How Boardrooms Assess CEO Performance

While boards rate CEOs low in talent development, financial performance still dominates
by Mike Hunter

Boardrooms are giving poor grades to CEOs for their mentoring skills and board engagement. However, although an overwhelming majority of companies consider long-range planning to be important, they place very little weight on many non-financial performance measures when actually evaluating a CEO’s performance. The survey found that only a 5-percent weighting was given to a CEO’s performance in the areas of talent development and succession planning, and employee satisfaction/turnover was weighted at half that number. 

These findings in recently released study by the Center for Leadership Development and Research at Stanford Graduate School of Business, Stanford University’s Rock Center for Corporate Governance and The Miles Group reveals that companies still prioritize financial performance above all else.

At the same time, however, when directors were asked to rank the top weaknesses of their CEO, “mentoring skills” and “board engagement” tied for the No. 1 spot. “This signals that directors are clearly concerned about their CEO’s ability to mentor top talent,” says Stephen Miles, founder and CEO of The Miles Group. “Focusing on drivers such as developing the next generation of leadership is essential to planning beyond the next quarter and avoiding the short-term thinking that inhibits growth.”

“While boards clearly see mentoring and talent development as weaknesses in their CEO, the problem is that they are not evaluating CEOs against those measures in a meaningful way,” says David F. Larcker, James Irvin Miller Professor of Accounting and co-director of the Center for Leadership Development and Research at the Stanford Graduate School of Business, observing that financial performance still dominates the grading metrics.

 

Key Findings of the 2013 Survey on CEO Performance Evaluations

Percentage of companies that say they have never evaluated their CEO: 10%
“Given their fiduciary duties, it’s strange that any company would not evaluate its CEO,” says Professor David Larcker. “Without [this], how can the board claim to be monitoring a corporation?”

Percentage of CEOs and directors who believe the CEO evaluation process is effective: 63% of CEOs, 83% of directors
“Nearly a third of CEOs don’t think that their evaluation is effective,” says Professor Larcker. “The success of an organization is dependent on open and honest dialogue between the CEO and the board. It is difficult to see how that can happen without a rigorous evaluation process.”

Percentage of directors who believe their CEO is in the top 20% of his or her peers: 41%
And 17 percent believe he or she is below the top 40 percent “The board hires the CEO — they should believe that they have the individual in that job who is absolutely the best, or can quickly become the best,” says Stephen Miles.

Percentage of CEOs and directors who believe the evaluation process is balanced: 64% of CEOs, 83% of directors
“The truth of the matter is that the CEO evaluation process is not that balanced,” says Professor Larcker. “Amid growing calls for integrating reporting and corporate social responsibility, companies are still behind the times when it comes to developing reliable and valid measures of nonfinancial performance metrics.”

Percentage of evaluations that evaluate customer service: less than 5%
“Seeming important things such as product service and quality, customer service, workplace safety and even innovation are used in less than 5 percent of evaluations,” says Professor Larcker.

CEOs’ failure to engage boards of directors: No. 1 weakness
“Board engagement is absolutely vital to the function of the CEO – and to the health of a company,” Miles says. “How can the board understand what’s going on in the company if the CEO is not engaging?”

Center for Leadership Development and Research at Stanford Graduate School of Business, Stanford University’s Rock Center for Corporate Governance and The Miles Group: 2013 Survey on CEO Performance Evaluations

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