KEY CONCEPT
The greatest weakness of CEOs is their lack of people management and talent management skills, according to a Stanford Graduate School of Business survey of Boards of Directors. However, the directors themselves must shoulder part of the blame: the survey also shows that when evaluating their CEOs, boards place significantly more value on financial metrics than any other factor.
IDEA SUMMARY
CEOs tend to be strong in decision-making and the financial elements of their jobs, but weak when it comes to managing their people and developing talent, according to a survey of 160 North American boards of directors and CEOs. Specifically, ‘mentoring skills’ was tied with ‘board engagement’ for first place in CEO weaknesses, followed closely by ‘listening’ and ‘conflict management’ In contrast, CEOs scored high in ‘decision making’ and ‘planning’.
Boards are clearly concerned about the ability of their CEOs to develop talent in the organization, a key element in assuring the future success of the company. However, the poor results in listening, conflict management and other people management categories such as delegation and empathy also highlight the surprisingly poor performance of CEOs in connecting and communicating with their employees.
However, the evaluation process itself reveals that short-term financial metrics are the principle measures used by boards to rate CEO performance — which may explain the focus that CEOs might place on these measures. And it is not just the soft people skills that are undervalued in the evaluations. Issues such as customer service, workplace safety or innovation did not even make an appearance in an astounding 95% of the evaluations.
Nevertheless, a majority of both CEOs (64%) and directors (83%) believe — somewhat mistakenly, it appears — that CEO evaluations are balanced between financial and non-financial metrics.
A few other surprises emerge from the survey. The first is that directors are rather lukewarm about the quality of their CEOs. Almost 60% of directors believe that their CEOs are not even in the top 20% in performance compared to their peers; and nearly 20% of directors go further by placing their CEOs in the bottom 40% of their peers.
Another surprise: 10% of companies say they have never even evaluated the performance of their CEOs. These kinds of statistics might reinforce the wariness that many harbour about a board’s ability to supervise and monitor their CEOs.
Finally, almost a quarter of the directors say that unexpected litigation or regulatory problems at the company would not impact their evaluation of a CEO. This slightly controversial result is mitigated by the fact that 100% say that ethical issues would harm a CEO’s evaluation.
BUSINESS APPLICATION
Behaviour rewarded is repeated, according to the old adage, and it can be understood that CEOs are going to focus on the attributes that corporate directors — their bosses, after all — value the most. If boards want to see better performances in vital non-financial areas such as customer service, innovation or talent management and development, they will have to adjust their evaluations of CEO performances accordingly.
At the same time, CEOs should take the initiative in addressing these areas. If boards — and investors — are focused on the short-term, CEOs and their top management teams have the responsibility to look beyond the dominant financial metrics and become more effective at the less obvious attributes that, in the long run, build the success of the company: developing management talent, reinforcing employee satisfaction, communicating effectively with workers, and assuring product quality and service, high-level customer service and workplace safety.
One-third of CEOs don’t believe their performance evaluations are meaningful exercises, but even those CEOs who believe in the evaluations may want to think twice before assuming that the evaluations offer a full and accurate picture of their performance. Specifically, they need to take a close look and ask themselves: is there truly a balance between financial and non-financial metrics? And if not, what is being missed?
REFERENCES
2013 Stanford CEO Performance Evaluation Survey. David F. Larcker, Stephen Miles, Brian Tayan &Michelle Gutman (May 2013).
FAQs
Gather quantitative and qualitative data from multiple sources. In order to accurately evaluate the CEO's performance, the board should gather data on results against the stated business metrics and it should get input from reliable sources who have direct observations of the CEO's performance and leadership.
Are CEOs typically on the board of directors? ›
Often, the CEO will also be designated as the company's president and, therefore, be one of the inside directors on the board (if not the chair). However, it is highly suggested that a company's CEO should not also be the company's chair to ensure the chair's independence and clear lines of authority.
Why do boards fire CEOs? ›
If the board loses confidence in the CEO's capabilities, it can lead to a swift termination. This loss of trust can stem from various factors, such as poor decisions, a lack of transparency, or an inability to articulate a clear vision for the company's future.
Is the board more powerful than the CEO? ›
Since the board chairperson is superior to the CEO, the CEO has to get the board chairperson to approve any significant moves. While the board chairperson has the ultimate power over the CEO, the two typically discuss all issues and effectively co-lead the organization.
Why do boards pay CEOs so much? ›
'. Company Performance: One of the most significant factors impacting CEO pay is company performance. CEOs are often rewarded handsomely when their companies achieve exceptional financial results and outperform their competitors.
How should a board support a CEO? ›
The board, in partnership with the CEO, should decide the process, time and form of the CEO's performance reviews. Reviews must be based on the CEO's job description and the objectives that should have been included in with it. The CEO's salary package will also need to be reviewed on a regular basis.
Who gets paid more, CEO or Chairman? ›
The executive chairman's compensation package can vary significantly depending on the company's size, industry, and financial performance. Their pay is typically on par with or slightly below the CEO's. Currently the average salary for an Executive Chairman in the U.S. is $395,590 per year.
Who does the CEO report to? ›
The chief executive officer serves as the public face of the company in many cases. CEOs are elected by the board and its shareholders. They report to the chair and the board who are appointed by shareholders.
What's the #1 reason CEOs are fired? ›
#1 Inadequate Revenue Performance
Generally, this means “not enough leads / not quality enough leads / leads not leading to enough revenue.” This is the top reason CEOs, CROs and even CFOs get fired too.
Can you be fired if you own 51% of a company? ›
If you own more than 50% of your company's shares, you might think you have ultimate control. While it's true that a majority stake will likely prevent the company from being sold without your consent, it doesn't protect you from being fired.
But firing the CEO is a tough decision. It often suggests that something has gone very wrong and the organization could be in trouble. It implies that the person was a bad choice to begin with, which impugns the judgment of those who hired the CEO. And there's also the personal confrontation that nobody relishes.
Can a CEO override a board? ›
In many cases, a CEO does not have the direct authority to unilaterally fire the entire board of directors. The power to remove directors is usually vested in the shareholders or may require a vote of the board itself.
Who is most powerful after CEO? ›
In most organizations, the positions above the CEO include Chairman of the Board, President and Vice President. If your company is a start-up, then in some sense, a start up advisor could be seen as also being higher than the CEO.
Who has the most power on a board? ›
A chair of the board (COB) holds the most power and authority on the board of directors and provides leadership to the firm's officers and executives. The chair of the board ensures that the firm's duties to shareholders are being fulfilled by acting as a link between the board and upper management.
How do you measure a CEOs performance? ›
8 Possible CEO KPIs
- Revenue growth. Revenue growth means your earnings are increasing over time. ...
- Profit margin. More than just revenue earnings, companies often want to measure profit margins. ...
- Net promoter score. ...
- Customer satisfaction. ...
- Employee satisfaction. ...
- Spending. ...
- System quality. ...
- Return on investments.
Evaluate candidates not just on past achievements but on how their vision aligns with the long-term strategic goals of your company. This involves a deep dive into their understanding of industry trends, potential disruptors, and the ability to pivot the company's direction in response to changing market dynamics.
How to review performance of CEO? ›
The performance review should include a review of progress since the last review. This will help track the effectiveness of the CEO's development plan. It is useful to record the tasks the CEO finds most enjoyable, and those which they find difficult.
Does the board determine CEO salary? ›
1 The role of the board of directors
They also have the authority to approve and monitor the compensation of these executives, which usually involves consulting with external experts, benchmarking against peer companies, and aligning with the company's goals and values.
