Meghan Day

Principal Solution Designer

CEO evaluation tool: Conducting a thorough board-led evaluation

A CEO’s annual evaluation serves several different purposes. In the best-case scenario, the CEO evaluation tool reflects that the CEO is doing a great job and is compensated appropriately for the performance. In that case, the employees benefit, the company benefits, the board benefits, and the CEO benefits as well.

It also benefits everyone, as the CEO will remain in the position as long as possible. It’s costly to have CEO turnover. It may take six to nine months for boards to decide that a CEO isn’t working out. It may take another three to six months to find a new CEO and another year or so to get a new CEO up and running well. It’s better to help a poorly or marginally performing CEO than to fire the current one and hire a new one. Here, we’ll explain how to leverage CEO evaluation tools to make these mission-critical decisions, including:

• How and why boards evaluate the performance of a CEO
• An effective CEO evaluation process
• Common challenges boards face in getting the right information for evaluations
• Leveraging Diligent Boards as a CEO evaluation tool

Board evaluation of a CEO

Boards shouldn’t micromanage CEOs; they need a genuine way of assessing their performance. Because the CEO’s and board’s roles are so different, it’s often easy for CEOs to make it appear that they’re doing better than they really are.

Boards must make sure that the company is running well. If problems are looming, tackling them sooner rather than later is better. Not spotting top management problems early on can create extensive damage that leaves the board with no choice but to fire the CEO. When the CEO fails, companies often fail along with them. There’s no question about how much is at stake regarding the CEO’s performance. It’s often better to use the board evaluation of a CEO process to help an existing CEO boost his or her performance than to let them go and start over.

Financial incentives are excellent but not always sufficient to elevate CEO performance. Leveraging a CEO evaluation tool shouldn’t be a perfunctory process. Under the best circumstances, the board will devise a board evaluation of a CEO process that helps them assess the company’s financial and operating metrics and the CEO’s progress against their strategy. Another important part of the CEO evaluation process is for boards to identify key management attributes that demonstrate what the CEO does to help the company progress or set it back.

It can also be helpful for evaluators to get the CEO’s feedback after the evaluation process is over. Most CEOs appreciate a more interactive approach to their evaluation.

Process for quality board evaluation of a CEO

In the best of all worlds, the CEO evaluation process will highlight any flaws or red flags in management style. However, like anything, the success of the process has everything to do with how you structure it.

To turn CEO evaluation into an open discussion that advances CEO success and positions the board as a trusted advisor:

1. Appoint a director to oversee the evaluation: Independent directors are the best candidates to conduct the board evaluation of a CEO because, by definition, they will be less biased. This can lead to a more subjective look at the CEO’s opportunities for improvement. They may also collaborate with the executive committee on designing a swift evaluation process.
2. Establish clear evaluation criteria: Directors first need to decide which metrics to use to evaluate the CEO. These should be clear, measurable, relevant and align with the organization’s strategic objectives. While criteria can vary slightly between organizations, many evaluations include financial performance, leadership effectiveness, operational efficiency and progress toward key goals. Communicate these criteria to the CEO upfront so they understand the benchmarks against which they must perform.
3. Design the evaluation process: The evaluation process determines how the board will gather the information necessary to determine the CEO’s success on each criterion. This usually involves a combination of quantitative metrics — financial performance indicators, for example — and qualitative assessments like 360-degree feedback from peers and subordinates. While this information can be collected manually, a CEO evaluation tool can provide a more comprehensive and centralized view of CEO performance and set an optimal evaluation cadence. Regular and consistent evaluations are key to delivering the CEO timely feedback they can use to adjust.
4. Gather input: A successful CEO evaluation depends on creating a well-rounded perspective on CEO performance. Gather feedback from board members, senior executives, direct reports, and other stakeholders collaborating closely with the CEO. Once independent directors have interviewed the CEO’s subordinates and developed the customized questionnaire, the CEO can use the same survey to rate his or her own performance.
5. Conduct the evaluation: The board drives the CEO evaluation process, but representatives from HR and compliance and ethics also play a part in developing a fair, compliant process. As the board of directors designs the process, a compliance and ethics officer will review it and all materials to ensure it complies with regulatory requirements and ethical standards. HR will also weigh in throughout the process; it’s up to them to cultivate a process that aligns with the organization’s professional development policies and yields constructive feedback for the CEO.
6. Review and analyze the results: After collecting all necessary data and perspectives, the board should analyze them carefully. This involves comparing the CEO’s performance against the previously established benchmarks. The combined results from the CEO and the independent directors provide a platform for rich discussions about preventing past problems and working together more cohesively to help the company thrive and prosper.
7. Communicate feedback to the CEO: The results should be a launchpad for CEO improvement. Boards should deliver feedback constructively and responsibly, working with HR to ensure it aligns with company policies. All feedback should be clear, actionable and tied to the evaluation criteria.
8. Set performance goals and follow up: The board and CEO should set new performance goals and schedule evaluations regularly, often annually or semi-annually. Independent directors will find it helpful to keep past CEO evaluations to help frame evaluations in the future. Periodic check-ins can also ensure the CEO has the support they need to be effective. Quality board evaluations of a CEO can also help compensation committees justify a proper and fair level of compensation.

