Evaluating the Board of Directors: International Practice

Abstract

Board evaluation can provide a vital tool for directors to review and improve their performance. This will eventually lead to significant value creation opportunities for firms. But is increased regulation and regulatory guidance requiring board evaluation a realistic or sensible move? Is it necessary for regulators to compel boards to be more active in the area of self-evaluation? As is often the case, the risk of regulatory initiatives aimed at forcing or even “nudging” greater responsibility is that it merely encourages “box-ticking” behavior in which managing the appearance of compliance becomes the overriding objective. Resources devoted to managing an image of compliance (and not substantive compliance) are wasted, and the potential gains from meaningful self-evaluation are never realized. However, empirical research presented in this paper seems to indicate that companies that are listed in countries with more specific principles and substantive guidance do tend to adopt more meaningful and open forms of board evaluation practice than their counterparts in jurisdictions with no or less detailed requirements. This does suggest that “law matters” in this context.

Keywords: Board of Directors, Board Diversity, Board Dynamics, Board Evaluation, Corporate Culture, Corporate Governance, Corporate Strategy, Financial Crisis, Independent Directors, Innovation, Value Creation

JEL Classification: D20, G34, K22, L21, L25, O16