Why Are Board Directors Giving Their Peers Failing Grades?

Nicholas J Price
6 min read
The corporate marketplace is evolving more rapidly than it had for many years. The marketplace is being affected by many things, including global trade tensions and increasing expectations for boards to improve their performance. Boards are responsible for overseeing their companies' strategy. As boards make the most important decisions for the company, shareholders are exerting more pressure on them. Shareholders have been increasingly voicing their expectations for greater engagement with the board.

Boards are facing more opposition from shareholders, which is having an impact on most boards' views of their own performances and causing them to give their fellow board directors failing grades. In recent years, boards are becoming more critical and dissatisfied with their peers. While many board directors are willing to express their dissatisfaction with their peers privately, their actions suggest that they're hesitant to take action to refresh the board.

Collegiality is a source of pride in the boardroom and while mutual respect is an important part of board discussions, it can cause some board directors to resist speaking out against their peers, even when it's obvious that they should.

Board Refreshment and Composition Are Still Major Issues

Board composition and board refreshment are still major issues for boards and shareholders alike. Institutional investors are also placing a fair amount of pressure on boards to form high-quality, competent boards for effective oversight of the company. The emphasis is largely on diversity. Most recently, lawmakers are responding with new legislation.

In response to the pressures, board directors are becoming more critical of their peers. PwC's Annual Corporate Directors' Survey indicated that just under half of board directors believed that at least one director on their board should be replaced. The survey also indicated that 23% of the board directors surveyed felt that their boards would be best served if they could relieve two or more board directors from their duties. Despite these sentiments, the percentages of board turnover are still low.

As an example, the report showed that only 406 independent board directors of S&P 500 companies left their positions on the board. This number represents fewer than one board director per board.

Perhaps more surprisingly, a majority of the board directors who left their positions were either at the board's retirement age or somewhere near it. Obviously, this is an indication that, despite a large, vocal call for board refreshment, most board directors are still aging out of service, rather than leaving the board due to poor fit.

The report also indicated that where boards admitted having a strong sense of collegiality and respect, they often avoided having discussions about where their peers were lacking in their individual contributions.

Regarding the types of complaints that board directors have about their peers, about 15% of board directors claimed that their peers were hesitant to challenge management. Also, about 13% of board directors felt that some of their peers overstepped the boundaries of the board's role in their oversight duties. In addition, about 13% of board directors said that some of their peers brought a negative stance to board discussions and that their attitudes and demeanors negatively impacted board dynamics.

Maintaining Collegiality Is Still a Major Factor

In many boardrooms, as board directors pursue board refreshment, collegiality is a highly valued characteristic. Most board directors place their peers on equal footing. It's uncommon for board directors to compete for roles or status. A strong sense of loyalty permeates the boardroom, where it's an unwritten rule that board directors don't openly criticize their peers. As a result, it's common for board directors to be hesitant to ask their peers to step down from their positions due to performance issues.

Collegiality is a double-edged sword. The nature of a board of directors' work requires them to have a certain degree of respect and collegiality to be productive. At the same time, too much friendliness reduces their effectiveness because it creates an environment where it's difficult for board directors to voice dissent, even when they have strong opposing opinions or different perspectives. Hearing dissenting opinions is critical for high-performing boards. The most recent Corporate Directors' Survey shows that about 43% of board directors acknowledged that they found it difficult to voice a dissenting viewpoint inside the boardroom.

The issue of collegiality also impacts the board's interaction with shareholders. Tightknit boards find it difficult to push back over shareholders who put pressure on boards to change their agendas. Shareholders are pushing for greater diversity on boards and signs that the board is committed to ESG issues. Despite the increased pressures, every board director has a responsibility to ensure that collegiality won't get in the way of board effectiveness.

Today's boards also admit the pressures they face are motivating them to improve their performance. Board directors are more tech-savvy than in the past and they're better prepared to handle an unexpected crisis. They're also starting to cave in to the pressure to create a more diverse board. In another new development, board directors are starting to value shareholder engagement and they're looking for ways to make their discussions more productive.

As another indication of board directors' commitment to improving their performance, boards are 71% more likely to take action on the results of their board assessments, which is up 49% since 2016. Today's boards are also weighing more heavily on increasing expertise and diversity on the board even though they're still reluctant to address poorly performing board directors. About 61% of boards are now committed to doing individual board director assessments, as indicated by best practices for good governance.

A discussion about board refreshment and composition wouldn't be complete without factoring in term limits. To date, a relatively small number of boards have set meaningful term limits. About 24% of board directors indicated that they wouldn't be inclined to have a tough conversation with any of their peers, which causes a major barrier to refreshment. About 18% of board directors stated that the collegial atmosphere was a barrier to confronting peers about their performance. About 20% of board directors expressed a lack of confidence in their board assessment process. This is an easy barrier to overcome.

Diligent Assessments provides boards with a digital solution for effective board assessments. This tool alleviates the concerns about loyalty and collegiality because it offers the ability for board directors to answer anonymously so they can be completely honest in their assessments of their peers. The tool is easy to set up and to administer. Automation makes it easy to track submissions to ensure that they're completed in a timely manner. The program automatically creates custom reports using just a few clicks.

Directors will enjoy the convenience of being able to complete their assessments at any time of day or night and using any mobile device. With the Diligent Assessments tool, board directors' failing grades can be quickly identified so boards can take action and justify it with qualified data.