How to Evaluate the CEO– M.S.Srinivasan, O P Dani

(Published in “Chartered Secretary”)

Synopsis

(The CEO of a company has to be evaluated as rigorously and comprehensively as its other executives.   And this system of evaluation must include not only the CEO’s performance but also his or her character.  In this task, independent directors can play an important and fruitful role.)

An Honest CEO

 One of the important and problematic domains of corporate governance is evaluating the CEO.  In an interesting article in Harvard Business Review, Stephen Kaufman, CEO of Arrow Electronics, presents an honest, first person account on the process of evaluating the CEO. (1)  Kaufman discovers that the company he is heading doesn’t have a proper system for evaluating him as a CEO.  And he creates a system of assessment using independent directors of the board as the main source of evaluation and feedback.   Kaufman’s approach has a living relevance to corporate governance in the contemporary corporate scenario where many past and present CEO’s, in India and abroad, are coming under sharp and critical scrutiny and the role of independent directors are a subject of extensive debate.  This essay examines the problem of evaluating the CEO based on Kaufman’s honest and thought-provoking article but reviewed in the light of integral management.  The perspectives and methodologies presented in the article can be applied not only for evaluating the CEO, but also¾with some modifications¾for assessing any top corporate leader.

Assessing the Top Boss

In most companies there is no real and effective system for evaluating the CEO except some financial indicators.  This is in stark contrast to the comprehensive system of assessment for evaluating other senior executives.  As Kaufman states, comparing the formal and perfunctory reviews he has received from the board and the comprehensive manner by which he himself evaluates his managers under him:

“Those reviews were very different from how I evaluated my team. I collected input from many sources and assessed performance on multiple dimensions. I worked with my direct reports to identify flaws in their management styles, and I tried to help them adjust before problems arose or their careers got stalled. I had received similar guidance on my way up to the C-suite, but all that disappeared suddenly when I became CEO. My total worth was based on just three or four financial measures, and the independent directors’ assessment of me was driven almost entirely by their need to justify their compensation decisions.”

And as a result of this honest assessment, Kaufman and his top management team arrived at a process of evaluation which makes independent directors the main source of assessment.  As Kaufman explains the essence of the process:

“We at Arrow Electronics, where I was CEO for 14 years, came up with a process to improve how I was evaluated. The independent directors based their assessments of me on direct observation and input given to them by executives at multiple levels of management. As a result, they could detect problems that I might not have noticed. My performance benefited materially, and I learned a lot about leadership.”

Let us now examine briefly the main features of the system of evaluation introduced by Kaufman in Arrow Electronics.

The Process of Evaluation

The process of assessment implemented by Kaufman has the following stages:

  1. Every year between mid December and mid February, each independent director met with three executives separately to discuss topics selected by the Board.  There are some six independent directors, so some 18 executives will be involved in the discussion.
  2. The night before the board meeting in late February, when all the directors have finished their discussion with the executives, directors would have a long private dinner to share their reviews, insights and assessments.  When two or more directors reported a similar issue, they are flagged for further discussion next morning.
  3. In this meeting, the committee members try to arrive at some final assessment on the CEO performance on five dimensions.  As a reference they also have a three-to-five page of self-assessment chart given by the CEO.
  4. The outcome of that meeting was reported at the year-end closed sessions of independent directors. At that stage group finalizes the review, and finally the committee meets with the CEO to give their feedback on his/her performance.

Kaufman gives an example to show how this process helped him.  He initiated a bid to acquire a competitor.  Since he thought he knew the target’s management well, he ignored the advice of the investment bankers.  But eventually Kaufman’s gamble failed and he lost the deal.  Kaufman explains how the director’s feedback helped him to discover the blind spots in him which caused the failure of the deal:

“But price wasn’t the reason for the deal’s failure, as the directors discovered from discussions with our executives. They learned that I had mistrusted and routinely ignored the advice of the investment bankers we’d engaged. In fact, as the comp chair pointed out at my review, we might have closed the acquisition quickly and at the price we wanted had I gone along with the bankers recommendations regarding bidding strategy and mechanics. It was a valuable lesson about respecting the skills of our advisers.”

