Board Operations

How Boards Evaluate CEOs (Agenda Survey)

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Agenda, a boardroom resource platform that provides intelligence for corporate directors, and Hay Group, a global management consulting firm, published a series of articles and conducted a survey of directors and executives throughout September and October 2015 to learn more about the CEO feedback process and metrics that are used to assess the performance of corporate chief executive officers.  Major keys to effective CEO performance appraisals contained in the Agenda and Hay Group report are summarized below:

    1. Directors Cast the Net Wide When Fishing for CEO Feedback—Self-evaluations from CEOs are often among the most valuable feedback.  Directors collect insights from internal and external stakeholders – including the CEOs themselves – in assessing CEO performance.  The CEO’s self-evaluation was cited as one of the most important sources of information on how well the CEO is meeting the goals and objective set out by the board.  While those metrics determine compensation, a CEO’s self-assessment adds relevant context that underscores why the company is meeting or not meeting its short-term and long-term goals.  The CEO’s self-assessment typically covers leadership issues, performance of the executive team, and talent and cost management.
    2. Chairs, Comp Committee Heads Entrusted to Lead Evaluations—Good listeners and tactful communicators are best for delivering feedback. Board chairpersons and leaders of compensation committees typically lead evaluations of CEOs and then deliver the findings to the CEO, according to the Agenda and Hay Group report. Many Fortune 500 companies set clear rules on which board members should lead CEO evaluations, but effective approaches may vary. For example, Goldman Sachs’ proxy states that its CEO evaluation process is conducted by its lead director along with the governance committee. Caterpillar leaves the job to the full board, made up of all independent directors, except for the chairman-CEO. Some proxies specify who is responsible for explaining the assessment to the CEO on behalf of the board. Other public companies such as Wal-Mart Stores do not state on their proxy statements who assesses the CEO.
    3. Boards Say Leadership Is a Key CEO Performance Metric—CEOs who are coachable and react well to feedback are most desired. Public demands for greater accountability of business leaders and transparency around their decisions have impacted CEOs’ leadership responsibilities. While evaluating a CEO’s financial or operational strengths are quantifiable, individual leadership ability is not as easily quantified. As a result, in order for a CEO’s performance evaluation to be a meaningful exercise, experts say, boards need to set targets for leadership as well. Several experts suggest that boards can use 360-degree feedback exercises or interviews with senior staff to get a feel for the CEO’s leadership performance. Boards should also factor succession planning and team building into an evaluation of a CEO’s leadership skills.
    4. Boards Urged to Weight Soft Skills When Setting CEO Pay—CEO evaluations usually affect discretionary bonus, experts say.  Most companies have a formal link between the results of CEO performance evaluations and CEO compensation.  Of these such companies, most primarily rely on the achievement of financial performance goals as the driver of additional compensation.  However, the link should also include “soft” CEO skills such as leadership and cultivating relationships with external stakeholders.
    5. Informal Check-Ins Help With Tricky CEO Evaluations—Performance can be improved through more board and CEO discussions. The vast majority of boards formally evaluate their CEOs at least once a year, but governance experts say more frequent informal feedback is becoming integral to the evaluation process, especially in delicate situations. Directors and consultants say that informal, semi-frequent discussions about CEO performance can help improve the relationship between boards and their CEOs and mitigate unwelcome surprises at year-end. One of the biggest problem discovered by the survey was a lack of clear and open dialogue between directors and CEOs regarding the board’s evaluation of the CEO’s performance, throughout the year. Without open dialogue, the CEO is unable to fully ascertain the board’s objectives until it is too late, which in turn, results in a negative year end performance. To assist CEOs in understanding and exceeding the year end performance goals determined by the board, Patrick Shannon, a partner at human resources consulting firm Mercer, suggests the following solution: have the board set the performance criteria of the CEO at the beginning of the year. Then throughout the year, have the CEO frequently review their own performance, gather additional input from the board, summarize the feedback and finally, ensure there is a set stage for the year-end discussion between the board and the CEO.

The full report from Agenda and Hay Group is available here.

 


About the Editor(s)

Sawyer Duncan

Sawyer Duncan

Sawyer Duncan is an associate in King & Spalding’s Corporate Practice Group. His practice involves representation of publicly-traded and privately-held companies in mergers and acquisitions, capital raising activities, “going private” transactions, and corporate governance advisory. He also advises private equity funds in equity investments, recapitalizations, and middle-market control buyouts.