CEO Selection and Evaluation Criteria

CEO Selection and Evaluation Criteria

Posted on Posted in Professional Perspectives

Arthur D. Collins, Jr. & Sophia Shaw
Managing Partners, Acorn Advisors LLC

One of the most important responsibilities of any board of directors is to select and evaluate the CEO—and in the unfortunate situation where a CEO is not preforming adequately, to replace him or her in a timely fashion. In reviewing the efforts of many successful corporations and other institutions inside and outside the United States, it is clear that a board of directors should consider a number of important criteria when conducting a selection and evaluation process for any CEO. These efforts should be deliberate, comprehensive, and interactive. A board’s decision on the most appropriate type of individual to lead an organization, whether the CEO is already in place or is being hired from inside or outside the organization, should reflect both the current and future needs of the business (e.g., over the next decade).

The CEO position is all about leadership, and the two most important leadership criteria for a successful CEO are judgment and integrity. These two characteristics should not be considered as all-inclusive determinants of success, but rather as fundamental prerequisites that overshadow other considerations. Judgment and integrity also serve as the foundation for a number of additional leadership skills that an effective CEO must possess and continually demonstrate.

The list of 25 traits that follows is based largely on personal experience and observing many successful CEOs over several decades. While the list is specifically relevant to the CEOs of large, multinational corporations, many of the criteria apply to smaller for-profit leaders, as well as the chief executives of many nonprofit institutions. In this regard, the words “corporation” and “corporate” can be modified to address the specific type of institution that a chief executive oversees. (The reader may wish to refer to For-Profit and Nonprofit Boards: Similarities, Differences, and Keys for Success on the Acorn Advisors website.)

In this context, an ideal CEO should be able to:

1. Articulate and act as a role model for the mission and core values and that underpin the corporation.

While many aspects of the business of most corporations are in a continual state of change and evolution, a corporation’s mission and core values need to be constant and act as a bedrock foundation. These core values act as a moral compass and they should serve as a guide and inspiration for how a corporation will operate and how decisions will be made. The CEO is expected to be the principal champion and protector of the mission and core values, and no one can effectively lead a corporation without this capability.

2. Foster a culture of ethical behavior.

Particularly in the post-Sarbanes/Oxley and post-2007/2008 financial crisis environment, the CEO must ensure that the corporate culture embraces the highest level of ethical behavior and adherence to all laws and regulations applicable to the corporation. The CEO should lead this effort and ensure that necessary policies, procedures, and training programs are in place to help ensure compliance. The CEO should make it clear that ethical behavior is expected as a condition of employment and that any indiscretions or policy violations will be dealt with quickly and appropriately. The CEO also should make the case why ethical behavior is always good for business and consistent with the corporation’s core values.

3. Formulate and effectively communicate the corporate vision, strategy, and goals.

With the concurrence of the board of directors, the CEO must ultimately articulate a clear vision that sets a course for the corporation. The corporate strategy and its rationale need to be explained in way so they are well understood both inside and outside the organization. The vision and strategy should always be consistent with corporate core values and define those businesses and markets in which the corporation should and should not participate. Corporate goals need to include performance expectations (e.g., market, financial, quality, customer satisfaction), and continuous improvement should be expected in all areas. While the CEO undoubtedly will be supported in this effort, he or she cannot delegate this key responsibility.

4. Ensure that capable employees are hired, developed, motivated, rewarded, and retained.

A corporation’s success is largely determined by the quality and dedication of its employees. The CEO needs to stress the importance of contributions from all employees and then make certain that actions are taken so that the necessary talent is available, effectively deployed, developed, and rewarded. This starts with the executive team, but certainly doesn’t end there. The CEO needs to be a good judge of character and be honest and candid in his or her assessment of individual performance and potential. Succession plans should be in place at all levels of the organization, and those plans should be reviewed and updated frequently. The CEO also must champion employee and supplier diversity and inclusion throughout the company. As work/home balance and social responsibility become a greater consideration for many employees when deciding for which organization they will work, it is important that the CEO demonstrate his or her understanding of and commitment to addressing these topics.

