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The 21st Century Board: Structure, Responsibility, Assessment

April 28, 2006 

"Restructuring the corporate board is one component in the evolving corporate governance reform process. Congress has imposed specific reforms on publicly traded companies by enacting the Sarbanes-Oxley Act of 2002.  An important focus of corporate governance restructuring is board composition.  Upon deciding to restructure the board to include a majority of outside directors, the board must then consider issues such as the frequency of executive sessions of independent directors, as well as the number of independent directors assigned to key committees.

The flash point for the recent explosive corporate scandals has been money, particularly executive compensation.  One reaction to the recent corporate scandals has been legislative, regulatory, and investor attempts to improve accountability for the oversight of accounting practices of public organizations.  In corporate architecture, the capstone of management, external auditors, internal auditors, and the board of directors is the audit committee.  This position means that an audit committee's oversight role has expanded, and its duties are dictated by the provisions of the Sarbanes-Oxley Act of 2002, security market listing standards, and the pressure exerted by institutional investors to conform to recommend performance guidelines.    An audit committee should be composed entirely of independent directors and should have at least three members.

The committee that has the most direct impact on restructuring the board into an independent force within the corporation to provide checks and balances on management is the nominating /corporate governance committee.  The committee is also responsible for shaping the corporate governance of the company.  Under the New York Stock Exchange rules approved by the SEC, the committee must have a written charter that addresses the committee's dual purpose: 'identify individuals qualified to become board members, consistent with criteria approved by the board, and to select, or to recommend that the board select, the director nominees for the next annual meeting of shareholders; develop and recommend to the board a set of corporate governance principles applicable to the corporation; and oversee the evaluation of the board and management[.] (NYSE, November 4, 2003, Rule 303A.04)

Under New York Stock Exchange rules, all listed companies must perform an annual assessment of the board and the audit, compensation, and nominating/corporate governance committees and address the annual performance e valuation in their corporate governance guidelines (NYSE, November 4, 2003, 303A.04(b)(ii), .05(b)(ii), .07(b)(ii)&.09).    In a survey of directors conducted in 2002 by Korn/Ferry International and Corporate Board Member magazine, of the 2,041 surveys returned, only 33.3% indicated that the entire board's performance was formally evaluated on a regular basis (Korn/Ferry International & Corporate Board Member Magazine, 2002, question, 39a).

Although establishing a mechanism for the assessment of the board, board committees, and board members as a component of corporate governance reform may be a daunting and uncomfortable task in the minds of board members.  Performance review formats include group self-assessment (for the board and committees) and individual director evaluations (director self-assessments and peer evaluation), usually under the aegis of the nominating/corporate governance committee (Sonnenfeld, September, 2002, p. 113).  For board self-assessment, the following issues may be addressed in the evaluation tool:  board structure, information flow, internal processes, training and education, director qualifications and compensation (See Korn/Ferry, 2002).

In the same vein, committees of the board should develop assessment tools that facilitate the discussion of best practices in their area of oversight and measure current performance against that benchmark.  When constructing a self-evaluation or a peer-assessment, the evaluation tool should include a rating of the performance of the essential responsibilities a director owes to the shareholders, including: knowledge of the industry and business operations, diligence, loyalty and integrity, director education (See Hall & Keane, manuscript submitted for publication; Conger: & Lawlor, 2002).  For director evaluations to be an effective means of director development, the assessment should be constructed around the best practices in corporate governance and should be conducted in a manner to encourage both the individual director and the board as a group to rate their current status against their best practices objectives and to develop a strategy to reach that objective by measurable increments (Hall, Keane, McConnell, & Becker, 2005, p. 62-72)."

Reference:  Reference:  Hall, R.F.; Keane, T.P.; McConnell, C.; Becker, S.; (2005). The 21^st century board: structure, responsibility, assessment.  Journal of Leadership and Organizational Studies, Vol. 11, No. 3. 

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Created: 2007-08-28, Updated: 2009-02-17