Comparing the performance of publicly traded and nonprofit boards is a common sport, with for-profit directors often coming in second to nonprofits’ “mission-driven” behavior.  However, there is one essential element of governance where publicly-traded boards excel – the annual evaluation of the performance of the board and its members.

The Annual State of Board Evaluation in the U.S. 2023, from Korn Ferry and Gibson Dunn, is a real eye-opener. Drawing from annual statements, the report analyzes the performance of America’s Fortune 500 companies and finds that 97% report their board evaluation processes in their annual statements. These reviews can assess the performance of boards, board committees, and individual directors

With for-profit companies, where does the impetus come from for these reviews? The shareholders.

Shareholders expect the directors they elect to be aggressive watchdogs for their interests who will ensure that management is focused on fulfilling its primary mission – returning value to the shareholders through the regular payment of dividends and the appreciation of the value of their stock.  Nonprofit directors have a similar goal – fulfilling the agency’s mission. Still, without shareholders, there is no one to police their performance and vote them out if they fail to execute their duties faithfully.

Director reviews come in two varieties: evaluations of the performance of the governing board as a whole and assessments of the performance of individual directors.  While both processes are important, this post will only discuss the director evaluation. Another blog will discuss assessing the performance of nonprofit boards.

Unfortunately, too many nonprofits are happy to have their board seats filled and don’t want to cause problems by setting expectations for their directors.  This attitude can set the stage for future issues – problem directors are not confronted, absentee directors make meeting quorum requirements difficult, and good directors opt to leave.  The result is that when real problems arise, boards cannot provide the needed leadership.

Hopefully, having gained your commitment to performance reviews for directors, let’s answer some basic questions about the process.

When should director evaluations be conducted?

Most publicly traded corporations conduct annual board evaluations. Annual evaluations for nonprofits allow board leadership to identify issues and address them before they escalate to a level where discharging a director becomes the best resolution. Without an annual review, nonprofit boards often discuss the individual performance of board members when their terms on the board come up for renewal.

Who should conduct the evaluation? 

Among Fortune 500 companies, 32% always use an outside consultant to conduct their annual review and 73% periodically use consultants. 

Nonprofit boards infrequently engage consultants to perform board evaluations, and when they do, the focus is usually on board performance, not the performance of individual directors.

Many boards, through their nominating process, use the expiration of a director’s term as an opportunity to assess performance.  These reviews are conducted by a Nominating Committee or a Governance Committee, but too often do not go beyond an assessment of a director’s attendance record.  These reviews are almost entirely subjective because boards lack clearly defined, written standards for directors, such as a job description.

While common for employee appraisals, the director review process rarely starts with a self-assessment.  Imagine asking a director with an expiring term to put in writing what they view as their most significant contributions to the charity during their time on the board.  Some commentators suggest that this be part of a reflective process that does not ask directors to “turn in” this assignment.

But let’s be honest. How often are nonprofit directors voted off the island? Almost never. This fact is the number one justification for board term limits—boards that refuse to address problematic or nonproductive directors can, at least, wait them out. 

Are there tools or forms available to assess director performance?

Yes, you can find numerous Director Evaluation samples online. But you can create one yourself. Start with your director’s job description.  Hopefully, you will have used that as part of your recruitment process so that directors will clearly understand what they are being evaluated for.  If you don’t have a report card, director scorecard or other evaluation tool, then the Executive Committee, Governance Committee or whoever conducts the review should create one.  Some criteria are easily quantified – like the percentage of board meetings attended.  Other criteria are subjective – like “plays well with others” or “doesn’t intentionally interrupt meetings.”  Although hard to quantify, these behavioral traits are, nevertheless, important attributes of well-functioning boards.

Director Evaluation Traps

Finally, I’d like to highlight some things that might be said during a director review process.   It should be obvious why these “concerns” should be ignored and not used as an excuse to avoid addressing a problem. Here are just a few:

“He is a very big giver.”

“He would be very upset if he could no longer serve on the board.”

“He is a very good friend of many of us.”

“He’s never done anything really bad.”

“He always shows up.”

“He just has three more years left in his term.”

And finally, “Stop comparing us to for-profit companies – those directors get paid.”  Bad news – paid or unpaid, directors have the same performance expectations.  That is why both for-profits and nonprofits should be doing director evaluations.

For a complete discussion of evaluation criteria, see our next blog, “Six Review Standards for Directors.”