Article adapted from Seraf: Portfolio Management for Early-Stage Investors
One of the best ways to facilitate the CEO’s future growth and success is by providing them with an annual review detailing how they are doing in the job. It is the responsibility of the board to conduct this review since the board is responsible for hiring and firing the CEO.
A well done review offers tremendous value to the CEO. It should highlight the CEO’s strengths and weaknesses as a leader and strategist. Ultimately, a successful CEO will embrace the feedback, both positive and negative, and apply what they learn to improve overall performance.
What are the business reasons for an Annual CEO Performance Review?
All directors on a company board hold a fiduciary duty to the company. At the core of this duty is the requirement that a director must exercise good business judgment in the guidance of the business. A well thought-out performance review supports this duty in 3 very important ways:
- Build alignment between board members and the CEO: Determine whether the board and the CEO agree on the near and long term strategy for the business. Building a successful company is hard enough without having the CEO and her board pulling in opposite directions on fundamental topics!
- Improve Board/CEO communications: Help expose situations where directors are frustrated or concerned by the quality and frequency of communications between the CEO and the directors. Better communications will result in better outcomes.
- Develop the CEO: By outlining weaknesses in a CEO’s performance, the CEO can focus on areas to improve in the coming year.
What are some of the key aspects of the CEO Performance Review?
A CEO for an early stage company wears many hats. But, ultimately, there are three areas where she should spend most of her time. Those areas are: Strategy, Team and Finances. To establish an effective annual performance review, clear business objectives must be agreed upon in advance with the CEO. Once these objectives are set, the CEO’s goals for the upcoming year should be outlined, written down, and agreed to.
What should these goals look like? They should:
- Support the strategic objectives of the company
- Measure the CEO’s ability to build her team, establish strategy and lead the organization
- Be tied to the financial performance of the company
In addition to informing the CEO on her performance relative to the board’s expectations and goals, the performance review is an important vehicle for establishing how large (or small) her annual bonus will be. If you put in place well-defined, measurable goals, it’s much easier to agree on the appropriate level of compensation at year end.
What does a CEO Performance Review process look like?
Keeping things simple is one of the best ways to ensure that the job gets done in a timely fashion. There are a number of steps in a performance review, and it will take time. There are ways to make the process more efficient, but someone (usually the board chair or lead director) will have to stay on top of it.
We recommend doing a 360 degree review of the CEO. In a 360 degree review, you will speak to the entire board in addition to speaking with the CEO’s direct reports.
So, what are the steps? We suggest the following:
- At year end, the CEO writes up a self evaluation of goals for the past year.
- Ask all directors and direct reports to review the CEO’s self evaluation.
- Arrange for a 30 minute phone call with each director and direct report. Get their opinion on whether they agree, disagree or otherwise modify what the CEO wrote in her self evaluation. This phone call should be conducted by the board chair or lead director.
- Write up a report that summarizes the key elements discussed during the phone conversations. It can be helpful to include any paraphrased notes from the calls. This gives the CEO a chance to hear “directly” from her evaluators.
- Sit down with the CEO and share the results of the report. In some cases, it’s best to have this conversation one-on-one. In other situations, you might want to have two directors meet with the CEO.
- An optional final step is to present the results of the review at a full board meeting.
There are some important extenuating circumstances that might make this process a bit more challenging than outlined above. If there are some serious relationship issues between the CEO and the board or any direct reports, or if there are major deficiencies in the performance of the CEO, the final steps in the process may need modification. Remember, one of the main goals with a performance review is to improve overall performance in the future. Use your best judgment in how you deliver the results of the performance review to the CEO to achieve the best results.
What are some additional issues to keep in mind during a CEO Performance Review?
In our sample questionnaire there are lots of questions. You shouldn’t expect to ask all of them. Tailor your interviews to what’s important for your company. Make sure the questions you ask are focused on the three main responsibilities of the CEO: Strategy, Team and Finances.
It’s very important to hear directly from the source. That’s why you need to interview the full board, and if you choose to, the entire management team. Delivering the results of the review to the CEO in person is an important step in the process. It can be a challenging conversation. So remember, it’s okay to be critical, but it’s not okay to be adversarial. Don’t just provide performance feedback once a year. It’s helpful if the lead director/chair has an ongoing discussion with the CEO. And finally, good process will lead to improved outcomes and help further develop the CEO.
There’s one last question to ask when thinking about CEO Performance Reviews. Is a performance review appropriate with very early stage companies? We believe the answer is yes, because we think all CEOs can benefit from good, constructive feedback. You might want to scale back some of the formality in the process outlined above. Or, you might want to give more regular, informal reviews throughout the year. But, just because the company is still very young, don’t skip this valuable board responsibility.