Keeping the CEO 'on target': there are ways to conduct the CEO evaluation so that the CEO can be comfortable participating and the board can be candid.

• Author: Ehrlich, Clifford J.

CORPORATE GOVERNANCE has received a nasty, slow-healing black eye this past year. The exodus of chief executive officers from Enron, Tyco, WorldCom and other companies is symptomatic of big trouble at the top. Investors and employees, to name just two constituencies, must wonder if there is any way to revamp corporate governance protocols to protect their interests. I suggest that there is a way: regular, formal evaluations of chief executive officers by company boards of directors.

When you consider what the law requires in terms of oversight responsibility of a corporate board, it becomes very difficult to ignore the importance of providing regular feedback to the CEO. It can never be overlooked that the most effective way for the board to keep the corporation on target is to be sure that the CEO is on target. That means the board and CEO must reach agreement on business goals and measurements for them; evaluate the CEO's success in reaching them; and tell the CEO how well, or how poorly, he or she did.

Many publicly traded companies have instituted this process in some form. In most organizations, chief executives make regular forecasts of business growth and report on progress in achieving sales and earnings targets, and the board has an opportunity to give the CEO feedback on the company's performance. This often occurs when the board is establishing management's compensation plan and incentives.

Boards can reach out

If directors lack the acumen and experience to evaluate progress against goals, independent advisers can help them with the analysis. Another method boards should employ more frequently is developing working relationships among staff a tier below the CEO's direct reports. Relationships with individuals at this level have the dual benefit of giving directors broad access to information and acquainting them with up-and-comers.

CEOs may chafe at the idea of oversight. After all, they're a little like quarterbacks: confident, aggressive, able to lead a team, willing to listen to the coach, yet desirous of making independent decisions. But oversight is in the best interest of all concerned--investors, board members, employees, customers, and the CEO.

Some boards are less aggressive than others in setting up the evaluation process. Those who delay moving in this direction do so at their peril. Directors increasingly understand that their board service requires a new level of vigilance. Those who fail to recognize it risk...