Evaluating the CEO

I’m often asked about CEO evaluations. I’ve helped boards with everything from developing a process, to designing the method, to gathering and analyzing information, and even communicating the results.

I’m a strong proponent of conducting an annual CEO evaluation. For one thing, it’s the board’s job to do so. The board-CEO relationship is an important one and an effective evaluation process can help strengthen it.

It’s hard for any CEO to get honest feedback. Even in organizations where staff and front-line supervisors receive annual reviews on every aspect of their performance, executive evaluations, including the CEO’s, are often more conversational, informal, and sometimes downright perfunctory.

Some organizations rely on a few words from the board chair and an annual pat on the back. I suppose that’s better than nothing, but pretty much any CEO in any sector or type of organization can benefit from a more structured, thorough approach to evaluation.

Why Evaluate CEO Performance?

There are many benefits to a formal CEO evaluation, for the CEO, the board, and the organization as a whole. In reviewing CEO performance, the board:

• Sets an example of accountability.
• Signals that it wants performance management to be part of the organization’s culture.
• Aligns CEO performance with the organization’s objectives.
• Lets the CEO know exactly what it expects.
• Provides transparency about the link between performance and compensation.
• Encourages the CEO to set personal developmental goals.
• Promotes a stronger board/CEO relationship.
• Benefits from an early warning system for possible problems.

The Evaluation Process

In performance evaluation, the process is just as important as the output. Whether you’re designing it from scratch or looking to improve one that already exists, the process has a better chance of success if it meets the following criteria:

• It’s critical but not adversarial.
• It focuses on both the past and the future.
• It provides for multiple sources of input.
• It allows for setting future CEO goals.
• It emphasizes the CEO’s personal development.
• It’s tailored to meet the specific needs and realities of your organization.

The evaluation process consists of three basic steps:

1. Establish expectations.
2. Monitor performance.
3. Conduct the annual review.

Step One. Establish Expectations

The process begins with the board and the CEO agreeing on clear objectives — between five and ten is optimal — that align the CEO’s goals with the organization’s strategy.

It’s important to find the right balance between different types of objectives — quantitative and qualitative, financial and non-financial, objective and subjective, leading and lagging, personal and organizational. Finding that balance is more of an art than a science. Exactly where it lies is different for every organization — the sector, industry, size, type of organization, and culture all need to be taken into consideration.

Most well-rounded CEO evaluations cover three areas: financial and operational objectives, progress on strategic goals, and performance of CEO competencies.

Financial and Operational Objectives. These objectives are quantitative in nature, based on a clear system of financial metrics such as revenue, expenses, profit, and return on investment, and operational KPIs such as productivity, efficiency, quality, and customer satisfaction. They generally reflect how well the company is being run and how healthy is its financial situation.

Progress on Strategic Goals. These objectives address the organization’s success in achieving its strategic goals such as growth, market expansion, innovation, digital transformation, or culture change. Strategic goals often stretch out over a few years, so for evaluation purposes they’re broken down into annual objectives that reflect whether major projects are on schedule, change initiatives are on track, and the plan is unfolding as it should.

Performance of CEO Competencies. These objectives are the most qualitative and subjective of all. They address how the CEO goes about delivering on expected results, reflecting the CEO’s leadership style, communication skills, interpersonal relationships, people management, and ethical conduct. Here you’ll find objectives relating to leadership, succession planning, executive development, the board-CEO relationship, stakeholder relations, and organizational culture.

Step Two. Monitor Performance

Over the course of the year — usually quarterly — the board receives reports that allow directors a window into the organization’s financial and operational results as well as progress on strategic goals.

This kind of ongoing monitoring has a couple of advantages: it gives the board an early warning system about potential problems, and it provides an opportunity for directors to give the CEO constant informal feedback about their performance.

With ongoing discussions throughout the year, the annual formal evaluation becomes just a part of the whole process instead of the be-all and end-all.

Step Three. Conduct the Annual Review

This part of the process begins with gathering the required information. Establishing whether or not objectives have been met in the financial, operational, and strategic areas is the easy part. Management reports provide the objective, quantitative data that the board needs.

Assessing how well the CEO has performed in the area of leadership competencies is more problematic. Usually, individual directors’ views will be gathered through a confidential survey, and the results aggregated into a report. But when you think about it. directors’ interaction with the CEO is really quite limited, and there are few opportunities for board members to observe the CEO as they do their job. Too often, it’s a case of no news is good news.

Using a 360 feedback system is one way to address this limitation. It’s an assessment process in which the CEO receives confidential, anonymous evaluations from the people they work with. Typical sources include the executive team, board directors, a self-assessment, and sometimes external stakeholders.

It's not a bad idea to incorporate 360 feedback into the CEO evaluation process every few years. A carefully designed 360 survey helps the CEO draft a development plan, gives the board and the CEO a common view, provides directors with insight into how direct reports perceive the CEO, and demonstrates to management that their opinions matter. Occasionally, it uncovers behavioral issues that the board would otherwise be unaware of.

