Managing CEO’s performance: A board’s agenda

By Na Boon Chong

Aon Consulting (Singapore)

Overview

As the pressure mounts on publicly-owned companies to improve their corporate governance practices, more firms are adopting formal CEO evaluations, going beyond merely providing a three-year contractual arrangement of terms and conditions. A common fallacy is that the CEO’s performance and the company’s performance are one and the same. In reality, this often is not the case.

In Aon Consulting’s recent Best Managed Board (BMB) study, working jointly with the Singapore Institute of Directors and released in February, 80 per cent of the participating boards evaluate their chief executives’ performance formally. This is consistent with global trends where 80 per cent of the companies do so. In our consulting experience, we have developed a CEO performance management framework with common performance categories for the board to use in evaluating the CEO’s performance. The framework is presented below, accompanied by illustrative questions.

Performance category

Strategy development and execution

Does the company have a well-defined strategy?

Does the management process result in decisions that clearly support the long-term strategy?

Are specific measures in place to monitor achievement of the long-term strategy?

Has the long-term strategy been communicated clearly to the board and their support obtained?

Financial results

Has the company defined appropriate long-term financial objectives consistent with its business strategy, and annual goals that support these objectives?

Has the company achieved financial results for the past fiscal year at a level that clearly supports the company’s long-term strategic direction that compares favourably against other competitors?

Is sufficient, timely, and clear information provided to the board about results achieved, and progress towards achieving longer-term financial goals?

Operations control and risk Management

Are appropriate internal systems in place to maintain effective operations control? Have critical risks to the business been identified and the accountabilities for managing these risks been allocated?

Is the CEO able to recognise and balance the need to grow the business as well as to mitigate the risks associated with that?

Is the board kept abreast of the risk levels of the critical risks to the business and management decisions relating to these risks?

Vision and leadership

Does the CEO lead the company with a clearly defined sense of business direction and purpose? Has the CEO effectively communicated his vision and values for the company to all employees? Does he serve as a role model for this vision and values? Does the CEO assess performance and make timely changes in strategy and resource allocation? Does the CEO effectively serve as the company’s liaison with the industry and the investor community?

Succession planning and management Development

Has the CEO selected an effective senior management team capable of achieving the company’s business strategy? Has the CEO taken steps to ensure that key executives have sufficient exposure to the board, and receive the board’s feedback on their performance? Are programmes in place that will aid in retaining and motivating this top management team, or attracting new executives as needed? Is there an effective process in place for identifying and developing the next generation of senior managers? Has the board or the nominating committee reviewed the succession planning process and results?

Human capital management

Does the CEO take steps to maintain employee engagement at its highest possible level? Are systems in place to measure this? Has the CEO ensured that programmes are in place to provide capability development as needed to support the business strategy? Are systems in place to measure progress towards the capability development objectives? Is there a sound reward and recognition policy in place to attract, motivate and retain good performers?

Government, customers, shareholders and community relations

Has the CEO effectively communicated with the appropriate government entities concerning the company’s vision, value, goals and objectives?

Has the CEO effectively communicated with environmental, social and other stakeholder entities concerning the company’s vision, value, goals and objectives?

Has the CEO ensured that programmes are in place to maintain effective relations with such groups and the local communities served by the company?

Board relations

Do the CEO and the board have an effective working relationship? Do they have open communications?

Is the board kept fully informed on all important issues facing the company (internal and external)?

Has the CEO facilitated the information flow to the board and committees’ decision making? Allowed direct access to senior management? To external advisers?

Does the CEO recommend appropriate policies for the board’s consideration? Does the CEO, together with the board, operate with a role description for the board and for the CEO, including the definition of the limits to management’s responsibilities?

A common fallacy is that the CEO’s performance and the company’s performance are one and the same. In reality, this often is not the case. An effective evaluation uses objectives that focus on behaviours and actions that the CEO can control directly. It also should adjust for changes in the industry and economy so that the CEO is neither punished for an unforeseen market downturn nor rewarded undeservingly by an exuberant market.