Holy Roman Emperor Charles V, enthroned over his defeated enemies, Giulio Clovio, mid 16th century
Ideas for Leaders #439

What Boards Think of CEOs

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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?

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