Is a Third-Party Evaluation Right for Your Board?
The board evaluation process is fundamental to board effectiveness. A successful board assessment helps the board evaluate and test whether it has the right composition, dynamics, operations, and structure to oversee the company now and in the future.
In fact, in its recently released board effectiveness framework, the EY Center for Board Matters identified board evaluation as a key element of an effective board. Additionally, NACD recommends that rigorous director evaluation serve as a component of renomination decisions.
Periodically using a third-party facilitator to assist with some or all parts of an evaluation, from reviewing or drafting evaluation questionnaires to designing and fully executing tailored evaluation programs, is a growing practice that can optimize the value of a board evaluation and, ultimately, increase the return on investment of the board. Our research found that in the past year, slightly more than a third (34 percent) of Fortune 100 companies disclosed using or considered using a third party to facilitate the board evaluation, up from 22 percent in 2018.
With interest in this practice growing, how do you know if a third-party evaluation is right for your board? Below are five reasons to consider a third-party board evaluation. They can:
- Offer an impartial view of the board’s collective performance. An independent third party can act as a sounding board for directors, allowing them to air their concerns and directly raise sensitive issues. This level of candor, along with the ability of an independent third party to objectively bring perspectives and issues to the board’s attention, can help boards break through dysfunction of all kinds that can disrupt their potential—from lack of effective ways to challenge peers to unhealthy power dynamics among directors to overstepping into management’s role or having the wrong people in the boardroom.
- Take your peer evaluations to the next level. Board evaluations typically start at the full board and committee levels but until recently haven’t focused on the individual director level. That has changed. In 2022, 53 percent of Fortune 100 companies disclosed performing individual director evaluations as part of the board evaluation process, up from 24 percent in 2018, according to our research. Most made clear that these included peer (as opposed to just self) evaluations. Because directors are often more direct, open, and candid with a third party, an outside facilitator can optimize the value of that growing practice.
- Help your board gain market insight. Even the strongest board can have one or more blind spots or biases. Third parties bring market insight and knowledge of leading practices gained from their work with other companies that can enhance and strengthen the assessment process and lead to improved action-item development.
- Create accountability for board improvement. Beyond offering insights and observations, an independent third party can also provide related recommendations, facilitate calendaring of action items for improvement, and help the board assess the effectiveness of its changes over time. This relationship can provide an additional layer of accountability as a board does the work of acting on evaluation outcomes.
- Build investor trust. Disclosures about the board’s evaluation process can enhance investor trust by offering a valuable window into the rigor of the board’s self-assessment and commitment to continuous improvement. Disclosing the use of an independent third-party evaluation facilitator can underscore that rigor and commitment and may further boost investor confidence in the board’s effectiveness.
These are just some of many reasons to bring in an independent third party to enhance the board evaluation process and, ultimately, the board’s value.
Kris Pederson, NACD.DC, is the Americas leader of the EY Center for Board Matters.