Why boards should evaluate their CEOs

Why boards should evaluate their CEOs

Why boards should evaluate their CEOs



8 Jun 2020

8 Jun 2020

The CEO is the link between the top functions in an organisation – from the board of directors down through to the management team. His or her actions and decisions resonate throughout the entire business. Hence, the importance of ensuring a strong and effective leadership from your chief executive cannot be stressed enough. A regular, purposeful feedback loop regarding CEO performance — a cornerstone of effective governance — is key to claiming that insurance.

However, it can be difficult for superiors, peers and subordinates to give honest feedback to their CEO. This is mainly due to the nature of the position. Naturally, the CEO is the decision maker when it comes to the continuous employment of the people he or she oversees. This creates a dynamic in which it might be costly for employees to criticise their leader – so why risk the consequences?

Most often, the reason superiors (i.e. the board) struggle with giving feedback to their CEO is a lack of mutual understanding around non-financial KPIs. Sure, it’s clear that the chief is to deliver a certain return to shareholders, but the next level of detail is usually missing. Thus, it’s crucial that the board — whose primary responsibility is to provide oversight and assistance to the CEO — establishes a sustainable feedback system that aligns all parties of the operation.

What is a CEO evaluation?

A CEO evaluation is undoubtedly the best measure a board can take for following up on CEO performance. The process most often involves objective critique from board members and the chairman, as well as a subjective evaluation conducted by the CEO herself. When put together, and measured against the goals and expectations of the organisation as a whole, one paints a picture of the alignment between the two bodies as well as the level of output from the chief executive.

An effective CEO evaluation will look at metrics regarding:

  • Alignment of priorities & goals between the CEO and the board. For organisational success, the goals and objectives of the CEO must reflect those of the board. There has to be a reciprocal understanding of what the board sets out to achieve in order for the CEO to execute accordingly.

    This particular metric is sometimes subject to excessive expectations from the board. A list of performance dimensions that is too large to be workable creates unrealistic prospects. There needs to be a focus on a manageable number of objectives.

  • Growth and development opportunities for the CEO. Considering areas for improvement is critical to the direct success and development of the CEO, and indirectly to the company overall. Structured objective feedback helps the CEO identify necessary changes and where focus may need redirecting, or simply to highlight personal success factors.

  • Operational impact. Influencing the company’s effectiveness in operational areas is a core responsibility of the CEO. Albeit being one of the more straightforward metrics to track, it’s one of the most fundamental and is directly tied to the CEO’s actions. How the chief progresses against set strategies mirrors his/her operational competency (given that communication around what the strategy incorporates is clear)

  • Leadership effectiveness. Responsibilities such as succession planning, meeting key customers and investors or developing long-term strategies — and the quality of those actions — all fall under leadership effectiveness. Building and leading a strong executive team also sets the bar for the CEO’s management capabilities.

What can you, as a board, expect to gain from a ceo evaluation?

The insights produced by a CEO evaluation are beneficial to both the board and the CEO. 

Throughout the process, the person in question gains a stronger apprehension of the board’s agenda and goals. It also provides her with an opportunity to clarify personal expectations surrounding performance and to potentially receive positive feedback on accomplishments. A well-structured process will help the board and the CEO to engraft attention to the company’s direction by clarifying strategic objectives, which also serves as part of her ongoing leadership development.

The board, on the other hand, opens the door for better and more transparent communication – both internally, and between themselves and the CEO. Unobscured communication equals alignment, which in turn acts as the basis for making collective, informed decisions. Whether it be aspects requiring change or to ascertain the progress of strategies, transparency is key.

An evaluation also helps recalibrate the state of affairs when the board is recruiting a new CEO, or as part of onboarding a fresh appointee and making decisions regarding appropriate remuneration. How does his or her competencies line up with the rest of the board? What skills and type of experience are we missing in our top-team?

A heads up..

The CEO’s attitude toward the evaluation and reaction to its feedback sets the tone for how it’s perceived, and can be the difference between full engagement of participants and a so-called window dressing scenario. A process suddenly dropped in the chief executive’s lap can send mixed signals regarding the nature of the board-CEO relationship. Both parties need to make a dedicated investment to make sure that potential risks are minimised from the outset, therefore increasing the probability of establishing a sustainable and value creating evaluation process.

Before initiating said process, the board and its members need to be aligned around what is expected of the CEO. Without agreeing on expectations, how can she act accordingly? Don’t get me wrong, debating over the appropriateness of criteria for evaluating performance is encouraged – open communication and diversity in opinion creates friction that in turn produces informed decisions. But there must be a consensus regarding what dimensions of performance and objectives are examined before placing anyone under the looking glass. 

It’s also important for all members of the board to possess relevant information and documentation before voicing an opinion. Financial and key operational metrics are most often ripe for the taking, but insights regarding more non-quantitative aspects — such as leadership effectiveness — also have to be taken into account.

Thus, in order to absorb the evaluation’s full value, it is highly recommended to conduct a board evaluation prior to scrutinising your CEO. A prominent board evaluation will establish the foundation of alignment and transparency you need to assess the CEO according to the correct dimensions. Consequently, it will drastically minimise common pitfalls – something that could otherwise defeat the purpose of the entire process. A board evaluation can also serve as a cornerstone of the overall process you (should) have in place, where evaluations of the different top-tier facets in your organisation are conducted on a regular basis.

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