5. Allocate necessary resources and ensure plans are in place to achieve strategy and goals.

The CEO ultimately must ensure that resources (e.g., financial and people) are assigned to corporate functions and operating businesses in a manner that supports achievement of the near and longer term corporate goals. Since there will never be enough resources to satisfy all requests, it is important to decide what not to do as well as what to do. When important resource allocation decisions are made, the CEO should explain the rationale for those decisions. The CEO also should make sure that necessary planning efforts (both strategic and operating) take place throughout the corporation and that plans are appropriately reviewed and monitored at the management and board level.

6. Set realistic expectations that balance both stretch and achievability, and then deliver strong results that meet or exceed stated objectives.

This balancing act is critical to maintaining a high-performance culture that is capable of delivering aggressive and industry-leading performance (financial and otherwise). Performance expectations must consider both near and longer term results, always keeping in mind that a corporation is in business for the long haul. Whether is corporation is publicly traded or privately held, financial performance should provide shareholders with an attractive return on their investment. In a nonprofit organization, financial performance should provide donors with a sense of pride and confidence that their investments have been well deployed. “Shortcuts” to goal achievement must never be encouraged or tolerated. Ideally, a CEO candidate should have a demonstrated track record of success in this area before he or she assumes the role.

7. Encourage innovation.

Whether in product development, marketing, or any other key aspect of the business, the CEO should encourage a culture that rewards innovative approaches. Innovation will undoubtedly lead to some failures, so the CEO should ensure that people are not punished for pursuing new solutions or experimenting with novel ideas as long as there is proper approval, good intent, and a potential business or customer benefit. Whenever possible, the CEO should make a point of linking the benefits of innovation to customer satisfaction as well as to the wellbeing of the general public and the environment. (The reader may wish to refer to Keys to Research & Development Success on our website.)

8. Continually promote both safety and quality improvement.

Considering the importance and impact of products and services on customer satisfaction and the ultimate success of a corporation—and in many cases on the safety and welfare of employees and the general public—safety and quality need to be at the center of everything a corporation and its employees do. The CEO should demand safe working conditions for all employees, contractors, and volunteers residing inside and outside the United States. The CEO also should champion quality and safety improvement and ensure that scorecards and improvement programs exist throughout the corporation. To underscore the importance of these topics, many successful CEOs require that safety and quality be listed as the first agenda item at all operating reviews and board meetings.

9. Be honest in assessing performance and risk, but whenever possible view the glass as half full rather than half empty.

The CEO is expected to be a straight shooter who fairly and accurately assesses situations without being overly optimistic or pessimistic. This is a critical requirement if others are to trust the CEO’s judgment. Having said this, it is also helpful to have a CEO who by nature is upbeat and optimistic without being Pollyannaish.

10. Display courage and make tough decisions in an appropriate manner.

Whether strategic or tactical, many important decisions land on the CEO’s desk. Making the right call and making it in the right way are both critical. Hard decisions will not always make the CEO popular, but they will help ensure that the CEO garners the necessary respect he or she needs to lead. In this respect, the CEO should be able to absorb quickly and assimilate the data necessary to make a decision and then act decisively—never being forced to make a decision before it needs to be made, but never failing to make a decision when it should be made. Displaying courage also includes asking for help from board members or topic experts when necessary. A good CEO will realize that asking for help when necessary, and allowing others to see him or her doing so, is a symbol of strength, not weakness.

11. Foster teamwork.

In many ways, the CEO is the head coach of a very large team. Once the right talent is put in place, it is important for the CEO to ensure that employees work together cohesively. While individuals and individualism should be recognized and encouraged, the good of the team and the good of the corporation are paramount, and the CEO should underscore this fact through both words and deeds.

12. Effectively delegate with appropriate checks and balances.

The CEO can’t do everything alone, and he or she must be willing to delegate when and where appropriate (remembering that some tasks and decisions cannot be delegated). The CEO should also make it clear that when authority is delegated, so is responsibility for the outcome of decisions made. That said, the CEO also must see that appropriate safeguards are put in place to help ensure that delegated authority is not abused or misused.

