A CEO’s annual evaluation serves several different purposes. In the best-case scenario, the CEO is doing a great job and is appropriately compensated for the performance. In that case, the employees benefit, the company benefits, the board benefits and the CEO benefits as well.
It also benefits everyone for the CEO to remain in the position as long as possible. It’s costly to have CEO turnover. It may take six to nine months for boards to decide that a CEO isn’t working out. It may take another three to six months to find a new CEO, and another year or so to get a new CEO up and running well. It’s better to help a poorly or marginally performing CEO than it is to fire the current one and hire a new one.
Board Evaluation of a CEO
Boards shouldn’t engage in micromanaging CEOs, but they need to have a genuine way of assessing their performance. Because the roles of the CEO and those of the board are so different, it’s often easy for CEOs to make it appear that they’re doing better than they really are.
Boards have a duty to make sure that the company is running well. If problems are looming, it’s better to tackle them sooner rather than later. Not spotting top management problems early on can create extensive damage that leaves the board with no choice but to fire the CEO. When the CEO fails, companies often fail along with them. There’s no question about how much is at stake regarding the CEO’s performance. It’s often better to use the board evaluation of a CEO process to help an existing CEO boost his or her performance than to let them go and start over.
Financial incentives are nice, but they’re not always sufficient to elevate CEO performance. A CEO evaluation shouldn’t be a perfunctory process. Under the best of circumstances, the board will devise a board evaluation of a CEO process that helps them assess the company’s financial and operating metrics and the CEO’s progress against their strategy. Another important part of the CEO evaluation process is for boards to identify key management attributes that demonstrate what the CEO does that helps the company progress or sets it back.
It can also be helpful for evaluators to get the CEO’s feedback after the evaluation process is over. Most CEOs appreciate a more interactive approach to their evaluation.
Process for Quality Board Evaluation of a CEO
Independent directors are the best candidates to conduct the board evaluation of a CEO. The best approach to the evaluation is a multifaceted approach. Boards can accomplish this by directly observing the CEO on the job and collecting input from executives at multiple levels of management. In the best of all worlds, this process will highlight any flaws or red flags in management style. The results should serve as a forum to open up discussion about exactly where CEOs can make improvements before major problems surface and the CEO’s career gets derailed. It’s also a good opportunity for boards to step up their game in their advisory role and to offer extra doses of guidance and advice.
Diligent’s Board Evaluation software is an excellent tool for this purpose. It’s accurate, efficient, cost-effective and covers all the right bases. The software provides a template for creating a questionnaire that focuses questions on the main categories of CEO performance, as listed below:
- People management
- Relationships with external constituencies
- State of corporate strategy
- Competitive position
Once independent directors have interviewed the CEO’s subordinates and developed the customized questions for the questionnaires, the CEO can use the same survey to rate his or her own performance. The software provides a platform for various types of questions and responses. As independent directors complete their assessments, they can submit the questionnaires online and monitor the completion of the process using any mobile device in any setting. The program analyzes results and provides a comprehensive review of CEO performance.
The combined results from the CEO and the independent directors provide a platform for rich discussions about how to prevent past problems and how to work together more cohesively to help the company thrive and prosper.
Independent directors will find it helpful to use the questionnaires in future board evaluations of a CEO to evaluate progress in weaker areas, as well as to note achievements and innovative efforts. Quality board evaluations of a CEO also help compensation committees to justify a proper and fair level of compensation.
Challenges in Getting Information for Board Evaluation of a CEO
Independent board directors will get the most valuable information by speaking with the CEO’s subordinates. This is a challenging situation because independent board directors usually only see lower-level executives in structured settings, such as board meetings and dinner meetings, where the CEO is present, and everyone is on their best behavior. Lower-level executives may be tempted to sugarcoat certain aspects of the CEO’s performance so as not to affect their own jobs or relationships with the CEO.
This is why it’s important for boards to establish a formal policy on board evaluation of a CEO. The policy may outline a process whereby the independent board directors visit corporate facilities one to four times a year to view the operations and speak with managers on multiple levels. It’s best to choose the same time every year for purposes of consistency, so as not to skew the results.
If this isn’t possible for some reason, boards can arrange for lower-level executives to travel to meet the independent director at another office.
By using an online board evaluation software tool like Diligent’s Board Evaluation questionnaire, directors can use Diligent Messenger to communicate securely and confidentially as they share insights about what the CEO is doing, or not doing, that’s moving the company forward or backward. The software is a tool that helps to make the process much more collaborative in nature. Directors will also appreciate the fact that they don’t need to meet in person to share their results and to finalize the review because they can access all of the information online from any setting using any mobile device.
Many boards find it helpful to allow the CEO to review their results and to clarify any areas of misunderstanding before they finalize the review and share the results with the compensation committee.
In the past, board directors often had their share of CEO experience before joining the board. As boards seek to diversify their composition and to add specific skill sets to the board, many of the independent directors will not have the perspective of first-hand CEO experience. Boards will get the most value out of the board evaluation of a CEO process when they inform new CEOs on how they will be evaluated at the end of their first year.