Managing the board CEO dynamic James Beck Advisors Queensland, New South Wales, Victoria, Western Australia and New Zealand Effective Governance Level 8, Waterfront Place 1 Eagle Street BRISBANE QLD 4000 T: 1300 295 515 www.effectivegovernance.com.au
Boards will be at different levels of maturity with respect to their CEOs example Question Formative Developing Acceptable Advanced Leading Practice #. #. #. #. The Board's assessment process of the CEO is: The frequency with which CEO's performance is evaluated: Our documentation (e.g. policy, procedures, CEO's position description and performance agreement) for evaluating the CEO's performance is: The extent to which the CEO's behaviour is aligned with the Board's expectations is: Not conducted informally or formally. Never. None of the key documents exist; position description, KPIs, performance review criteria, strategic plan. Not at all. The Chair has an informal discussion with the CEO. Informally and/or at intervals well in excess of yearly. One or more key documents may not exist, or has not been reviewed in the last 3 years. The Chair has informal discussions with the CEO about unsatisfactory behaviour on an as needs basis. The Chair or a committee has a scheduled discussion with the CEO reviewing achievement of KPIs. Formally at least once a year and informal performance exchanges between the Chair and the CEO at least twice a year. All key documents exist, but one or more of them has not been reviewed in the last 12 months. The Board has informal discussions with the CEO on a regular basis as to what behaviour is expected. The Chair or a committee has a scheduled discussion with the CEO reviewing their achievement of KPIs and utilising feedback from the Board, CEO and their direct reports to assess their behavioural expectations. The full Board discusses the CEO's performance and the CEO's self-assessment of their performance. The Chair provides feedback as required. Formally at least once a year and, where required, after each Board meeting. All key documents exist and are reviewed annually by a committee of the Board. A structured process, including feedback from the whole Board and EMT, exists to align Board and CEO expectations on an annual basis. An expert third party conducts a scheduled process with the CEO reviewing their achievement of KPIs and utilising feedback from the Board, CEO and their direct reports to assess their behavioural expectations. The full Board discusses the CEO's performance and the CEO's selfassessment of their performance The whole of Board provides feedback as required. Bi-annual formal reviews and continuous performance feedback given as issues arise. Documented and reviewed annually by a committee of the Board and reviewed and approved by the Board annually or as part of the Board's rolling program of policy reviews. A structured process, including feedback from the whole Board and EMT, exists to align Board and CEO expectations on an annual basis. The CEO has signed and agrees to be bound by the corporate code of conduct and Board expectations. Effective Governance 2017
The board s role with the CEO
CEO roles of the board Succession planning Dismissing Appointing BOARD Assessing Remunerating Mentoring Source: Kiel, et al., 2012, Directors at Work 4
CEO succession planning
Board involvement Boards will differ in the degree of their involvement in CEO succession planning Minimal Collaborative Complete Control CEO controls the process with little or no input from the board Board drives the process in close collaboration with the current CEO Board controls the process with little or no input from the current CEO 6
Succession plans Two types of plans 1. Short-term succession plan Planned absences, e.g. medical leave Unexpected incapacitation or loss of the CEO, e.g. death, the board loses confidence in the CEO 2. Long-term succession plan for when vacancies can be unexpected or be known well in advance 7
Strategy drives succession Before considering any particular candidate to succeed the current CEO, the board must understand the strategic context in which the next CEO will have to operate, i.e. Key business drivers Industry trends Competitive landscape Markets Goals (both financial and non-financial) Only then it is possible to define the competencies the next CEO will need 8
Oversight of the senior management team The board-ceo relationship is central to corporate governance because it provides the link between the direction of the organisation provided by the board and its management CEO succession planning is a key element of this relationship and a part of this is ensuring appropriate internal candidates are available as an option for succession The board has a role to review and approve CEO direct reports (e.g. CFO, HR Manager, Operations Manager, etc.) The board may also consider it appropriate to have at least one director involved in senior management recruitment and selection processes 9
