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]
[i] NYSE, Listed Company Manual § 303.A09.
[ii] See, e.g., Jonathan F. Foster & Steven A. Rosenblum, The Importance of Director Self-Evaluations (Feb. 25, 2013), https://currentcap.com/2013/02/25/the-importance-of-director-self-evaluations; see also Frederick D. Lipman & L. Keith Lipman, Corporate Governance Best Practices: Strategies for Public, Private, and Not-for-Profit Organizations 12 (2006).
[iii] Taylor Griffin et al., How Board Evaluations Fall Short, TheCLSBlueSkyBlog.com (Mar. 22, 2017), http://clsbluesky.law.columbia.edu/2017/03/22/board-evaluations-and-boardroom-dynamics (“Only half (55 percent) of companies that conduct board evaluations evaluate individual directors ….”).
[iv] See id. (reporting that “only one third (36 percent) believe their company does a very good job of accurately assessing the performance of individual directors”).