Monday, 28 September 2015

EVALUATING THE CHIEF EXECUTIVE OFFICER (CEO)

Wale Tinubu, CEO, Oando Plc
The performance of the Company is intricately linked to the CEO’s performance and inevitably, the CEO’s performance (or a lack thereof) is measured against the Company’s performance. Thus when CEOs stumble or fall, they pull their companies down with them.

Whilst the Board should not bear down on the CEO or teleguide her, it has to clearly define key performance indicators (not only financial performance), approval limits and reporting expectations amongst others. Assuring CEO autonomy should not be an excuse to limit performance appraisal to the company’s financial performance.

As the day-to-day running of the Company is delegated by the Board to the CEO, it is imperative that the Board conducts a regular evaluation of the CEO’s performance to ensure that she remains on course in actualizing the Board’s mandate. The evaluation of the CEO helps to create a balance between a relationship of trust and support, with one of accountability.

The Securities and Exchange Commission (SEC) Code of Corporate Governance for public companies as well as the PENCOM Code for Pension Fund Operators provide that the Chairman shall oversee the annual evaluation of the performance of the CEO. In South Africa, the King III Report provides that the performance appraisal of the CEO and executive directors should be undertaken at least once every year. This evaluation according to King III will concentrate on the CEO’s performance, as a director and as the Chief Executive Officer, and should be considered by the Remuneration Committee and then by the Board.

However, as critical as this function is, it is also one of the most difficult for the Board. The more senior the executive and the greater his impact on the company’s performance, the less rigorous the evaluation process. In many organizations, whilst Senior Managers and other executives go through painstaking performance reviews in which they are systematically graded against a detailed set of key performance objectives, the CEO’s appraisal tends to be conversational and informal.

CEOs are usually strong, powerful people who would typically find it emotionally difficult to accept critical feedback. They tend to believe that no one – especially Non-Executive Directors – can possibly appreciate the complexity of their role or accurately judge their performance. Nevertheless, the Board has a responsibility to undertake the CEO’s performance evaluation.

A bi-annual rather than an annual appraisal is recommended as this would give the Board real time assessment of the CEO’s effectiveness and by implication the performance of the Company in general. It is also recommended that the evaluation process be handled by the Governance Committee (also called the Nomination or Remuneration Committee) made up of a majority of Independent Directors and led by the Board Chairman. This Committee will have the responsibility of defining the KPIs and agreeing them with the CEO.

To be effective, the evaluation process should be objective and constructive. It should define clear objectives including an opportunity for the Board to work with the CEO to agree specific strategic objectives and performance metrics for the year; provide feedback on the CEO’s developmental areas and an opportunity for the Board to gather data that informs an assessment of the CEO’s performance leading to decisions about the CEO’s compensation and indeed continued employment.

For Boards who undertake the CEO appraisal, the review is all too often focused primarily on financial metrics. This appraisal ignores strategic thinking, incisive decision making and other leadership capabilities required by the CEO to excel. Stephen Kaufman, former CEO of Arrow Electronics (now a Senior Lecturer at the Harvard Business School) shares Arrow’s Five Dimensions of CEO Performance as follows:

Leadership: How well does the CEO motivate and energize the organization, and is the company’s culture reinforcing its mission and values?
Strategy: Is it working, is the company aligned behind it, and is it being effectively implemented?
People Management: Is the CEO putting the right people in the right jobs, and is there a stream of appropriate people for succession and to support growth goals?
Operating Metrics: Are sales, profits, productivity, asset utilization, quality, and customer satisfaction heading in the right direction?
Relationships with External Constituencies: How well does the CEO engage with the company’s customers, suppliers, and other stakeholders? Source (Harvard Business Review)

Feedback from the CEO performance evaluation process is important to the CEO as well as the Board. Through the evaluation process the CEO gains a clear understanding of the Board’s expectations of her role, gets an opportunity to clarify any misconceptions around performance and receives well-deserved and positive feedback on accomplishments. She also receives constructive feedback in areas that require improvement.

For the Board, evaluating the CEO helps to build a stronger more productive relationship between the Board and the CEO which engenders candor and constructive engagement. It also enables the Board to fulfill its primary responsibility of ensuring that the Company is well led and if not, to provide a legitimate basis for removing the CEO. (businessday)