CEO appointment
Appointing the CEO Selecting a new CEO is the time when the board has the greatest opportunity to influence the future direction and performance of the company But It is not finding CEOs that is hard; it is finding the right CEO (Kelly, 2008) 11
CEO appointment process Ongoing CEO Succession Planning Trigger event Decide process Confirm implications of strategy for new CEO appointment Review and revise CEO position description Initial search Short listing Final board decision Negotiations (contract, etc) Induction Organisation Strategy Source: Kiel, et al., 2012, Directors at Work 12
CEO remuneration
Components of CEO remuneration Total reward Fixed remuneration Variable remuneration Salary Benefits Short term Long term 14
CEO payments Not-for-profits Average fixed pay = $261,250 1 Average ST incentives = $70,417 Average total pay (fixed + ST & LT incentives) = $288,906 Public listed companies Average fixed pay = $759,642 Average ST incentives = $465,322 Average total pay (fixed + ST & LT incentives) = $1,312,145 ASX100 2 Average total pay = $5.01m Highest total pay = $30,796,223 (Ramsay Health) Lowest total pay = $657,073 (Flight Centre) 1 ProNed, 2016, 2015/2016 ProNed Report: Non-Executive Directors Fees and CEO Remuneration 2 Australian Council of Superannuation Investors, 2015, CEO Pay in ASX200 Companies 15
CEO mentoring
Mentoring Mentoring is an enabling or developmental relationship in which one person helps another in making significant transitions in knowledge, work or thinking Boards and directors are an important source of advice for the CEO Ideally, directors will use their knowledge and skills to mentor the CEO especially newly appointed CEOs so they become a better and stronger organisational resource Mentoring provides informal feedback on meeting expectations 17
Benefits of mentoring For Individuals Establishing networks Decreasing stress Developing skills and knowledge Developing insight into the organisation Providing guidance and support Providing feedback on performance PERSONAL AND PROFESSIONAL SATISFACTION For Mentors and Organisations Easing transitions of new members Increasing confidence Enhancing collaborative efforts Building alliances and partnerships Increasing commitment to the organisation Increasing personal satisfaction Developing organisation citizenship PROVIDE OPPORTUNITY FOR NEW CEOS TO QUICKLY BECOME A VALUE-ADDING Adapted from Kram & Hall, 1996, Levinson et al., 1978, Luna & Cullen, 1995, McManus & Russell, 1997, Rankin, 1991 18
CEO assessment
Good practice principles A CEO assessment must: q Align CEO performance with the objectives of the organisation; q Be based on clear expectations developed and agreed in advance with the CEO; q Have a clear, transparent and agreed link between performance outcomes and remuneration; q Encourage the CEO to set developmental goals and plans and provide specific direction as necessary from the outcomes of the assessment process; q Maintain and enhance the relationship between Board and CEO; q Be tailored to the specific needs of the organisation; and q Comply with relevant standards for accountability and communication of the results for the organisation. 20
Mistakes boards make in CEO assessments Delaying the CEO assessment Emphasising only the negative Emphasising only the positive Storing up concerns for the review Reviewing personality, not performance Failing to debrief the CEO Forgetting the CEO s context Emphasising the wrong outcomes Choosing the wrong assessment approach Ignoring situational changes during the year Delaying feedback Neglecting to evaluate themselves
CEO assessment how much board involvement? Greater committee involvement BOARD INVOLVEMENT CONTINUUM Greater board involvement Board delegates entirely to committee, which makes the decisions Board provides final 'sign off' expectation is for 'little board discussion and no change' Board considers a draft but not yet finalised assessment expectation is for a thorough board discussion which may result in revised final assessment(s) Board undertakes the assessment committee facilitates the process and provides 'apparatus', conducts surveys, etc. Board undertakes the assessment no separate work in committee considered necessary 22
Generic CEO assessment cycle Establish Guide Assess The board agrees goals and key expectations for the CEO The chair or committee negotiates performance goals with the CEO Ongoing advice, particularly from the chair The chair or committee undertakes a detailed review using: Objective measures Subjective measures The board formally discusses the chair or committee s findings: Objective measures Subjective measures Set Expectations Expectations for CEO performance are agreed by CEO and board/committee Endorsed by the board PERFORMANCE Formal Appraisal The chair or a committee meets with the CEO to review performance Performance assessment process formally reviewed at board meeting Source: Kiel et al., 2012, Directors at work 23
