Since 2003, the NYSE has required the boards of listed companies to conduct an annual self-evaluation.[i] Commentators have endorsed such evaluations as being a critical corporate governance best practice, arguing that no one—not managers, shareholders, or regulators—has better information about how a board performs.[ii] Outsiders are largely limited to evaluating board members based on outputs, such as firm performance, while board members are in the room and thus able to use a much broader set of metrics to evaluate both inputs and outputs.
In practice, however, boards are as bad at self-evaluation as they are most other tasks. Barely half of companies evaluate the performance of individual directors, as opposed to evaluating the board as a whole,[iii] despite the obvious importance of determining whether individual board members are making effective contributions to the board’s decision-making processes. Of those that do conduct individual evaluations, just slightly over a third believe their company’s evaluation of individual directors provide an accurate assessment of each individual’s contributions.[iv]