However, effectiveness of the above process depends on two conditions.  First, as Kaufman explains: “On the ability of its independent directors to conduct nuanced interviews with executives that probed critical business issues.”  Second, on the character of the CEO, who must be like Kaufman, honest, matured and objective enough to receive unpleasant and critical feedbacks without defensive ego-reaction and willing to correct his weak spots.

The Dimensions of CEO Performance

This brings us to the question what are the parameters for evaluating a CEO’s performance?  Kaufman gives the following five dimensions of performance:

Leadership. How well does the CEO motivate and energize the organization, and is the company’s culture reinforcing its mission and values?

Strategy. Is it working, is the company aligned behind it, and is it being effectively implemented?

People management. Is the CEO putting the right people in the right jobs, and is there a stream of appropriate people for succession and to support growth goals?

Operating metrics. Are sales, profits, productivity, asset utilization, quality, and customer satisfaction heading in the right direction?

Relationships with external constituencies. How well does the CEO engage with the company’s customers, suppliers, and other stakeholders?

If a company wants a more detailed assessment, some of the crucial dimensions like leadership or people-management can be further sub-divided.  For example, The Global Executive Leadership Inventory (GELI) of Instead has evolved a system of matrix for assessing the competency of global leadership on the following dimensions: (2)

Envisioning Articulating a compel­ling vision, mission, and strategy that incorporate a multi­cultural and diverse perspective and connect employees, shareholders, suppli­ers, and customers on a global scale

Empowering Empowering follow­ers at all levels of the organization by delegating and shar­ing information.

Energizing. Energizing and moti­vating employees to achieve the organiza­tion’s goals.

Designing and aligning Creating world-class organizational design and control systems and using them to align the behavior of employees with the organization’s values and goals.

Rewarding and feedback Setting up the ap­propriate reward structures and giving constructive feedback.

Team building Creating team play­ers and focusing on team effectiveness by instilling a coop­erative atmosphere, promoting collabora­tion, and encouraging constructive conflict.

Outside orientation Making employees aware of outside con­stituencies, such as customers, suppliers, shareholders, and other interest groups, including local com­munities affected by the organization.

Global mind-set Inculcating a global mentality, instilling values that act as a glue between the regional or national cultures represented in the organization.

Tenacity Encouraging tenac­ity and courage in employees by setting a personal example in taking reasonable risks.

Emotional intelligence Fostering trust in the organization by creating – primarily by setting an exam­ple – an emotionally intelligent workforce whose members are self aware and treat others with respect and understanding.

The Integral View: The Dimension of Character

The main emphasis of most of the corporate evaluation models including the more comprehensive ones, are based mainly on performance.  However, in an integral perspective, performance alone is not sufficient for evaluating the CEO of a large, global company.  In the contemporary corporate environment where ethics is becoming an important factor and some of the high-performing executives are coming under critical scrutiny for ethical violations, we must add one more important dimension: Character.

The Meaning of Character

This brings us to the question what is precisely this allusive quality called “Character” or to be more precise good, noble or wholesome character.  In popular conception, character is associated with morality or sexual morality.  However for corporate leadership we need a broader framework which includes ethics but also other qualities related to the total development of the personality.  In this integral perspective, character is the inner foundation of long-term sustainable performance.  We may look at character in terms of the following dimensions:

  1. Life Governed by Higher Values: Constant aspiration for and a life of work and action governed by higher values like truth, beauty, goodness, harmony and unity.
  2. Integrity of the Personality: Honesty and integrity in thought and speech and a consistent harmony in thought, feeling and action organised around higher values.
  3. Light and Calm in the Mind: Clarity in thinking and the ability to remain calm and undisturbed in all circumstances, especially in difficult and crisis situation.
  4. Caring Heart: Kindness, generosity and compassion in the heart oriented towards the wellbeing of people and the society.
  5. Courage, energy and force in the vitality: Courage to admit mistakes, explore the unknown and confront threatening situation; ability to sustain high-level of energy for a prolonged period; forceful in execution of the idea.
  6. Firmness and Strength in Will: Unyielding persistence in will in following a course of action or decision to its material conclusion; firmness in upholding values and principles.
  7. Self-awareness and Self management: knowing oneself and mastering oneself.
  8. Mastery over ego: ability to rise beyond the self-interest, ambition and greed of the ego and serve a higher cause or wellbeing of the larger whole.