Board decisions What does the board wish to achieve (e.g. CEO development; performance rating) 1. What are the objectives of the process? 2. What are the performance standards? What will be the balance between strategic and objective measures? What are the KRAs/When will the KRAs, KPIs and targets be set? What will be the rating scale? How will outcome measures and strategic measures be weighted? 3. What method will be used? 4. Who will conduct the assessment? Who will be responsible for the various stages of the process? How will the CEO s bonus be determined? 5. What are the outcomes of the assessment? Source: Kiel, et al., 2012, Directors at Work
Areas to consider when developing performance standards Leadership Management style Culture Strategy Mission fulfilment Strategic planning Management Management of operations Controls and risk management Human resource management Succession planning Environment, health and safety Innovation Financial management Stakeholder engagement Community Working with the board Personal qualities 25
What method will be used? Quantitative or qualitative measures? Quantitative indicators are numerical, e.g. financial and accounting data Qualitative indicators are typically soft issues that are not readily quantified, e.g. staff satisfaction, customer satisfaction 26
What method will be used? (cont d) Example: 360 feedback for the CEO Key members Chair Other stakeholders Other board members CEO Major clients Customers Direct reports 27
CEO expectations questions example Working with the Board The CEO effectively represents the needs and concerns of the Board back to the management team: The CEO understands the organisation s requirements for governance practices: (Board Only) Strongly Disagree Disagree Neither Agree Nor Disagree Agree Strongly Agree Don t Know 1 2 3 4 5 9 1 2 3 4 5 9 The CEO has a strong working relationship with the Board Chair: (Board Only) 1 2 3 4 5 9 The CEO has a strong working relationship with the Board of Directors: (Board Only) The CEO ensures the Board receives information destined for outside stakeholders before it is communicated to them: (Board Only) 1 2 3 4 5 9 1 2 3 4 5 9 Personal Qualities Strongly Disagree Disagree Neither Agree Nor Disagree Agree Strongly Agree Don t Know The CEO has the strength to make the tough decisions: 1 2 3 4 5 9 The CEO has personal presence and creditability: 1 2 3 4 5 9 The CEO is an effective oral and written communicator: 1 2 3 4 5 9 The CEO facilitates cohesiveness and teambuilding among those with whom he or she works: (Management Only) The CEO demonstrates and ability to work with diverse groups and individuals: (Management Only) 1 2 3 4 5 9 1 2 3 4 5 9 28
CEO expectations feedback Gap rating
Outcomes of a formal CEO assessment Align behavioural expectations of the CEO between the CEO and the board Determine overall performance for the previous 12 months Assist in determining remuneration levels for the next 12 months Assist in determining the amount of performance bonus Enhance the CEO s performance through personal development Assist in succession planning 30
CEO dismissal
Dismissing the CEO Two major reasons for CEO termination Sudden crisis The CEO s actions are illegal, in breach of the code of conduct or are otherwise so damaging to the organisation and its reputation that they must be removed Ongoing pattern of non-performance, e.g. Failure to live up to the agreed-upon standards of performance Inability to fit into the culture of the organisation or lead effectively inability to implement strategy or adapt to a changing environment 32
Key considerations When considering the replacement of the CEO, the board must take into account: Legal obligations The board should understand the organisation s legal obligations as the CEO s employer, e.g. contract terms CEO succession The board should be prepared to appoint an interim CEO for the period of transition Impact on its stakeholders (internal and external) The board should consider the impact of replacing the CEO on internal and external stakeholders a communication plan should be put in place to address any concerns The board should also consider its part in the CEO s failure 33
Key relationships
Key relationships CEO-board relationship Chair-CEO relationship Chair-other director relationship CEO-other non-executive director relationship CEO-other executive relationship Chair-CEO-company secretary relationship CEO-company secretary relationship CEO-management relationships 35
