Heard Off the Street: Bottom line remains uppermost for CEOs

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More companies are talking a good game when it comes to promoting workplace safety, transparency, leadership and other nonfinancial measures. But how much are those nonfinancial measures being used to judge the performance of CEOs?

Not so much, based on the results of a survey of directors and CEOs at more than 160 public and private companies conducted by Stanford University and The Miles Group, a corporate leadership consultant. The researchers also discovered an interesting level of ambivalence among directors toward their CEOs. A surprising number of directors and CEOs said their company does not even bother to evaluate the CEO.

Directors identified mentorship and engaging -- corporatespeak for communicating -- with directors as the biggest weaknesses of CEOs. But those skills and other nonfinancial measures were minor criteria when it came to evaluating performance. Instead, directors rated their CEOs primarily on meeting earnings targets or other financial measures.

Despite that, well more than half of the directors and CEOs who were questioned thought evaluations used a balanced approach that considered financial and nonfinancial criteria.

That indicates there's a disconnect between what companies say and what they do, said Stanford University accounting professor David F. Larcker.

Both directors and CEOs were given 10 possible ways to measure CEO performance and asked how important each one was on a scale of 1 to 100.

While they gave a score of 41.1 to accounting, operating or stock price performance, here's how they scored some nonfinancial measures: succession planning and developing internal talent (4.9); product or service quality (4.4); customer service or satisfaction (4.2); employee satisfaction/turnover (2.5); and workplace safety (1.5).

"There is some weight put on those [nonfinancial] things, but clearly not on the same level as financials," Mr. Larcker said. "There should be some balance there.

"It could be those nonfinancial measures tell you more about the long-term prospects of the company," he added.

Stephen Miles, CEO of The Miles Group, said that in addition to mentorship and developing talent, listening and conflict management were the skills that directors mentioned the least often. "Each of these should be at least in the top five of a CEO's strengths because they are critical components to excelling in the CEO role," he said.

The fact that directors indicated CEOs are weak when it comes to engaging with their boards indicates a serious problem, Mr. Miles said.

"How can a board understand what's going on in the company if the CEO is not engaging?" he said.

About a quarter of the directors said unexpected lawsuits or regulatory violations would have no impact on their CEO's evaluation. But all of them said ethical violations or a lack of transparency with the board would negatively impact the evaluation.

"That's a good thing," Mr. Larcker said.

The survey also found that although directors select the CEO, a surprising percentage are ambivalent about their hand-picked talent. Less than half believe their CEO ranks among the top 20 percent of their peers, and 17 percent ranked their CEO in the bottom 40 percent.

"For almost half of directors to say that their CEO is just 'in the top 20 percent' is not exactly a ringing endorsement," Mr. Miles said. "The board hires the CEO. They should believe that they have the individual in that job who is absolutely the best, or can quickly become the best,"

Moreover, nearly 10 percent of the directors and CEOs surveyed said their company had never evaluated the CEO.

"I was sort of astounded," Mr. Larcker said. "Ten percent is not a huge number, but the fact that it was bigger than zero was not a good outcome."

Only about two-thirds of the CEOs found the review was a meaningful exercise. And almost half of those who were evaluated did not disagree with any aspect of their review.

"It's hard to believe that boards are pushing CEOs on their evaluations if they pretty much agree with their evaluation," Mr. Larcker said.

He said the point of the survey was not to conduct a scientific study of evaluations, but to get people thinking about how the process can be improved by shedding light on how the judgments are made. "It's cloaked in a bit of mystery in terms of what goes on," Mr. Larcker said.

He acknowledges that it is hard to measure a CEO's performance when it comes to developing talent, innovation, strategic thinking and other nonfinancial measures. But if directors believe those skills are important, they should work harder to develop methods for quantifying them, Mr. Larcker said.

"If you think talent development is a big deal, the board ought to push for more data, more informed insights around that," he said. "It's the old story: If you don't measure it, you may not be managing it."

bizopinion

Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.


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