Completing a CEO evaluation is a basic fiduciary responsibility of a board of directors. It is also an invaluable tool for preventing micromanagement, maintaining the CEO/board relationship and avoiding a costly CEO transition.
The CEO evaluation is a tool in which the board assesses and scores the CEO on his or her major duties, providing feedback on how the CEO can maintain what the board values and improve on what is missing.
For the CEO, the greatest value of an evaluation is a validation that he or she either has the continuing trust of the board members or knowledge of the issues that may be eroding trust and that need to be confronted.
For boards, the evaluation has two clear values. First, it fulfills the board’s basic fiduciary responsibility. A board is charged with the Duty of Care which, simply stated, is the obligation to be careful in directing and monitoring the affairs of the corporation. Assuring the CEO is acting in accordance with the board’s directives and regularly evaluating his or her performance is a key part of this obligation. Should a CEO do damage to shareholders or stakeholders and the board has no history of evaluation or confronting issues with CEO performance, then there is legal exposure for the board.
Second, a good CEO evaluation exposes a lack of trust and confidence in the CEO, particularly if there is any disagreement amongst board members regarding trust, and allows these issues to be talked through until consensus is reached. This avoids two costly problems:
- Micromanagement: Micromanagement often occurs when there is a lack of information or an erosion of trust. A CEO evaluation allows the “erosion” to be identified, named and traced before micromanagement can occur.
- Damaged Board/CEO Relationship: Frequently the board agenda is too full to allow for relationship maintenance with the CEO during meetings. If a board doesn’t have a habit of routine executive sessions to discuss how the working relationship is going, then board members start holding in their concerns rather than expressing them. The pressure builds up until there is an irrational acting out against the CEO. A regular evaluation allows this situation to be short circuited and assures the conversation to build and maintain trust will happen.
To get real ROI from an evaluation, the process must include the board’s identification of the actions the CEO has to take to improve his or her scores. Then the board must schedule a follow-up with the CEO 4 to 6 months down the road to give feedback on whether those areas are improving or not. The ROI for a CEO evaluation diminishes when these key pieces are not in place.
An organization will only go as far and as fast as its leadership. Decision making is slowed dramatically and the ability to take risks comes to a halt when the relationship between the board and the CEO is eroded. A regular evaluation of the performance of the CEO and the quality of the working relationship between the board and CEO are essential to an organization realizing its full potential.