The past year has been a tough one for chief executives, with bosses and boards of some of the biggest businesses in the world under the spotlight for poor decision-making and misconduct.
This makes the work of the board in holding management to account for its performance more vital than ever. An effective system of performance management and reporting is central to this.
“When it comes to the board’s responsibility to hold chief executives to account, good directors are constantly asking: ‘What am I missing?’” AICD Head of Board Advisory Gabrielle Schroder FAICD, also chair of the NSW Local Advisory Board of the National Heart Foundation of Australia, says of the board’s responsibility to hold chief executives to account. But what happens if that question reveals unsavoury truths? Do boards have the tools to safeguard against a flailing leadership?
Directors have an obligation individually and together to make sure they are testing things from different angles and perspectives, and to satisfy themselves the board is getting the information it needs. That means the chair needs to work hard to draw in as many viewpoints as possible to a board discussion with management, Schroder says, while individual board members must take active measures to seek out additional information rather than being reliant only on what is presented to the board.
Continual assessment of prevailing conditions or any changing environment around the company and the market is also critical, she says. “Boards [should] test management on how it is thinking about these changes in the context of performance achievement.”
Ask the right questions
In order for boards to avoid basing their assessment and success metrics solely around the preset indicators, they need to be asking targeted questions of management, beyond the numbers and the strategy roadmap.
Schroder says that to do so, a board initially “needs to be clear on what it is measuring and the information it needs to measure effectively”.
That might include:
- How well the CEO determines the organisation’s strategic direction and then owns that vision
- How aware they are of broader market and customer considerations — and address those in decision-making
- Whether/how the CEO ensures tasks within the business are properly executed
- What their people management skills are like
- Whether they have developed shared goals, values and behaviours in the company
- What their relationships with peers and associations outside the company are like, and
- How well they execute multiple decisions in the day-to-day life of the business.
This should be sought either in written or verbal form. One way to assess the effectiveness of management against these factors might be to ask board members to complete individual reviews using a rating system. Putting a finite figure on feedback helps to sharpen the board’s attention on the things that matter. Comparing the responses of the board to a chief executive’s own self assessment can be a useful exercise in understanding any expectation gaps or warning signs in relation to non-financial risk.
To make sure the board is getting the information it needs and expectations are aligned, it helps to establish feedback loops not only between directors and the CEO, but also between the board and operational executives.
EY People Advisory Services partner Dr Juliet Andrews says those communication channels can be useful to understand some of the cultural behaviours perpetuated through the company. “There can often be an enormous disparity in culture and behaviour at the front line and the top of the organisation,” she says. “Leadership is hearing what they want to hear and getting reinforcing messages that it’s being implemented and playing out, so they feel comfortable. What they don’t see is what’s happening underneath with the teams at the front line.”
”By directly observing management, directors gain a greater understanding of the range of issues facing the company.” – David Larcker and Brian Tayan
Andrews believes boards need to scrutinise the data they’re getting around culture differently. “It helps them to be better educated on what good organisational culture looks like, so they then know what questions to ask of management. And they need to ask questions of people who are not management.”
Some boards are changing their process approach to this. In How Netflix Redesigned Board Meetings (Harvard Business Review, 8 May), David Larcker and Brian Tayan describe the twin challenge for many boards. “Directors have a less complete understanding of the company than executives because of their limited exposure to day-to-day activities. The format of the information they receive does little to overcome this information deficit.”
They wrote of Netflix’s “radically different” approach implementing two practices. Individual directors are encouraged to be observers at one of three meetings held each year between, variously, the top seven leaders, the top 90 executives, or the top 500 employees at a two-day quarterly review gathering.
“By directly observing management, directors gain a greater understanding of the range of issues facing the company, the analytical approach that underpins managerial decisions and the full scope of the trade-offs involved,” Larcker and Tayan wrote. “Ultimately, the aspiration is that this will translate to significantly more confidence in management and its choices.”
