Between a Rock and a Hard Place

What outside board chairman Jack McDaniels thought was going to be an uneventful board meeting at $750 million South Hills Trust had suddenly turned contentious. One of the newer directors raised the issue of board evaluations, asking whether the institution could benefit from a governance exercise designed to help directors analyze their contribution, discuss goals to improve their performance, and, subsequently, create a more effective and focused board. The suggestions sparked a firestorm of posturing that led to the formation of two entrenched camps of directors. One group believed the exercise would be helpful to the organization; the other group thought that an openly shared evaluation program would be destructive and a huge waste of time. Realizing that the board was locked in a stalemate, all eyes turned toward McDaniels for leadership on this issue. We asked several individuals how they might advise the chairman.Board evaluations can be a valuable part of sound corporate governance. Like employees and management, directors have ever-increasing responsibilities they must fulfill, especially to shareholders. Evaluations provide helpful feedback on how to improve each individual`s contribution. The opposition the process may produce among some directors often stems from confusion regarding directors` roles and responsibilities and anxiety toward underlying performance issues, not the evaluation process itself.As a first step, I would suggest a survey that allows the board to assess its performance as a group. The board should be asked to rank its responsibilities by order of perceived importance, and then grade its performance on each one. This will allow the chairman to determine if there is general agreement among the directors on which of their roles and responsibilities are the most important prior to embarking on further evaluations. Questionnaires should include close-ended questions that ask directors to grade the board`s performance on administration, objectivity, and business development skills, as well as open-ended questions that enable directors to provide feedback. To diffuse opposition, results should be tabulated by a third party to preserve confidentiality and should then be presented and discussed at a board retreat. Evaluations of individual directors should proceed only after the board has achieved consensus on its responsibilities and performance as a whole, and then only if most directors feel it is warranted.When done properly, performance evaluations should foster communication, reinforce job expectations and responsibilities, and boost the board`s effectiveness. Claude A. Hanley Jr.

Managing Director

Furash & Co.

Washington, D.C.The whole purpose of an evaluation program for board members would be for each director to utilize the evaluation as a vehicle to improve personal performance. To achieve this goal, there is no need for disclosure of a director`s own evaluation to other members of the board. Every director should be provided with a copy of a well-structured questionnaire that allows him or her to self-evaluate and to set goals going forward. It should be up to each director to decide whether to participate. At most, 15-20 minutes could be set aside at a future board meeting for a presentation by a third party experienced in giving and assisting in these type evaluations. This expert could help each board member interpret his or her own results or, alternatively, such an individual could be made available for private consultations. Michael L. Owen

Partner

Paul, Hastings, Janofsky & Walker LLC

Los Angeles, CaliforniaEven though I think it would be good for a board to do individual evaluations, if I were to suggest to my directors that they evaluate themselves, it would be my last official act as CEO. My board is made up mostly of family members who own a majority of the bank and don`t really embrace anything that is touchy-feely, especially if it involves them. I have no worry about this problem occurring at my bank.As far as advising Jack McDaniels, I`d suggest in his situation that he create an exercise where directors could do a self-evaluation if they so chose, but not make it mandatory. Maybe some directors who felt confident about the evaluation process could then discuss what they learned from the experience. This might create a forum for more constructive discussion in the future. I have read more about boards doing this kind of performance analysis, but with most of the boards of the smaller banks that I`m familiar with, the idea of evaluations is not going to be accepted for some time.Bank CEO

Name withheld upon requestThe chairman should first make sure the board as a whole understands its responsibilities, mission, accountability, and corporate governance objectives. Second, the chairman, with input from directors and the CEO, needs to determine if the board is functioning properly (via board and committee performance reviews). This will help determine whether individual reviews are necessary. If the board is highly functional, this issue may not be worth splitting the board over. Personally, I am in favor of individual board member goals and reviews. High-performing organizations have strong accountability throughout their entire organization, including directors. The chairman, through a board committee, could establish specific individual director goals and also complete the reviews. Michael Vea

