Constructive thinking on CEO evaluation.

• Author: Bonsignore, Francis N.

In narrow efforts to measure performance, boards run the risk of subverting their higher-order role to offer sound judgments and informed counsel to management.

Along the way to the governance renaissance, the principal responsibility of corporate directors has been obscured. In the often raucous debate about levels of CEO rewards, forms of governance, and how to improve board effectiveness, one axiom has been given insufficient attention: namely, the foremost obligation of the board is to select, evaluate and reach decisions concerning the performance of management.

Recently, considerably more prominence has been accorded derivative measures (e.g., CEO compensation) than management performance. Defining the performance dimensions and considering the right questions in this context are essential parts of the corporate director's role.

The risk of pitting the CEO against shareholder interest groups and perhaps even some directors is an ominous trend. Prospective outcomes could be dilution of management accountability, added confusion as to what is appropriate corporate governance, and fuzziness on how deeply directors can and should peer into management operations. As the responsibilities of management, CEOs and boards are increasingly scrutinized, individually and collectively, the shared focus should be on obtaining the best results from the enterprise for all stake-holders - investors, employees, and customers.

Achieving this requires that directors adopt a view of enterprise effectiveness that moves beyond performance evaluation in narrow, obligatory terms to considering how the CEO and senior executives contribute to the prosperity of the corporation and how management - and business results - can be enhanced. To achieve these beneficial ends, boards require a perspective that can be subscribed to broadly and purged of confrontational and overly mechanistic evaluation features. Developing approaches that support constructive communications and change is the challenge, not necessarily conforming to one set of governance principles or performance measures.

Adopting an overall framework

At the risk of over-simplifying a complex subject, productive management evaluation builds on sensible practices rather than prescriptions, precise routines, or highly defined templates or criteria. Evaluation of top management in a more disciplined - yet not constricting - manner is in its embryonic stage; associated processes will have to evolve. The most fertile ground for seeking improvements is where shareholder interests, governance roles, and management responsibilities intersect.

The relevant starting point for both the CEO and the board is the need to understand top management's responsibilities and the expectations of the board. The leadership's job in this framework is to articulate priorities and address issues in the business that bear most directly on achieving desired business results.

In the broadest sense, the board should consider the evaluation of management to embrace three sets of variables:

* External variables (e.g., market share, new business, stock price and related measures and "benchmarks").

* Internal "hard" variables (e.g., operating results, accomplishment of strategic...