13. Clearly and persuasively communicate, communicate, communicate!

The CEO is expected to be visible and able to communicate on a broad range of topics inside and outside the company. The CEO should be articulate—orally and in writing—and be both comfortable and effective in addressing large and small groups through prepared and extemporaneous remarks. The CEO must be quick on his or her feet and be able to handle friendly and hostile situations with ease. On the flip-side, the CEO should encourage his or her staff and others to provide candid feedback and constructive criticism (without this invitation, it is sometimes difficult for employees to challenge the CEO). The importance of effective communication will only increase as any corporation grows in size and expands geographically.

14. Have a broad understanding of the corporation’s products, technologies, customers, and operations.

Leading a corporation requires having “hands on” knowledge of the products and services provided, as well as a genuine interest in what employees do and how they interface with customers on a daily basis. Key people inside and outside the company want to know that the CEO is on top the corporation’s business and fully engaged without micromanaging. As an example, the CEO should make frequent and unscripted visits to facilities to interact with employees and customers—and regulators if the corporation’s products and services fall under government regulation. A detached or aloof CEO will be incapable of effectively leading a modern corporation.

15. Get out from behind the desk and “walk around” to see firsthand what is happening.

A corporation cannot be effectively led by just sitting in the corner office. A visible CEO frequently takes walks around headquarters or the corporate campus and enjoys getting out to meet people inside and outside the company. The CEO must also be willing to travel a significant percentage of his or her time. Remembering first names and sending follow-up notes after visits makes a CEO more genuine and pays dividends far beyond the time invested. This takes dedication in addition to a strong physical and mental constitution (and an understanding family if the CEO has one). To get out and about, the CEO also needs to have a very capable assistant who can ensure the CEO’s office runs smoothly whether or not the CEO is present.

16. Be global.

Even if a corporation does not sell into international markets, the CEO should stay current on global trends. If a corporation has products or services that are dependent on a global market, the CEO must recognize that future success cannot be driven from the United States alone. Correspondingly, the CEO should be familiar with international markets and be comfortable and adept in conducting business in different countries and cultures. If the corporation’s products are regulated or purchased by foreign governments, the CEO also should be experienced in dealing with in-country government officials. While some boards have not made international experience an absolute prerequisite for becoming CEO, having lived and/or worked outside the United States is a major advantage.

17. Walk the talk.

It is expected that the CEO will set expectations and then be the first person whose actions live up to those expectations. The leader of an organization should be quick to share praise when things go well. Conversely, the CEO also should step up and assume responsibility for failures, recognizing that he or she bears ultimate accountability for the corporation’s overall performance. In this regard, every CEO should recognize that he or she is always watched very carefully, with words and actions often taking on more meaning than ever intended. The CEO is a public figure, and how he or she chooses to handle and share certain information about his or her personal life—e.g., mental and physical health, family, politics, religious beliefs, privacy expectations—sets a tone for the corporation’s employees (and sometimes customers).

18. Negotiate well.

The CEO should be skilled in the art and science of negotiation. Whether on behalf of corporation or the industry, the CEO will find himself or herself personally negotiating on a broad range of issues. The CEO should also be experienced in planning for and directing others who conduct negotiations on the corporation’s behalf. Specific negotiating experience pertinent to the environment or industry in which the corporation operates is also very helpful (e.g., major contracts, mergers and acquisitions, licensing, legal and regulatory, labor relations).

19. Assume the role of and become viewed as a spokesperson for the industry.

The CEO must be willing to support and enhance the corporation’s position within the industry it operates. Whether as a member or officer of the leading industry association or as a speaker at related meetings, the CEO should be willing to participate in industry-wide gatherings and initiatives. However, if the CEO can appropriately delegate some time-consuming industry obligations to another senior executive without jeopardizing the corporation’s reputation, this should be done.

20. Be visible and participate in key civic activities.

As the most senior representative of the corporation, the CEO should be visible, accessible, and carry a positive reputation. The CEO can play an important role in contributing to and shaping his or her community by selectively supporting important local organizations and events (business, civic, and charitable) and by sitting on the board of at least one nonprofit institution. He or she may also benefit from occasionally attending national or international meetings. While the CEO should be willing to devote a reasonable amount of time to civic leadership, these commitments must never negatively impact key obligations internal to the corporation.

