21 Mar 2017
Subscribe to our newsletter. Enter your details below.
How boards can – and should – evaluate CEO performance
All board members know that their most important job is to hire and fire the CEO.
Yet what comes in between – evaluating and measuring the CEO’s performance – is where the real challenging work lies.
Here’s a quick how-to guide and reasons why boards should pay attention.
Why evaluation matters
I’m surprised by how many board members ask me whether they should even assess their CEO’s performance, and by how many CEOs report that they have never received any formal evaluation.
The three arguments I hear most often are that:
- CEOs don’t need or expect to be evaluated; all that matters is overall results.
- Board members don’t have enough information to properly evaluate the CEO’s performance, especially on the softer side.
- Evaluating the CEO’s performance may damage or unnecessarily complicate the CEO-board relationship.
Assessing CEO performance offers a unique opportunity for the board to set the stage for a healthy relationship with the CEO. It helps ensure that important feedback about the CEO’s leadership is provided in a structured and constructive manner, rather than through inconclusive conversations. For CEOs, formal evaluations help shape the board’s expectations and ensure they get recognised (and paid) for what they deliver.
Optimising the evaluation process
Instead of focusing on why it can’t happen, try to set clear objectives for the CEO’s evaluation, such as:
- Capture quantitative and qualitative feedback and evidence.
- Provide a springboard for reflection, action and development.
- Enhance the trust and communication between the board and the CEO.
- Be simple to implement.
The simplest way for the board to frame the evaluation process is to ask the CEO two questions at the beginning of the year:
- Where do you expect to spend your time over the next 12 months?
- How will you measure your success and impact?
The second task is to create success metrics for each objective – which are different from overall organisation goals – and provide ongoing feedback to the CEO.
After each quarter, the board should dedicate an hour to the CEO to discuss:
- What objectives have you accomplished?
- Where did you fall short?
- What did you learn?
- What will you focus on?
- How can we help?
At year-end, the board should collect deeper feedback from the management team and key internal/external stakeholders to close the loop on the CEO’s performance.
A customised 360 survey can be quite effective to gauge the CEO’s performance and surface any disconnects between the CEO and the senior team.
A formal year-end evaluation should meet these requirements:
- Each board member contributes independent thoughts on the CEO’s performance and leadership behaviour.
- A Board Committee reviews feedback and prepares a CEO Evaluation report.
- The board Chair reviews the feedback with the CEO.
- The CEO prepares a Development Plan and commits to specific goals for the year.
As boards feel increased pressure to improve governance, forging a robust CEO evaluation is often a low hanging fruit.
Not only does the board benefit from a clear evaluation process, but CEOs themselves often breathe a sigh of relief once they experience the value of structured feedback and learn how to negotiate performance goals that help translate their leadership into tangible results.
How to frame the CEO’s evaluation
Try using these five dimensions of CEO performance when developing your CEO’s annual objectives or evaluation:
- Strategic Agenda: Where the organisation is going, competitive drivers and key strategies/ technologies the CEO plans to champion.
- Execution Agenda: How will the CEO set priorities and monitor implementation, using systems such as a balanced scorecard.
- Financial Agenda: How the CEO will drive investment/capital decisions and deliver value for shareholders or investors.
- Talent Agenda: How the CEO will position the organisation to win the war for talent, and shape the values and culture required to win.
- Stakeholder Agenda: How the CEO will manage relations with key stakeholders – including the board, customers, employees and the senior management team.