way for being on the board

10. Is there D&O Insurance for the board

Cluster 6 – Transformational/Communication Factors

1. Does the board have a clear statement of its deficiencies

2. Does the board have a board improvement plan that is being carried out

3. Does the board have a leader with a clear vision for the future of the board?

4. Does the board have a clear vision of the future of the organization? the industry or sector?

Cluster 7 – Governance Factors

1. Does the board govern the organization or just provide advice

2. Are their five examples where the Board voted in key areas to the company

3. The board has a 3-5 outlook or plan to direct the organization

4. Violations of board rules or board set policies are dealt with quickly, publicly and consistently

5. Are there term limits for board members

Cluster 8 – Reputation Factors

1. How well known is the organization and its board

2. How well respected is the organization and its board

3. How many articles, speeches and books have board members written or given as a board member

4. Does the organization have a plan for promoting the board’s reputation and the organization’s reputation

Cluster 9 – Performance/Results Factors

1. Can the board show it has contributed 10% to the top line/bottom line in the organization in the past year

2. Has the board corrected or improved at least 3 major problems in the organization in the past year

3. Does the board know and have a plan to correct or improve 3 major problems the organization will face in the next year.

4. Can each board member identify a significant contribution he/she has made to the organization within the last 60 days

5. Can each board member identify a significant contribution that he or she will make to the organization in the next 60 days

6. Can each board member identify a significant contribution that each other board member has made to the organization in the last 60 days

7. Has the board made 5 key financial decisions in the past 90 days

Cluster 10 - Alignment Factors

1. Does the board have general agreement regarding its major roles and responsibilities

2. Does the board agree on the major problems of the organization

3. Does the board agree on the major opportunities of the organization

4. Does the board agree on the key values of the organization

Disaggregating the Individual Factors

These clusters provide a strong indication of board performance. Mining the data on the individual factors listed below will give a board more in depth, valuable information. The factors below can be analyzed at both the board level and at the individual board member level. We recommend rating all of the factors in board evaluations using a 1-5 scale or “maturity model” where 1 is the most negative or “never” response and “5” is the most positive, “always” or “excellent” response. The individual factors worthy of measurement in evaluating boards of directors are:

1. Recruitment and Experience

2. Training and Use of Technology

3. Terms of board members

4. Use and Availability of Outside Expertise

5. Board Recordkeeping

6. Oversight

7. CEO Supervision

8. Financial Management

9. Audit

10. Fiduciary Responsibility

11. CEO Accountability

12. Bylaws

13. Board Duties

14. Voting

15. Leadership and Capacity for Change

16. Resources

17. Board Results

18. Member Past Results

19. Member Future Results

20. Organizational Results

21. Board Processes

22. Meeting Process

23. Board Expectations

24. Board Member PR

25. Board Knowledge

26. Compensation

27. Communication

28. Demographics

29. Board Understanding of Opportunities

30. Board Understanding of Problems

31. Financial Value of the Board

32. Board Understanding of Stakeholders

33. Clarity and Alignment of Purpose

34. Competencies and Independence of the Board from the CEO and Management

Conclusion

This article is designed to reframe the discussion regarding Boards of Directors to institute new national and international standards for Boards of Directors. These proposed standards apply, in our judgment, equally to boards of directors of large or small for-profit companies, non-profit organizations and applies equally to large boards and small boards.

These standards, as well as the individual and clusters of factors which evolve from these standards, form the basis for evaluating boards of directors. We welcome your comments and suggestions for refinements and improvements in these new standards and evaluation factors for Boards of Directors.