Challenges in getting information for board evaluation of a CEO

CEO evaluations sound simple: solicit input, get feedback and then determine how well the CEO performed. Yet, gathering the right data from the right stakeholders presents ongoing challenges that can stop the entire CEO evaluation process in its tracks.

Many boards struggle to:

1. Extract feedback from key stakeholders

Independent board directors will get the most valuable information by speaking with the CEO’s subordinates. This situation is challenging because independent board directors usually only see lower-level executives in structured settings, such as board meetings and dinner meetings, where the CEO is present, and everyone is on their best behavior. Lower-level executives may be tempted to sugarcoat certain aspects of the CEO’s performance so as not to affect their own jobs or relationships with the CEO.

This is why it’s important for boards to establish a formal policy on board evaluation of a CEO. The policy may outline a process whereby the independent board directors visit corporate facilities one to four times a year to view the operations and speak with managers on multiple levels. It’s best to choose the same time every year for consistency to not skew the results.

If this isn’t possible for some reason, boards can arrange for lower-level executives to travel to meet the independent director at another office.

2. Keep evaluations current

Evaluation criteria are, by nature, fluid. Some criteria will remain relevant in perpetuity; others will shift based on the CEO’s performance or the broader business landscape. Ensuring CEO’s are held to a relevant and realistic standard demands that boards understand the business environment, the organization’s strategic objectives and how the CEO’s responsibilities intersect with each other.

HR and ethics and compliance officers can shoulder some of the burden, but ultimately, these changing pressures require the board to update the evaluation process regularly. This can be time-consuming, difficult to manage and cumbersome to implement.

3. Time constraints

Board members have limited time to execute on seemingly limitless responsibilities. In the face of rapidly evolving risks and opportunities, prioritizing CEO evaluations may not seem worthwhile. This can create an environment where board members struggle to dedicate time and effort to a thorough evaluation process.

Boards who struggle to design a comprehensive process may rush assessments and fail to fully capture the CEO’s performance and impact. At best, this can allow operational inefficiencies to slide by. At worst, this can allow risk and potentially damaging CEO conduct to continue unchecked.

4. Access to comprehensive data

CEO evaluations take more than asking questions or reviewing the company’s financial performance under their tenure. It takes weaving together complete and accurate qualitative and quantitative data across all aspects of the CEO’s role.

This can be difficult, costly and time-consuming for financial metrics alone, let alone gauging soft skills like leadership skills, employee morale and corporate culture impacts. Boards with all the necessary data may also find it difficult to synthesize it and develop a clear set of feedback, which undermines board effectiveness.

Leveraging Diligent Boards as a CEO evaluation tool

CEO evaluations are mission-critical and historically challenging. Boards know how essential they are to drive performance, HR sees the relationship between evaluations and professional development, and compliance officers understand that evaluations are highly regulated. Yet, CEO evaluations remain time-consuming, inefficient and unable to produce the data boards need to feel confident in the CEO.

Diligent Boards, part of the Diligent One Platform, features a powerful CEO evaluation tool that centralizes information and collaboration to create a single source of truth by:

1. Creating evaluation frameworks with templates for creating detailed questionnaires that hone in on key performance categories.
2. Streamlining questionnaires with intuitive workflows and flexible answer formats that save respondents time.
3. Enabling secure and confidential assessments that allow independent directors to collect and submit them seamlessly.
4. Facilitating real-time monitoring and communication so boards can communicate about the evaluation process and monitor its completion at any time from any device.
5. Analyzing and reviewing results to support rich discussions between board members and create benchmarks for future evaluations.
6. Supporting compensation decisions by delivering compensation committees the insights they need to justify appropriate compensation levels based on the software’s evaluation results.
7. Collecting and disseminating feedback, ensuring that all relevant information is considered before finalizing the evaluation.

Learn more about Diligent Boards or request a demo today to see how it can future-proof your CEO evaluation process.