Get serious to make CEO evaluations work: the review process should be rigorous, objective, and fair, and the end result should be a stronger relationship between the CEO and the board.

• Author: Boren, Susan S.
• Position: SPENCER STUART GOVERNANCE LETTER

AS THE NEED to avoid even a hint of boardroom impropriety grows, it is not surprising that boards increasingly are concerned about not only regularly assessing the performance of the CEO, but also utilizing a process that demonstrates the board's independence. Today, there is a growing expectation that CEO evaluations, like board evaluations, should be done using a more formalized approach.

CEO evaluations must be handled carefully and with regard for the changing governance environment and the sensitivity of the board's relationship with the CEO.

We have worked with a number of boards that have initiated a CEO evaluation process and have seen firsthand what works and what the potential pitfalls are. To help your board improve its CEO evaluation process, we have outlined the benefits of conducting evaluations. We also discuss how to best engage the CEO in the process and, most important, how to structure the evaluation to produce the most effective outcome for the CEO, the board, and the entire company.

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Benefits of the process

By implementing a thorough CEO evaluation process, the board can achieve numerous objectives, such as:

* Engaging the board in a discussion of the CEO's goals and objectives.

* Enhancing dialogue and candor between the CEO and the board.

* Providing meaningful performance feedback to the CEO.

* Reinforcing a positive "tone at the top."

* Providing important information to the board's compensation committee.

* Executing a key fiduciary responsibility on behalf of shareholders.

* Setting an example of accountability and dialogue for the entire management team.

The goal of a CEO evaluation process should be to enhance the relationship between the CEO and the board, in addition to improving the overall performance of the company, as a result of candid conversations around goal setting and performance measurement. Many of our CEO clients are pleased with recent interest on the part of their boards in providing a meaningful evaluation. They view this as a way to involve the board in the company's annual goal-setting process and to ensure that they are in touch with the board's opinions. For most CEOs, this is a much more desirable relationship than being blindsided with surprise feedback from the board or feedback that is unrelated to agreed upon goals and objectives.

According to the 2003 Spencer Stuart Board Index, approximately 72 percent of S & P 500 boards that responded to the survey reported having some type of...