Hiring a CEO is often viewed as the most important responsibility of a Board of Directors. However, hiring a CEO is only the tip of the iceberg when it comes to a Board’s responsibility toward the CEO.
An effective, high functioning Board sets clear goals and expectations, provides regular feedback to the CEO, and evaluates the CEO’s performance. They also ensure CEO compensation is aligned with the organization’s performance, compensation philosophy and financial resources, as well as with the relevant external market.
Board Role: Setting Goals and Expectations
Setting clear goals and expectations reduces the likelihood of misunderstanding or misalignment between the CEO and Board.
- Goals and expectations for the CEO often include both business goals, such as % growth in revenue, and behaviors, such as talent management.
The business goals ensure the CEO is leading the organization in the right direction and the behaviors ensure that the CEO is acting in a way that is aligned with organizational culture and values.
- There are models that can be used to help create strong goals, such as the SMART model. Many Boards find it helpful to get training on how to create goals, or to utilize an external consultant to facilitate the development of goals for the CEO.
Board Role: Providing Feedback
Throughout the year, effective Boards review progress against the established goals with the CEO. This provides a great opportunity for the Board to provide feedback to the CEO on what’s going well, and where additional progress or attention is needed.
- If the CEO is generally meeting the Board’s expectations, a good rule of thumb is to provide four instances of positive feedback for every one instance of constructive feedback.
- A quick email or phone call from a Board member sharing positive feedback can also be very effective.
- During the executive session, Board leadership can provide feedback to the CEO on the Board meeting, indicating what went well and what changes they’d like to see made for future Board meetings.
Board Role: Evaluating CEO Performance
Typically, the Board completes a formal performance evaluation for the CEO at, or just after, the end of the fiscal year. The performance evaluation is an opportunity to:
- Document performance against the established goals and provide the CEO with clear feedback from the Board on their successes (and perhaps failures) during the year.
- Begin to identify priorities for the new year.
Board Role: CEO Compensation
CEO compensation is often a significant financial investment for the organization. Setting CEO compensation levels so that they are reasonable and acceptable to the organization and attractive to the CEO takes time, access to data, and at times, some creativity.
A clear compensation philosophy helps a Board determining an appropriate level and form of CEO compensation.- Board members also need a general understanding of the possible forms of compensation including base pay, short and long term incentives, retention pay and deferred compensation.
Summary
The Board’s role in managing the CEO is on-going, multi-faceted, and critical to the success of the organization.
Contact Foundations Consulting for more ideas and insight on the Board's role in managing the CEO.