There are a few drawbacks to keep in mind. 360 feedback is, by its very nature, not objective. Those providing feedback often have limited understanding of the CEO’s work and the constraints under which they operate. Even board members’ perceptions are clouded by the limited time they spend with the CEO and the structured nature of board-CEO interactions.

Also be aware that attempting to engage external stakeholders in a 360 can unintentionally signal that the CEO is in trouble or that the board is trying to build a case for dismissal. For this reason, people may choose not to participate in a 360 unless the CEO has contacted them in advance to encourage their input.

If you do decide to gather 360 feedback, be sure to get buy-in from the CEO before you start, use a consistent framework with all participants, and do your best to eliminate bias in the process.

Once all the information is in — both objective data from management reports and subjective perceptions from surveys or interviews — it’s summarized in a formal document that’s shared with the full board. The board discussion allows for edits to the document to clarify the messaging and adjust the tone.

Then it’s time to provide the CEO with formal feedback in the form of the annual performance review. The task usually falls to the board chair along with one other independent director, preferably one experienced in delivering feedback. The presence of two directors ensures clear communication and limits the possibility of any one director’s personality clouding the process.

It’s a good idea to share the document with the CEO before meeting with them to allow time to absorb it and think about their response. The feedback session itself should occur in private, with enough time allocated to allow for robust discussion. The CEO’s response — whether written or oral — is summarized to the board to close the loop.

A Word About Policy Governance®

Boards that follow the Policy Governance® model (informally known as the Carver model) view CEO performance in a very specific way. In brief, under this governance model, CEO performance is identical to organizational performance.

A Policy Governance® board formally states it Ends — defining what the organization’s results will look like if the job is executed successfully — and its Executive Limitations — the conditions, situations, or circumstances that would be unacceptable.

As long as the CEO reasonably interprets the Ends and the Executive Limitations, the Ends have been accomplished, and the Executive Limitations have been complied with, then the CEO’s performance is considered successful, and no further evaluation is necessary or desired. In fact, under Policy Governance®, any further evaluation would be looked at as micro-management.

You Have to Start Somewhere

If you’re doing this for the first time, don’t try to start out with a complex, formal process. No one will be ready for it, and you can expect pushback and resentment. Instead, start with something small and informal. Whatever the process, get the CEO’s input to make sure they’re comfortable with it. Keeping them in the dark will get you started on the wrong foot.

If you’re working on getting started with CEO evaluation, here are some questions to consider.

• What are the objectives — to assess past performance, enhance future performance, and/or agree on a development plan?
• What’s the link between performance and compensation?
• What balance do we want between personal and organizational goals?
• Do we want to be more focused on results or on behavior?
• What methods will we use? Will we rely solely on data or incorporate surveys or interviews?
• Who’ll conduct the assessment — the board chair, a committee, or an independent consultant?
• Whose input will be gathered? Independent directors? The management team? External stakeholders? Self-assessment?
• What output will be produced?
• Who’ll communicate the results to the CEO?
• What’s the timing for the entire process?

Joan Garry’s article, 'A Simple Way to Conduct an Executive Director Performance Review', is useful if you’re planning a first-time CEO evaluation. It recommends forming a small committee to guide the process, then building on the CEO’s job description to create an evaluation form. After going through this simple process once or twice, the board and CEO can start work on a more structured, formal process.

One thing I especially liked about Garry’s article is that it emphasizes how the written evaluation should be crafted with care and diplomacy to support a productive conversation. The outcome of the process should be a shared understanding of past performance and where to focus in the future. From that understanding, the CEO and the board agree on goals for the coming year.

Your takeaways:

• An effective evaluation process isn’t adversarial. In fact, it strengthens the board-CEO relationship.
• The process should be designed to meet the specific needs of your organization.
• The evaluation cycle starts with agreeing on expectations, then monitoring progress, and finally providing feedback.
• 360 feedback can be useful but be mindful of its limitations and don’t overuse it.
• If your board uses Policy Governance®, your CEO’s performance is identical to organizational performance.
• For the first time CEO evaluation, start small and informal. Most importantly, involve the CEO from the beginning.

Resources:

• A Simple Way to Conduct an Executive Director Performance Review. Joan Garry. © Joan Garry Consulting 2024.
• Evaluating the CEO. Stephen P. Kaufman. Harvard Business Review. October 2008.
• Haven’t Done a CEO 360 Review? You Should! Boardspan Insights. © Boardspan 2024.
• How Do You Evaluate CEO Performance? 6 Ways to Grade the Chief. Joel Trammell. Forbes. August 2013.
• How Does a Policy Governance Board Evaluate its CEO? Ted Hull. The Governance Coach. January 2017.
• Nine Tips for Running a Great CEO Appraisal. Brendan Walsh. BoardPro. October 2023.
• Your Guide to an Effective CEO Performance Review. Audrey Smith, PhD. Development Dimensions International, Inc. (DDI) December 2021.
• 7 Essential Metrics for Your CEO Scorecard. Ray Sclafani. ClientWise. January 2024.

Thank you.

Scott

Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online membership with practical tools for board directors who choose a growth mindset.

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