How to Assess Character?

The most visible indicator of character is outer behaviour.  But assessment of inner character should not be based entirely on outer behaviour.  A clever and cunning person can hide all her dubious or dark motives behind a pleasant or noble outer appearance and behaviour.  We must look for more subjective indicators.

Another important factor we have to keep in mind in evaluating character is that we, human beings, are an imperfect organism.  Very few people are perfect in all the six dimensions of character we have listed earlier.  When we examine the lives of great leaders of the world who have contributed significantly to human progress, we will find most of them had some defects or flaws in their character or personality.  As Sri Aurobindo points out:

“Great are not usually models of character—men with great capacities or a powerful mind or a powerful vital have very often glaring defects of character than ordinary men.  Great men have more energy and the energy comes out in what men call as vices and what men call as virtues—vices are simply an overflow of energy in unregulated channels.” (3)

So a too heavy emphasis on external morality in assessing character may exclude people with great capacity for thought, action and execution, which are essential for effective leadership in the corporate world.   We can’t expect a modern corporate leader to be a perfect or a sattwic saint.  An effective corporate leader has to be essentially or centrally a rajasic man or woman of action governed by sattwic values.  And a strong rajasic personality may have some defects in his or her external character.  We should not give too much importance to such minor flaws of character in surface nature.

Here is an illustrative Zen story on the subject.  Someone comes to a Zen master and starts criticizing another Zen master, pointing out defects in his character.  The master asks one of his disciples to bring a large white sheet.  With a pen he puts a black spot on the paper and asks the person, “What is this?” He replies, “A black spot.”  The master replies with a smile:  “You are not able to see the large white expanse in the sheet but only the black spot.  Your criticism of the other master is of the same kind.  You are not able to feel the large greatness and nobility of his being but looking at some small and trivial defects in his surface being.”

Thus, in assessing character our aim must be to discover the extent of the white expanse of positive qualities behind whatever small black spots in the external personality.  But how to do it? What is the method or process? The most effective way to assess character is through intuition.  Someone who has good character can intuitively feel the quality of character in the other person.   And the highest form of intuition is knowledge by identity which means the ability to know the object of knowledge by becoming one with it in consciousness.  In understanding a person, knowledge-by-identity means the ability to identify with the inner being of the person and know his thoughts and feelings and motives. This capacity for intuitive knowledge can be developed by appropriate discipline and this discipline can be incorporated in management education and leadership development programmes.

However the method suggested by Kaufman for assessing performance can also be used for assessing character.  For, someone who interacts constantly with a person everyday may have some insight into the character of the person.  Probing interviews with people who interact everyday with the person, when they are conducted with sufficient tact and skill and with a clear objective of assessing character can reveal things behind outer appearances.

The other indicator of character is the total impact of the leader over a period of time on the social, mental and moral character of the community he is leading.  A leader with a strong and great character can elevate the character of a community as a whole.  For example during the Indian freedom movement, leaders with great character like Sri Aurobindo, Gandhi, Tilak and Bankim raised the moral consciousness of the entire nation.  Similarly in the corporate world, in the Tata Group in India, the strong moral foundation laid by the founders of the group, and later J.R.D. Tata, made the group well-known for its ethics and values.

However this domain of evaluating character is a difficult task which requires much research and thinking from the management scholars and professionals.  But first, the corporate mind must feel the importance of character for effective leadership and the need for assessing it.  When this need is there, then the mind in business, which is very active and innovative, will evolve a system through research, thinking and experimentation.

References:

  1. Stephen P. Kaufman, Evaluating the CEO, Harvard Business Review, October, 2008, p. 31-34.
  2. Herminia Ibarra and Otilia Obuduru, Woman Leader and the Vision Thing, Harvard Business Review, January 2009, 55-58.
  3. Sri Aurobindo, Collected Works, Sri Aurobindo Ashram, Puducherry, Vol. 22, 497-98.

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