How to evaluate the CEO.

• Position: Includes related articles - Advice to the Rookie Director

Here are important issues that should be considered in establishing a CEO evaluation process and some practical guidance on how to proceed.

A panel of 32 corporate governance experts convened by the National Association of Corporate Directors issued in 1994 a comprehensive set of recommendations for evaluating the performance of chief executive officers, boards of directors, and individual members of boards. The NACD Blue Ribbon Commission, as it was called, was chaired by Boris Yavitz, Dean Emeritus of Columbia Business School. The following article is excerpted from the part of the Commission's report that addresses the CEO evaluation process.

Any manager can benefit from a performance evaluation, particularly when the evalu-ators are successful, seasoned managers themselves. If done properly, on an ongoing basis, performance evaluation can help individuals grow and perform their jobs better and can provide a mechanism for meaningful and ongoing discussions of performance. The CEO is no exception to this rule. Yet, in many companies, the CEO's performance is not formally evaluated except in dire circumstances. In these cases, the evaluation is often too late to be of any constructive use.

Evaluation of senior management performance is a fundamental duty of directors. Most relevant state statutes provide that a corporation must be managed by or under the direction of a board of directors. Directors may, and in most cases should, delegate management to professional managers, but this is the beginning, not the end, of their responsibilities. Directors are responsible for management oversight, and hence for management evaluation.

So, why is it that many companies provide performance evaluations for almost all employees except those at the very top of the company? Some boards may believe that incentive compensation plans adequately address the need for evaluation of senior management. Others may assume that extensive, ongoing communication from the board to management regarding its performance makes formal reviews unnecessary. Still others may even see performance evaluation as inappropriate for any executive with broad duties and responsibilities.

To create a board culture that promotes meaningful CEO evaluation takes more than zeal on the part of a few directors; it requires full commitment. Ideally, that begins with the CEO, who should be the one to initiate the process.

Regardless of the extent of CEO enthusiasm for the matter, formal performance reviews are necessary - especially for the CEO, who has broad job duties, a large span of control, and a high degree of discretion in decisionmaking. We believe that CEO evaluations make sense not only for the inexperienced CEO or for the CEO whose company is experiencing difficulties but for all CEOs.

Starting a CEO evaluation process where one does not exist takes both time and effort. This report outlines some important issues that should be considered in establishing such a process and gives some practical guidance on how to proceed. Not every company requires a full-blown process right from the start; but as companies gain experience, evaluation standards and processes can be refined and improved. Every company is different, so company evaluation processes may take different forms.

Benefits...