21. Prioritize and make efficient use of available time and activities.

As hard as any CEO works, there will never be enough hours in the day (or days in the week) to spend on legitimately useful activities. As a result, the CEO must prioritize where his or her time is spent and be mindful of the message that this prioritization will send throughout the organization. Once priorities are set, the CEO should make efficient use of personal time allotted, recognizing that this too will send a message to the organization. Particularly as a new person takes on the CEO role, he or she should limit outside activities and obligations that don’t have a direct bearing on the corporation’s business—e.g., outside boards and non-industry associations.

22. Deal openly with and be trusted by the Board of Directors.

The CEO should remember that the board (representing the shareholders and stakeholders) is his or her boss and that it is necessary to always communicate with board members in an open, transparent manner. The CEO should never “sell” to the board or withhold key information; rather, the CEO should use the board (and particularly the lead director if one exists) for counsel while giving board members exposure and access to other executives and other key employees. The CEO should solicit feedback from the board and embrace candid, constructive suggestions. The CEO must earn the board’s trust, remembering that trust is a two-way street. Finally, should a CEO not also carry the chairman of the board title, he or she should not view the separation of these two roles in a negative light.

23. Maintain balance and equilibrium with a steady hand on the tiller.

Employees, shareholders, customers, and other key outside groups want to know that the CEO will always lead the corporation in a passionate but professional and ethical manner. The CEO should be competitive and determined to win, but win by the rules. He or she should recognize that setbacks inevitably happen and not be discouraged or overwhelmed when problems arise. In this regard, the CEO should handle stress well and always be in control and cool under fire, remaining confident, but never arrogant. However confident the CEO appears, he or she should never be reluctant to ask for help when needed—as mentioned previously, asking for help is a sign of maturity, experience, and strength, not weakness.

24. Be prepared to retire or step down when the time is right.

No matter how capable and devoted he or she may be, every CEO has an optimum time to serve in the position. Renewal in any organization is positive, and that certainly applies to the CEO as well. While there is quite a wide range of tenures for Fortune 500 CEOs, the average tenure has declined over the past decade and is now only about five years. While the normal employee retirement age of 65 sometimes acts as the governor in this regard, it does not apply if the CEO assumes the role at an “early” age. There is no best practice that applies to the optimum tenure, but the board should certainly pay close attention if the CEO passes the ten-year mark in the job, particularly if the incumbent appears less open to new ideas or looses enthusiasm for trying different approaches. Telltale comments like, “we tried that before” or “that’s not the way we do it here” can be red flags—both to the CEO and the board. Correspondingly, if the CEO shows signs of being bored with or jaded about key responsibilities (or thinks or says, “Oh no, not this again”), it is probably time for the CEO to move on. The board and the CEO should continually work together on orderly succession planning (including contingency planning for a “hit-by-the-bus” scenario), with a thoughtful and well-executed transition always the best outcome.

25. Keep perspective, remember that leadership is an honor and a privilege, and don’t forget to have some fun along the way.

The CEO must never forget that leadership is an honor and a privilege. Employees appreciate a CEO who leads by example and remains humble while maintaining perspective and a good sense of humor even in the darkest hours. The CEO should encourage celebration as appropriate and always keep in mind the critical role that employee dedication and motivation play in any corporation’s ultimate success. Since employees will pay close attention and look to their leaders to set the tone in this regard, the CEO should always check ego at the door, taking the job very seriously, but never taking himself or herself self too seriously. Life as a CEO can be stressful and sometimes short-lived, so it is important that anyone in that role takes adequate time to enjoy the ride and have some fun along the way.

Conclusion

The criteria and comments listed above are not intended to be exhaustive, but rather directional in nature. Also, equal weighting does not apply to all factors; recognizing this, the unique needs of the corporation will certainly alter the CEO’s focus at any particular point in time. No one person can be expected to have a long suit in each area, but a dedicated CEO needs to be committed to improving in all areas. The CEO should capitalize on his or her individual strengths, but also take immediate steps to shore up any areas of personal deficiency with support staff or other initiatives. Very importantly, the board and the CEO need to be candid with one another as CEO requirements, expectations, and performance are discussed.

Art Collins and Sophia Shaw

Art Collins and Sophia Shaw

Managing Partners, Acorn Advisors LLC

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