AICD’s Schroder says this kind of observation — be it physical or through talking with management and teams outside the confines of the boardroom — can provide a valuable touchpoint for emerging issues that might present a risk to the organisation that is not otherwise apparent. “How do you know if you’ve got a good finger on the pulse?” she asks. “One that goes to board evaluations and good conversations with management? The key thing for directors when they do this is ensuring that they are vigilant about their role and do not cross the line and involve themselves in management issues.”
Give real feedback
So why do boards stumble when it comes to reviewing their own CEO? For some, there could be subconscious pulleys in action because they were responsible for appointing the CEO. For others, it may be optimism that the promises a CEO makes about future performance will materialise.
Schroder says effective feedback goes to the heart of the relationship between a chair and a CEO. “And it goes both ways. If a CEO feels like they are not getting sufficient challenge from the board, it is on them to have the conversation with the chair to say, ‘There are things that I feel I’m missing and I’m not getting the kind of debate I need’.”
Why that isn’t happening could be down to the board not having the right composition, experience or insight to really test the CEO, she says. The chair then has a choice as to how those things are sourced — in the short term, whether the board seeks external consultants or advisors to help the CEO in the way they need; in the mid-term, look to fixing the composition of the board to ensure that challenge is there.
“I have seen that happen with some of the boards that we work with. The risk is large and it can be a very scary place if you feel like you are a CEO who is not being tested from all angles,” Schroder says. “That relationship is so key.”
In Radical Candor, a 2017 New York Times bestseller, former Apple and Google executive Kim Scott preaches the benefit of fronting up to colleagues to challenge them directly on issues or behaviour, but in a way that shows personal emotional investment and care. The same principle applies to boards that are looking to support wavering CEOs. Boards should work to understand what motivates their CEOs and use those drivers to help ensure they perform at their peak, Schroder says. Coaching and training are options, and should be approached the same as they would be for any other executive role.
CEO flaws — fatal or fixable?
Writing in a white paper on executive level performance, veteran US governance and leadership consultant and author Mark Nadler from Nadler Advisory Services talks about the anguish chief executives face in having to make a call on the performance of direct reports in their senior executive team.
Arguably, the anguish those decisions cause for the CEO are no different to the pain felt among members of a board that has growing concerns about its own chief executive.
“At the most senior level, each executive’s performance is magnified,” says Nadler. “One dysfunctional individual can stop the entire executive team in its tracks and wreak havoc throughout the organisation. Consequently, decisions about replacing executive team members are highly leveraged, with far-reaching consequences.”
Nadler says boards are wise not to expect that every senior or chief executive will perform every role flawlessly. With that in mind, he suggests boards should keep an eye out for such warning signs as CEO performance, internal consistency, evidence of shifting the blame, denial around company or personal performance, and signals from peers. He says that once a board has become sufficiently concerned about a company’s leadership, the only real question is — are the CEO’s problems “fatal, or coachable?”.
Schroder adds that coaching can work, “but ultimately it comes down to the way in which the board hold management to account for performance at every board meeting and the penalties put in place when performance measures are not met”.
As well as overseeing the CEO, boards must also assess their own performance. “Boards should be doing regular evaluations of themselves and their performance,” says Schroder. “That’s just good hygiene.”
The new AICD Board-as-a-whole Evaluation Questionnaire has been developed to identify and address governance issues. It includes 85 questions around board strength, areas of improvement, dealing with conflict, preparing for meetings, financial monitoring capabilities and whether the CEO evaluation process is adequate.
Schroder encourages board 360s as a way of identifying if a vacuum has developed between the board and management. “The board might think everything is working nicely — and then there is chaos in the business. Often, 360 reviews reveal that. If there is a disconnect or a large variance in perceptions as to what is working well, then that’s a great catalyst for a conversation between board and management on what is really going on.”
The AICD has a number of evaluation tools to identify and help boards address governance issues.