Chairman and CEO

National City Bancshares

Evansville, IndianaFrom a regulator`s standpoint, my advice to the chairman and the CEO would be that some type of board evaluation process, formal or informal, should be instituted and that the process be ongoing. However, the chairman and the CEO need to assure themselves that this issue will be more constructive than destructive to the board and the bank. I would further suggest that the board try to determine the underlying problem that sparked one director to conclude that there was a need for a formal board member evaluation. The chairman and the CEO need to take control of the situation and clearly explain to the dissenting board members that each of them brings unique characteristics to the board and that an evaluation process is not intended to look for ways to remove or discredit anyone. Emphasis needs to be placed on the benefits an evaluation process will have for the directorate and thus on the future success of the bank. No matter how well an organization is functioning, room for improvement always exists. Robert F. Milligan

Comptroller

Florida Department of Banking & Finance

Tallahassee, FloridaChairman McDaniels is faced with an interesting leadership challenge in deciding if or when to do a board evaluation. If the bank is winning (i.e., profitable), a generic board evaluation could waste precious board time, energy, and focus for questionable or incremental board governance improvement. Alternatively, if the bank is losing (unprofitable) or floundering due to board ineffectiveness, poor CEO/executive performance, defensive regulatory compliance, ill-conceived strategies, and conflicting egos, it`s time to “shine the light” and take action. Also, board effectiveness cannot be separated from bank performance, because ultimately the board is accountable for bank performance through fiduciary governance, CEO performance, and oversight of strategy. Board effectiveness is not just meeting a governance checklist of best practices. I would suggest to chairman McDaniels that every board has a philosophy of governance, whether it is stated or unstated. It is through this philosophy that every board chooses to govern. It is through these choices that boards become accountable. Effective chairmen understand this and lead their boards accordingly. Sir Adrian Cadbury outlines these fundamentals in his book, The Company Chairman. It should be a primer for any business leader who aspires to chair a board. His book also references Hugh Parker`s “Letters to a New Chairman,” which measures board effectiveness. Every board must be measured by the results of their collective decisions. It is through engaged debate that these decisions are reached. Good chairmen are able to guide these discussions to the appropriate conclusions that ultimately will benefit shareholders. Ed Merino

CEO

Office of the Chairman

Irving, CaliforniaFirst, Chairman McDaniels should tell the board that the practice of board evaluations is growing. A recent NACD survey showed that one-third of all boards have a formal board evaluation process, up significantly from an NACD survey conducted two years ago. I would suggest that the chairman cite several banks of similar size in the same geographic region where this practice is supported by the entire board. Then Chairman McDaniels should ask the directors to determine specific board processes and issues that they would like to critique and to receive feedback on. He should make clear that this would be a collaborative board evaluation process focusing on the effectiveness of board practices and issues as a whole, and not directed in any way toward the performance of individual directors. The final evaluation would be a critique of the overall board`s performance on issues and practices the directors themselves selected. The chairman would start this discussion with a list of practices other boards have assessed in their evaluations. (See the NACD Report on Director Professionalism for sample evaluation forms.) For example: board meetings are conducted in a manner that ensures open communication, meaningful participation, and timely resolution of issues; board monitors company performance with industry-comparative data; board members comprehend and respect the differences between the board`s policymaking role and the CEO/management`s role, etc. After discussion and consensus on questions to be included in the evaluation, chairman McDaniels should ask each director to complete the form, using a 1 (poor) to 5 (excellent) ranking. Every board member should also be given the opportunity to provide anonymous written comments. The chairman should report the results in summary form and lead a discussion on issues and practices in which the board believes it excels and critique areas where some corrective action may need to take place. The chairman should conclude with a discussion on the benefits of this process and what steps may be taken to improve board performance. Roger W. Raber

President & CEO

The National Association of Corporate Directors

Washington, D.C.