CEO Evaluation Best Practices are Evolving

For years, almost every company in the Spencer Stuart Board Index has conducted an annual CEO evaluation. Some do it more often than once a year.

However, the annual CEO evaluation is no longer just a large 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.

Current best-practice for most organizations conducting a CEO evaluation consists of surveying the Board of Directors on the CEO’s performance. Templates like this one are commonly used. They segment the CEO’s role and enable the person completing the CEO evaluation to rate the CEO for each element.

However, CEO evaluation processes like this have obvious issues. One of the biggest ones 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.

This is an issue that drives CEO’s crazy. They resent being evaluated by people they don’t trust to understand their role using evaluation tools that don’t reflect what they do.

As a result, two key trends in CEO evaluation best-practices are emerging.

Emerging Best-Practices in CEO Evaluation

The first is a move to customized evaluations that better reflect the CEO, their role and the organization they are leading.

The second is a move to externally-lead CEO evaluation processes.

Externally-lead processes tend to be more comprehensive. Because confidence in confidentiality is greater, externally-lead processes gather input from others, not just the Board of Directors. This includes gathering feedback from the Leadership Team – a group of people who clearly have insight on the CEO’s day to day performance. Others included in the process can include business partners of the organization and people the CEO interacts with on a regular basis.

CEO Evaluation vs. CEO Performance Management

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.

Finally, 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. One of the easiest ways to accomplish this is to have the CEO evaluation process lead by a qualified ex-CEO.

Ultimately, CEO performance and the success of the organization are the greatest benefits of a well-run, modern CEO evaluation process. As Boards become experienced with the process, more of them are moving to increase the quality of their evaluation and comfort of their CEO by moving to an externally-lead process.