How should the CEO be evaluated?
- Al Antoniewicz
- Kaushal Chari
- Cheryl DeMars
- Steve Johannsen
- Bryon Johnson
- Bill Mitchell
- Steve Raasch
- Lisa Reardon
- Valerie Renk
- Marcy Tessmann
- Derrick Van Mell
- Aaron Zell
Topic question: What is the proper way to evaluate the CEO?
The eye sees everything but itself. – Francis Bacon
3 big ideas
- The board chair must have a close and supportive relationship with the CEO
- Tracking today’s numbers doesn’t help the CEO create and strive toward a distant vision
- The risks in a CEO’s failure are enormous—and the board would be to blame
Robust CEO evaluations help organizations succeed now and into the distant future. Being lulled by short-term financial success can blind the board and the chief executive to future risks and opportunities. These twelve CEOs spelled out the essentials of monitoring CEO performance. Given CEO and board turnover, failure to have a system guarantees having uncertain leadership in a crisis.
CEO evaluations vary with the type of board. The boards and cultures of ESOPs, non-profits and public institutions differ markedly from closely-held and publicly-traded corporations. Unlike fiduciary boards, advisory boards might lack formal power but can still be influential.
Steve Johanssen set up our Intensive’s discussion questions by sharing stories from his fifteen years as CEO (when he had five board chairs with different styles and personalities) and subsequent years as board member and board chair evaluating CEOs.
- What’s good and bad about how you’re evaluated?
- What are the signals a CEO is failing?
- How can the board help develop the CEO’s strengths?
Support but verify: The CEO and the board chair
The CEO and the board chair have mutual duties to provide data—and both have power to control data. They must keep each other honest and collaborate to give the board just the right objective summaries. A wide-angle lens of the organization’s performance is essentially a view of the CEO’s performance.
Some CEOs want autonomy from the board and feel they should be left alone if the numbers are good. But this can stifle creative thought about new opportunities and even better results. No board has the time to understand all the firm’s dynamics, which is why the chair must meet the CEO monthly for more in-depth information.
But the CEO-Chair dyad isn’t just to monitor performance, it’s also to help the chair support and encourage the CEO. It’s a lonely job. Without sympathy and trust, any chief executive will stagnate. Of course, both CEO and chair should be aware of how their personalities affect an objective and complete review. Both should be selected for self-knowledge and emotional intelligence.
When the CEO is also Chair, the board must provide a liaison that can help the CEO/Chair remain objective and able to discuss mistakes and worries without undue criticism.
Not a star chamber: The chief executive and board as a whole
Many of our participants value their regular private conversations with the board in which they ask for feedback. These lightly-structured conversations help everyone understand each other’s duties, perspectives and priorities.
It matters if the board is small or large, if the board terms are short or long, and if there’s a committee for executive review and compensation. A board might knowledge gaps: if no one has a marketing and sales background, those aspects of the CEO’s performance might get short shrift. Outside directors keep board discussions from devolving into rehashes of familiar details.
Relevance of strategic planning
Fewer than 10% of businesses have a strategic plan they actively follow, making it hard for boards to evaluate by anything other than the financial statements. A long-term plan keeps members alert to this part of the CEO’s performance. The agenda must make time for high-level issues and board members must be recruited based on their ability to ask great questions. Al Antoniewicz shared an image he uses to remind board members to focus on the highest level issues (attached).
A high-functioning board is essential to having a high-functioning CEO.
Evaluation based on quantitative factors
Small short-term losses are sometimes part of big long-term gains. While CEOs and boards must avoid shoal waters, performance can’t just be measured by finances: boards should have other key performance indicators on their dashboards such as sales success, quality, retention, customer satisfaction and productivity (listen to executives quantify how the 5 top KPIs are affected by management competence in this Lubar podcast series).
Evaluation based on qualitative factors
Progress toward long-term goals is hard to quantify. Part of a CEO’s success is creating the conditions for future success, such as conserving cash, testing new markets or making new alliances. An indicator of organizational health and preparedness is the strength of the other senior managers: a strong C-Suite means the firm is ready for shocks and opportunities. It means the CEO delegates well, doesn’t hire sycophants and understands the value of talent. A cult of personality is big risk.
The board should hear presentations from senior staff from time to time and see their annual performance reviews. The board should closely monitor the organization’s succession and development plan. Our speaker, in his role as board chair, has made that his own direct responsibility.
Boards should be informed, yet not meddle. Carefully designed staff interaction lets the board feel if the organization’s culture is healthy and safe—a good indicator of the chief executive’s performance.
The peers’ comments above include concrete suggestions: CEO/Chair and CEO/Board meetings, bringing system to information flows, providing context through planning, and using senior manager meetings and evaluations as a lens on the chief’s performance. Here are other techniques these successful CEOs use:
- 360 review: While peer or staff (“360”) reviews can help, there’s a substantial risk that respondents will not trust the promise of confidentiality and provide only positive feedback.
- 3rd party review: A trained professional can provide structure, objectivity and mediation as part of the overall evaluation process.
- CEO peer reviews: Some CEOs seek rigorous reviews from a peer group, perhaps even sharing those finding with their board.
- Time evaluation: Ask the CEO to discuss how they allocate their time, which reveals how they think about their job.
- Evaluation tools: Using an evaluation checklist consistently reminds the board of what’s important, tracks performance over time, and can be the basis of the CEO’s development plan. The Center’s assessment is part of its Milwaukee Model of Manager Development. Another checklist was provided by Steve Johanssen (attached).
A CEO’s failure and removal is a catastrophe. The blame rests with the board as much as the CEO. A system of constructive and supporting CEO evaluations lets the board meet this fiduciary duty, and it helps everyone work together to foresee risks and spot and catch opportunities for the right kind of growth.