Board Evaluations: One Step Forward, One Step Back

Even as they publicly disclose more information about their evaluations, boards are carrying out fewer performance reviews of individual directors.

According to Korn Ferry’s annual analysis of the proxy statements of S&P 500 companies, more firms are disclosing information about the topics, format, and other aspects of their evaluation process. The report found that 97% of S&P 500 companies disclosed details of their board-evaluation process in their 2023 proxy statements, a 6% increase from 2022.  

But in a surprising reversal from past years, the report registered a decline in the number of performance reviews of individual directors. Only 48% of board directors were subject to such a review in 2023, 11% fewer than in 2022. The decline comes despite increased pressure on director performance from investors’ groups and activists. Last year saw a 7% increase in activist-investor campaigns globally, for example, the biggest jump on record.

Those survey figures—combined with data showing that at least half of current board directors think one or more of their peers should be replaced—suggest to skeptics that board evaluations may still be more of a compliance exercise for companies than a strategic imperative. “The problem is sort of obvious,” says David Larcker, a professor at the Stanford Graduate School of Business who specializes in corporate governance. “Directors don’t have much taste for telling other directors they aren’t doing a good job.”

Enlisting a third party to do so isn’t gaining much traction either: Only one-third of firms brought in outside evaluators. In other words, most boards evaluate performance—their own and that of individual directors—themselves. Fifty-three percent of the time, the preferred method of assessment is a written questionnaire and survey. “Paper surveys miss all the nuances and context that could create real value from board assessments,” says Larcker, whereas director interviews (a part of the evaluation process at only 49% of companies) provide a much richer portrait of the board’s social dynamics and decision-making process.

Anthony Goodman, head of the Board Effectiveness practice at Korn Ferry, says the decline in director interviews might not represent a trend; rather, it could reflect the fact that 30% of companies vary their evaluation process from one year to another—an approach, he says, that is emerging as a best practice for keeping directors engaged in the process. “Making evaluations different from year to year could help generate more insight and reflection from directors,” Goodman says. Still, he continues, if the goal is to generate more candor, eliminating the survey altogether and delegating evaluations to a third party “are more effective ways to vary evaluations.”

Goodman says boards are “moving in the right direction” by refining their approach to annual evaluations and disclosing more information. Providing additional details about these changes would be even more helpful to stakeholders, he says. Last year only 24% of boards disclosed changes they made relating to evaluations.  

Instead of substantial issues, however, boards mostly disclosed generic details around responsibilities, committee structures, and succession planning. Goodman says that’s a missed opportunity for companies. Being more forthcoming could unlock hidden value, he says. “Finding a way to highlight how the board is thinking about issues like AI, for instance, is important information,” he says.  

For more information, contact Korn Ferry’s Board and CEO Services practice.