“A New study shows the CEOs are doing a lousy job when it comes to people management.” This was the opening sentence in a recent Forbes article entitled, “CEOs Are Terrible at Management.” How is this possible with mountains of information that stresses the importance of customer service, servant leadership, and promoting employee engagement as the keys to having a successful company?

It emanates from an old adage, “what gets measured gets managed.” As this report points out that, the CEOs directors place little import on what they consider non-financial metrics. According to the study conducted by The Miles Group, these areas “are less than 5%” of a CEO evaluation done by board directors. So, its simple, if directors don’t see it as a metric worth measuring, then why should the CEO? After all, if it only counts as 5% of their evaluation, and the directors are placing more emphasis on how well their CEOs do in the areas of all things financial shouldn’t they focus on what is going to give them the best possible evaluation by their directors? Too many CEOs would agree that their focus should be on what the directors deem important. But they would be wrong and here our three reasons why.

1. Most directors don’t know how to evaluate a CEO until the CEO tells them on what they should be evaluated.

  •  Most directors really have no clue on how to evaluate their CEO. They focus on the area that is important to them, the financials. After all, it’s easy. The stock price is either up or down if it’s down, push on the CEO to get the price back up, if it’s rising, push them harder to get it even higher. So the CEO needs to point out to them there is more to the job than just keeping the stock price high. CEOs care about their legacy and want to be known for much more. They understand that focus on having a stable stock price is a key component of their job, but, it’s just one of many.

2. Most CEOs don’t have and honest discussion with their directors about the evaluation process.

  • It’s simple, CEOs are people too, and they don’t necessarily desire to talk about areas they need to work on, so they’re not honest with their directors when it comes to discussing what and how they should be measured. So both take the default setting of financial results. An open and honest discussion would be inclusive around and including how the CEO can improve in areas not directly related to financial management. Seeking assistance from the board on developing a talent management program, how to better handle conflict, or dealing with nagging customer satisfaction problems lends itself to a more balance approach to the evaluation discussion. It also, opens the lines of communication between the directors and helps them provide better guidance and direction to the CEO.

3. Both CEOs and Directors suck at the evaluation process.

  • According to The Miles Group study, there is a failure of some directors to evaluate their CEOs and there are those CEOs who don’t believe the evaluation process is a meaningful exercise at all. In other words, both the directors and CEOs suck at the evaluation process. Since they both suck at it they do the wink and nod at evaluation time. If the numbers are good here’s you envelope with your new compensation package, see you on the golf course this afternoon.  If the numbers are bad, get them up and here’s your envelope with your new compensation package, see you in Bermuda in two weeks.  Both the directors and CEO can benefit from the example of Stephen P. Kaufman former CEO of Arrow Electronics when he was surprised at how his evaluation was handled by the chair of compensation. 

While The Miles Group report points out that CEOs are lousy at managing, it doesn’t have to be that way. When the Stephen P. Kaufman CEO of Arrow Electronics received his 10 minute evaluation with the chair of the compensation committee he changed the process. That quick pop in meeting caused him to realize that if he was making his management team provide input from multiple sources, he should also be held to a similar standard by his directors. He instituted a process by which his board to improve how he would be evaluated. Through it, he learned about leadership and benefited greatly from the process. Mr. Kaufman would be part of the 12% of CEOs in The Miles Group study that felt they were rated too high or too low. (See October 2008 issue HBR Evaluating the CEO)

As the Forbes article stated CEOs might be lousy at managing, their directors are bad at the most important aspect of their job, which is giving their CEO real feedback during their evaluation process. Yes financial metrics are important, but so are, leadership, strategy, people management, and relationships with external constituencies. These combined with operational metrics (which finance is but one of several) are what Mr. Kaufman had his board evaluate him on and it resulted in a much better evaluation discussion that allowed him to get a better insight to areas he need to improve, which in turn allowed him to be a successful CEO for 14 years at Arrow Electronics.

Board of directors have a responsibility to ensure that the CEO performing at a level that will benefits the company throughly, and that means evaluating them not just on the financials, but, as pointed out, leadership, strategy, people management and development, and customer and community service. Both the CEO and board need to be engaged, Mr. Kaufman has provided them a template, perhaps they should follow it.

© Timothy A. Wilson 2013. All Rights Reserved