CEO Evaluation Best Practices

CEO Evaluation No Longer Just for Public Companies

For many years now, almost all public companies have conducted an annual CEO evaluation. Not doing so would hurt their relationship with regulators, exchanges and investors.

However, the annual CEO evaluation is no longer just a public company best-practice. Public institutions, not-for-profit organizations, Associations and other Boards responsible for corporate governance are moving rapidly to implement and perfect their CEO evaluation processes.

Even private companies are showing interest in better governance of their CEO’s. However, progress here is slower. Organization size, governance/operator role of many Boards and owner/operator role of many CEOs are factors that limit the interest of these organizations in the CEO evaluation process. As a result, the majority of private company CEO’s still have never been evaluated.

Issues with Current CEO Evaluation Best Practices

Current best-practice for most organizations consists of surveying the Board of Directors on the CEO’s performance.

However, CEO evaluation processes like this have obvious issues. One of the biggest issues is the fact that many Directors simply don’t have enough understanding of the what the CEO does to evaluate the CEO fairly. For many Directors, their only interaction with the CEO is at Board meetings.

Another key issue is the use of generic assessment tools that fail to reflect the unique challenges of individual organizations and CEOs.

Theses issues drive CEO’s crazy. They resent being evaluated by people they worry don’t understand their role using evaluation tools that don’t reflect what they do.

As a result, three key trends in CEO evaluation best-practices are emerging:

1. Customized CEO Evaluation Templates

The first is a move to customized evaluations that better reflect the CEO, their role and the organization they are leading. See below. In every instance it is customized to reflect the specific company and the unique role characteristics of its CEO. To customize the CEO  evaluation template we interview both the Board and the CEO (and others if necessary). We want to ensure that the resulting template reflects the unique requirements of each.

2. Inclusion of the CEO and the Management Team in the CEO Evaluation Process

How the CEO views their performance will inform the Board in a number of ways. Often it provides a perspective on challenges, issues and accomplishments that the Board was not aware of. Where there is gap between the Board and CEO’s evaluation of performance, it will help the Board understand what the gap is and why it exists. Finally, the most important reason for including the CEO is credibility of the process. CEO’s who are generally skeptical of the process will engage better if they are included.

The management team (and others) should be included because they work much closer with the CEO than the Board. Some Board members only see the CEO at Board meetings. Their ability to evaluate CEO performance is limited to quantifiable goals and achievements. Working with the CEO every day means the Management Team can accurately evaluate other important elements of CEO performance like leadership and decision making.

3. Externally-lead CEO evaluations processes.

Externally-lead processes can be more effective for a couple of reasons. First, confidence in confidentiality is greater when the process is externally-lead. Feedback is significantly more honest when there is confidence that it will be kept confidential.  This is vital. Secondly, it is helpful to have the CEO evaluation process lead by someone who is expert at it. Generally, processes lead by outsiders are less generous in their assessments and result in more action than internally-lead processes.

CEO Performance Management NOT CEO Evaluation

From our perspective, there is a subtle but important distinction between CEO evaluation and CEO performance management. Evaluation-only processes are frequently perceived as negative and uncertain by CEO’s. This is particularly true when the outcome is perceived as ‘pass/fail’, and it has a direct impact on the CEO’s compensation. Processes like this are overwhelmingly resisted by CEO’s who are proud of the role they do.

Performance management-oriented processes, tend to focus on the CEO evaluation as an element of an on-going, forward-looking approach to maximizing CEO performance. Although CEO’s can be (and are are) resistant, they become more comfortable when they see that the process is focused on recognition and improvement, not getting caught being imperfect. There is an immediate increase in quality, credibility and CEO comfort when those in charge of the CEO evaluation process are viewed as knowledgeable and empathetic to the CEO role.

CEO Evaluation IS a Best Practice

Ultimately, CEO performance and the success of the organization are the greatest benefits of a well-run, modern CEO evaluation process.