Chair and CEO Link between the board and management Facilitates flow of relevant information Fostering positive relationship requires a clear understanding of Respective roles Division of responsibilities Relationship should be characterised by: No surprises each should know what position the other will take on any major matter Public support and private candour on the part of the chair Relationship should be close, but not too close Chair plays a major role in the CEO s annual performance review Chair may be required to reprimand the CEO Chair may be required to dismiss the CEO if he or she loses the confidence of the board 36
Stages of the board-management relationship Management Board Management Board Management Board Dependent Relationship Independent Relationship Interdependent Relationship Dependent and subordinate relationships with management, with a focus on helping management accomplish their objectives. Compliance Independent relationships with management, with a greater focus on arm s-length oversight and a compliance orientation. Effectiveness Interdependent relationships with management, with a focus on performance, cooperation, alignment and strategic oversight. Adapted from Sabia & Goodfellow, 2005 37
Board-management relationship the key To be effective, boards and management, in particular the CEO, have to work as a team An effective board-management relationship requires an understanding of: Organisation s mission and vision Strategic and business plans Capabilities Implementation plans Probability of achieving outcomes Each other s expectations Boundaries 38
7 Enablers of better board CEO relations 1. Supporting a culture of trust, respect and collaboration 2. Creating shared purpose and values between the board and CEO / management 3. Communicating effectively 4. Providing support and professional development to develop governance skills 5. Enhancing board structures and processes to support board decision making 6. Conducting board evaluations that seek input from management and follow up on recommendations for improvement 7. Set clear and measurable objectives as well as performance and behavioural expectations for the CEO 39
Boards will be at different levels of maturity with respect to their CEOs example Question Formative Developing Acceptable Advanced Leading Practice #. #. #. #. The Board's assessment process of the CEO is: The frequency with which CEO's performance is evaluated: Our documentation (e.g. policy, procedures, CEO's position description and performance agreement) for evaluating the CEO's performance is: The extent to which the CEO's behaviour is aligned with the Board's expectations is: Not conducted informally or formally. Never. None of the key documents exist; position description, KPIs, performance review criteria, strategic plan. Not at all. The Chair has an informal discussion with the CEO. Informally and/or at intervals well in excess of yearly. One or more key documents may not exist, or has not been reviewed in the last 3 years. The Chair has informal discussions with the CEO about unsatisfactory behaviour on an as needs basis. The Chair or a committee has a scheduled discussion with the CEO reviewing achievement of KPIs. Formally at least once a year and informal performance exchanges between the Chair and the CEO at least twice a year. All key documents exist, but one or more of them has not been reviewed in the last 12 months. The Board has informal discussions with the CEO on a regular basis as to what behaviour is expected. The Chair or a committee has a scheduled discussion with the CEO reviewing their achievement of KPIs and utilising feedback from the Board, CEO and their direct reports to assess their behavioural expectations. The full Board discusses the CEO's performance and the CEO's self-assessment of their performance. The Chair provides feedback as required. Formally at least once a year and, where required, after each Board meeting. All key documents exist and are reviewed annually by a committee of the Board. A structured process, including feedback from the whole Board and EMT, exists to align Board and CEO expectations on an annual basis. An expert third party conducts a scheduled process with the CEO reviewing their achievement of KPIs and utilising feedback from the Board, CEO and their direct reports to assess their behavioural expectations. The full Board discusses the CEO's performance and the CEO's selfassessment of their performance The whole of Board provides feedback as required. Bi-annual formal reviews and continuous performance feedback given as issues arise. Documented and reviewed annually by a committee of the Board and reviewed and approved by the Board annually or as part of the Board's rolling program of policy reviews. A structured process, including feedback from the whole Board and EMT, exists to align Board and CEO expectations on an annual basis. The CEO has signed and agrees to be bound by the corporate code of conduct and Board expectations. Effective Governance 2017
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