Of all board functions, arguably the most critical is appointing the right person as CEO and monitoring the performance of that person. The ‘right’ CEO is someone who can work with the board to develop and then implement strategic and business objectives and drive performance to achieve those objectives in a way that is sustainable and consistent with the desired corporate culture.
In contemporary governance structures, the relationship between boards and CEOs is seen as one of collaboration, where both parties work together to achieve company objectives while maintaining the important distinction between the board’s role (to govern) and the CEO’s role (to manage).
In this context, board expectations of a CEO might be broadly viewed in two dimensions.
Firstly, a board expects a CEO to apply their skills, experience and industry knowledge to deliver the company’s strategic and business objectives.
Secondly, a board expects the CEO to be committed to a constructive and open relationship with the board, built on trust and candour.
In this two-part article we explore each of these dimensions.
Deliver strategic and business objectives
It is important that, at the outset of the CEO’s appointment, the board discusses with the CEO and gains agreement on:
- the principles on which the board and CEO relationship is based
- mutual expectations, and
- clear performance expectations.
In essence, boards want CEOs to work with them to develop an appropriate strategic direction and plan for the company in response to the strategic and competitive environment.
The CEO also has the key responsibility to implement that strategy and hence drive company performance.
Performance indicators – both financial and non-financial – are critical for the board to monitor progress in achieving the strategic plan. Setting the ‘right’ performance indicators are also imperative to drive the right performance consistent with the company’s desired culture and not result in unintended consequences.
Boards should also have a policy and process for reviewing the performance of the CEO against these performance indicators, which involves at least an annual formal review as well as regular informal feedback. A well-structured and facilitated performance review process can bring about significant benefits in an enhanced CEO and board relationship as well as organisational performance.
Boards will expect that their CEO participates in that process in a constructive and engaged way.
The CEO’s performance framework should be reviewed and set each year in advance of the period it covers irrespective of whether the CEO’s remuneration involves a bonus or ‘at risk’ component.
We consider that the CEO’s performance framework should involve three discrete parts.
Part 1: KPIs aligned to the strategic plan
Key areas of the CEO’s performance which might be reviewed in this regard include whether the CEO has met the board’s expectations regarding:
- embedding vision and organisational culture
- delivering financial performance
- delivering operational performance
- effectively managing physical resources
- motivating and optimising people and culture
- implementing governance frameworks and controls
- managing risk within the board’s approved risk appetite, and
- managing stakeholder relationships and representing the company.
As far as possible, KPIs should be succinct, measurable and focus on the key areas critical to achieving the company’s strategy.
If there is a performance bonus or ‘at risk’ component to the remuneration structure, then the performance framework should clearly set out the ‘stretch’ hurdles to be achieved.
Part 2: Leadership attributes and behaviours
CEOs need to have the right personal attributes and behaviours such as drive, commitment, communication and interpersonal skills, decision-making, self-awareness, emotional intelligence, integrity and the ability to motivate others.
These should be set out in the CEO’s position description.
Assessing how the CEO is living these attributes and behaviours is an important part of the review process, and is also critical to ensuring that performance is being driven by the CEO in a way that is consistent with company culture
Part 3: The CEO’s relationship with the board
The final component to be assessed in a CEO performance review is how the CEO works with the board. Aspects of this relationship are discussed further in Part 2 of this article.
Directors Australia assists a wide range of boards in developing CEO performance frameworks and facilitating CEO performance evaluations. For further information, visit here or contact us.
Kerryn Newton
Chief Executive Officer
