Evaluating CEOs

Evaluating employee performance has a certain framework, however, that framework is applied somewhat differently when assessing a startup CEO. A CEO is ultimately responsible for an organization’s performance, so the core of a CEO evaluation is fundamentally an organizational evaluation.

The Chief Executive Officer (CEO) is charged by an organization’s owners/stakeholders with the responsibility for guiding the organization into achieving its goals – and that forms the context for evaluating the CEO’s performance. For high-potential businesses, this means figuring out how to generate business success with satisfied customers, fast growth, and, ultimately, profitability. This can get a bit confusing when a founding CEO holds the majority of stock in a startup (so they are both owner and CEO) or when talking about a nonprofit CEO who is leading on behalf of a broader set of stakeholders in service of a declared mission, however, the principles remain the same. Regardless, the core idea to focus on is that the CEO holds the ultimate responsibility for organizational performance relative to its mission and that reality provides the context for evaluating their performance as a leader.

Who Evaluates CEOs

The responsibility for evaluating a CEO rests with the Board of Directors, who represent the organization’s key stakeholders, especially the shareholder-owners. Outside or independent Directors (meaning Directors who do not have a day-to-day executive role within the organization like, for example, a CFO) take the lead on evaluating corporate and CEO performance and planning for orderly leadership succession when that becomes relevant. The Board is the appropriate reviewer of performance for CEOs, who have broad job duties, a large span of control, and a high degree of discretion in decision-making. No one else in the organization is in a position to evaluate the full scope of the CEO’s responsibilities.

What Should a CEO Be Evaluated On

Leadership of a corporation is represented both substantially and symbolically by the CEO. An outstanding CEO can galvanize a corporation with inspirational leadership and sweeping vision and keep the organization on track with critical decisions about priorities, strategies, and day-to-day actions. Ultimately, that means that the most crucial focus when evaluating CEO performance is to assess the organization’s performance. CEOs should not be evaluated in a vacuum but within the particular context of the specific company at its particular time and stage of development. What is appropriate for a nascent startup is not suitable for a mature, profitable company, except in the most abstract terms. An engaged Board of Directors should be aware of where the emphasis should be placed and what capabilities are needed for the size and stage of the company under development.

Corporate performance includes the accomplishment of the organization’s mission, which is ideally tracked by both financial and non-financial metrics. In addition, corporate performance includes the softer elements of the quality of relationships with key constituencies and company culture. All of these elements depend on the Board and CEO achieving mutual clarity on the organization’s purpose and what success looks like for the organization’s stage of development in the coming period.

Ultimately, the core of a CEO’s role is leadership, which cascades throughout the organization’s people, processes, culture, and external relationships to produce the results the organization exists to achieve. A CEO’s leadership effectiveness is critically important because:

• The CEO is constantly in the spotlight, representing the organization publicly
  
  
• The CEO holds the greatest level of authority, including hiring and overseeing other executive leaders such as a CFO, CTO, and sales and marketing leaders, so they are ultimately responsible for getting the right people in the right roles to operate the business.
  
  
• The CEO must balance opportunities and risks to determine the best course to achieve the mission. This requires a tremendous amount of synthesis as well as hard decisions about what not to do and where not to invest, as well as what to focus on and prioritize.

Usually, there are multiple ways to achieve success, and the proof is in the results that the organization accomplishes as the CEO guides the assembly of the required puzzle pieces.

Agreement on the Role is Foundational

The collaborative development of a CEO position description can be a fruitful element of CEO performance evaluation by providing a framework for what the Board believes are the most important CEO performance factors and a basis for setting performance objectives. This, along with organizational performance goals, provides the clarity of expectations that support focus and achievement as well as alignment on what is most important. While it is unlikely that the position description, once defined, will change substantially from year to year, it should be reviewed periodically as the company advances through different stages of development.

Typical Components of a CEO Performance Review

The Board governing every organization will need to decide how to approach the CEO’s performance review, hopefully with input from the CEO themself. As food for thought, here are some elements to consider to accomplish a comprehensive review that can strengthen Board-CEO communication, highlight areas for improvement and support, and provide a clear signal to shareholders and regulators that the Board is monitoring and evaluating the CEO appropriately.

• Organizational Performance:  The foundation of a CEO review should be based on evaluating how well the company is performing against its financial and non-financial goals. The organization’s purpose and objectives should be agreed upon up-front, and performance against those goals should be evaluated, with input from senior management on any mitigating context that may be appropriate. As the saying goes, if you don’t know where you are going, it doesn’t matter where you end up. Without some achievable goalposts in mind, both the organization and the CEO are set up for failure.
  
  
• Personal Characteristics: As the company’s preeminent leader, a CEO’s vision, integrity, decision-making under pressure, and communication skills should be evaluated, with both positive and constructive feedback to help the CEO continue to grow. Feedback from the team, outside partners, and interactions with the Board itself will provide a balanced view. Beware of only using the CEO’s necessarily limited interactions with the Board as the sole basis.
  
  
• Leadership Abilities:  How the team responds to the CEO’s effectiveness as a leader and team builder is vital since the organization’s results will depend on the people who make up the organization. The Board may solicit confidential 360 input from those who work with the CEO to illuminate strengths and weaknesses in areas that team members can be expected to have valuable input on, such as clarity of communication, willingness to address performance issues, and ability to foster a sense of teamwork in pursuit of organizational goals. Critically important is that sometimes a leader’s most important decisions are hard decisions, and the Board will need to consider staff feedback in the broader context of the entirety of the CEO’s role, including their role in ensuring that any team issues are being dealt with and sometimes deciding to shut down initiatives.
  
  
• Relations:  One of a CEO’s most critical responsibilities is developing and maintaining strong relationships with critical groups, including board members, shareholders, and relevant external parties such as strategic partners, regulators, and major customers. The Board may solicit feedback where possible to gather some perspective on how the CEO is doing within these critical value-building areas.
   
• CEO Self-evaluation:  The CEO should have the opportunity to provide input on their own performance, including both strengths and weaknesses, as there are certainly areas that are often hard to get insight on given the breadth of the CEO’s responsibilities and the limits of an external perspective. The CEO’s self-evaluation should provide an opportunity to highlight any relevant circumstances.
  
  
• Mitigating Circumstances: When considering an organization’s progress, often these will be mitigating circumstances. It is essential for the CEO to raise mitigating circumstances and for the Board to acknowledge those they deem pertinent as context for evaluating CEO performance. In general, mitigating circumstances should be outside the CEO’s control, yet that impact opportunities and performance. Examples of mitigating circumstances include the COVID-19 pandemic, the previous management team, and new legislation. What is relevant depends on the particulars of the business, and the CEO should be able to articulate specifically how these external factors affected the company’s performance.

The Process

At some level, the CEO evaluation will span the entire year. At the beginning, the Board and CEO should collaborate to agree upon a position description and a set of organizational goals for the next period. During the year, regular board meetings will keep the Board in touch with the company’s progress and provide an opportunity for collaboration on the best way forward. Finally, information will be gathered from various sources, synthesized, and related to the original goals. Ultimately, there should be one or more conversations to discuss performance, opportunities for further support, and laying the groundwork for the next cycle. Ideally, the whole process can be constructive and positive as that maximizes the chances of success, which should be the goal.

Ultimately, CEO evaluation should be an opportunity to build collaborative relationships between the CEO, the Board of Directors, and the team to help the organization succeed. No one is perfect, yet a thoughtful process can help increase the chances of success and document the Board’s proper governance.