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Directors' performance goes under the microscope

More and more companies are evaluating the quality of their boards, writes ELIZABETH CHURCH

From Thursday's Globe and Mail

David O'Brien spent years calling the shots as head of the old Canadian Pacific conglomerate. But as the chairman of the board of two major Canadian companies, he has been told by his peers that he needs to work on his listening skills.

"I would say my greatest weakness is that sometimes I am a little dismissive," says the chairman of Royal Bank of Canada and EnCana Corp. "I don't listen to everyone's views. That has been said to me on occasion."

The increasing responsibility of corporate boards means that the performance of directors and chairpersons such as Mr. O'Brien is under the microscope like never before. More and more firms are evaluating the performance of their boards just as they do senior executives and an increasing number of them are asking directors to rate the contributions of their peers.

The results of this year's Report on Business Board Games ranking show that more than one-quarter of companies in the S&P/TSX index report that they have a formal evaluation process that includes board, committee and director performance reviews. At the other end of the spectrum, 15 per cent made no mention at all of board evaluation.

This new scrutiny on performance is being welcomed by many who see it as the breath of fresh air that is needed to get rid of the deadwood at the boardroom table. But others question whether all the surveys and director questionnaires are really improving performance. Some speculate there is a lot of "box ticking" going on at companies who want to say they have board evaluations, but who never take action on the results.

"In the end it comes down to what you do with all the information," said Mr. O'Brien on a week that he was reviewing the results of peer reviews at both the boards he chairs. "That is where the rubber hits the road. Some boards long before any of this went on used to ask John or Mary to step aside. There is a lot more formality now. Whether it is better or not, I am not sure."

That ambivalence is shared by others who worry that the process eats up valuable board time or that surveys on board performance lose their effect when directors are asked to fill them out year after year.

"Annual surveys, they are losing their life," said Arthur Sawchuk, chairman of Manulife Financial Corp. "We're 12 years into the process and there is no big leap yet to be made."

Mr. Sawchuk said he would like to conduct evaluations less frequently, with the aim that directors would take more time over the process.

Instead, Mr. Sawchuk and several other chairmen said annual one-on-one talks with directors offer the kind of opportunity for feedback and discussion of issues that surveys will never provide.

David McLean, chairman of Canadian National Railway Co., also sees the potential pitfalls of reviews. CN, like many other large companies, is testing the waters this year on peer evaluation -- the process where individual directors are asked to rate the performance of their colleagues at the boardroom table.

"I think it is a healthy thing," he said. " I don't think it is a thing you do every year. Every three years maybe. Otherwise you get hung up on navel gazing."

Of course, not everyone sees it this way.

Beverly Behan is a consultant with Mercer Delta in New York who spends a good deal of her time interviewing directors as part of companies' board evaluation process. Judging from the comments she hears, Ms. Behan said there is still plenty of work to be done.

Most directors, she said, have useful things to say about their peers and provided that those comments are made in a constructive manner, they can transform the performance of a motivated director. They also can be an eye-opener for a board member who is an underperformer.

On the other hand, she suspects there are plenty of firms that are just going through the motions with reviews. "You can make anything look good," she said. "Really it is not until you get into the boardroom that you see what is there."

Research conducted by Mercer Delta in the United States found only about half of the firms doing board assessments were actually acting on the results.

Some boards also are reluctant to conduct written evaluations for fear that any critical material contained in them could be used against them in the future as part of shareholder lawsuits.

Still, many prominent directors say they have witnessed real results from evaluations, especially if new approaches are taken to keep them meaningful each year.

Richard Haskayne, chairman of TransCanada Corp., said a decision three years ago to ask key executives for their evaluation of the board proved to be an eye-opener. "We've had some very valuable feedback. It's not necessarily critical, but it's constructive."

For the foot-draggers, there is increasing external pressure to conduct annual performance reviews. Board evaluations are required by the New York Stock Exchange and proposed corporate governance guidelines from the Canadian Securities Administrators state that a board should "regularly assess its own effectiveness, as well as the effectiveness and contribution of each board committee and each individual director.''

Shareholder groups such as the Canadian Coalition for Good Governance also are active in this area. Robert Harding, chairman of Brascan Corp., said his board has replaced its own evaluation with a form developed by the group as a way to improve the process.

Peter Stephenson, a Toronto consultant who devotes about one-third of his time to board evaluations, said there is no question support for evaluations is gaining momentum as it becomes accepted practice.

"More people are doing board evaluations just because -- because it is more accepted and more mainstream."

But he also sees boards becoming more serious about the performance of their members. The evaluation process reflects that, he said. "I am seeing an effort to put more teeth into it."

Indeed, many say the rising workload and responsibility also is motivating boards to address individual performance -- something many say boards have been reluctant to do.

"Historically, boards have not wanted to step up to the issue of director performance," Ms. Behan said. That trend is changing, she said, as boards become much more engaged and feel the need to clean house.

"There are still some Jurassic Park people out there on boards, but there are many fewer."

With files from reporter Janet McFarland

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