Archive for the ‘Survey Results’ Category

New CEO and Board Research from Stanford and The Miles Group

2013 CEO Performance Evaluation Survey Results: 

In Grading CEO Performance, Financials Still Dominate (PDF)

Boards rate CEOs high in decision-making, low in talent development

 STANFORD, CA – May 22, 2013 – A new study conducted by the Center for Leadership Development and Research at Stanford Graduate School of Business, Stanford University’s Rock Center for Corporate Governance, and The Miles Group reveals that boardrooms are giving poor grades to CEOs for their mentoring skills and board engagement – but still prioritize financial performance above all else. More than 160 CEOs and directors of North American public and private companies were polled in the 2013 Survey on CEO Performance Evaluations, which studied how CEOs themselves and directors rate both chief executive performance as well as the performance evaluation process.

 When directors were asked to rank the top weaknesses of their CEO, “mentoring skills” and “board engagement” tied for the #1 spot. “This signals that directors are clearly concerned about their CEO’s ability to mentor top talent,” says Stephen Miles, founder and chief executive of The Miles Group. “Focusing on drivers such as developing the next generation of leadership is essential to planning beyond the next quarter and avoiding the short-term thinking that inhibits growth.”

 However, when actually evaluating the performance of a CEO, companies place very little weight on many nonfinancial performance measures. The survey found that only a 5% weighting was given to a CEO’s performance in the areas of talent development and succession planning, and only a 2.5% weighting was given to employee satisfaction/turnover. 

“While boards clearly see mentoring and talent development as weaknesses in their CEO, the problem is that they are not evaluating CEOs against those measures in a meaningful way,” says David F. Larcker, James Irvin Miller Professor of Accounting and co-director of the Center for Leadership Development and Research at the Stanford Graduate School of Business. “Financial performance still dominates the grading metrics, so if boards really want CEOs to focus on other things as well, they will have to change the way they evaluate those in the top seat.”

 Additional key findings of the 2013 Survey on CEO Performance Evaluations include:

• Directors rate CEOs high in “decision making” but low in people management areas. In addition to mentoring and developing talent, “listening” and “conflict management” were the skills least mentioned as strengths of the CEO. “The fact that these were in the bottom three means that there is a real problem,” says Mr. Miles. “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. Decision-making, which directors overwhelmingly stated was their CEO’s greatest strength, is important, because you don’t want a CEO with ‘analysis paralysis.’ But ‘planning skills’ – which also made the top three in CEO strengths – are really what CEOs should be delegating, not focusing on themselves.”

• Little weight given to customer service, workplace safety, and innovation in CEO evaluations. While accounting, operating, and stock price metrics are assigned high value by boards, other factors generally hold little worth when boards rate their CEOs. “Seeming important things such as product service and quality, customer service, workplace safety, and even innovation are used in less than 5% of evaluations,” says Professor Larcker.

• CEOs and boards believe the evaluation process is balanced. Eighty-three percent (83%) of directors and 64% of CEOs believe that the CEO evaluation process is a balanced approach between financial performance and nonfinancial metrics, such as strategy development and employee and customer satisfaction. “Unfortunately, the truth of the matter is that the CEO evaluation process is not that balanced,” says Professor Larcker. “Amid growing calls for integrating reporting and corporate social responsibility, companies are still behind the times when it comes to developing reliable and valid measures of nonfinancial performance metrics.”

• CEOs failing to engage boards. “Board relationships and engagement” tied with “mentoring and development skills” as the #1 weakness in CEOs. “This serious disconnect between management and the boardroom has multiple negative ramifications,” says Mr. Miles. “Board engagement is absolutely vital to the function of the CEO – and to the health of a company. How can the board understand what’s going on in the company if the CEO is not engaging?”

• Directors lukewarm when comparing their CEOs against peer group.  Forty-one percent (41%) of directors believe that their CEO is in the top 20% of his or her peers, while 17% believe that their CEO is below the 60^th percentile. “For almost half of directors to say that their CEO is just ‘in the top 20 percent’ is not exactly a ringing endorsement,” says Mr. Miles. “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. The fact that nearly 20% of directors feel that their CEO ranks below the top 40% means that a lot of CEOs should be preparing their resumes.”

• Disconnect in how CEOs and directors regard the evaluation process. Sixty-three percent (63%) of CEOs versus 83% of directors believe that the CEO performance process is effective in their companies. “Nearly a third of CEOs don’t think that their evaluation is effective,” says Professor Larcker. “The success of an organization is dependent on open and honest dialogue between the CEO and the board. It is difficult to see how that can happen without a rigorous evaluation process.”

• 10% of companies say they have never evaluated their CEO.  “Given their fiduciary duties, it’s strange that any company would not evaluate its CEO,” says Professor Larcker. “The CEO performance evaluation should feed all sorts of board decisions, including goal setting, corporate performance measurement, compensation structure, and succession planning. Without an evaluation of the CEO, how can the board claim to be monitoring a corporation?”

•  CEOs highly likely to agree with the results of their performance evaluation.  Only 12% of CEOs believe that they are rated too high or too low overall, and almost half (49%) do not disagree with any area of their performance evaluation.  “Shareholders have to wonder at the objectivity of the evaluation process,” says Professor Larcker. “It’s hard to believe that boards are pushing CEOs on their evaluations if they pretty much agree with their evaluation.”

• Only two-thirds of CEOs believe that their own performance evaluation is a meaningful exercise. “Even though a high percentage of directors and CEOs think that the CEO evaluation process is meaningful, this number really should be 100%,” says Mr. Miles. “Every board has the power to meaningfully evaluate the CEO – whether doing it themselves, or bringing in someone to do it, or some combination thereof.”

• Directors unlenient on violations of ethics but more forgiving of CEOs with legal or regulatory violations that occur on their watch. “A significant minority of directors – 27 percent – say that unexpected litigation against the company would have no impact on their CEO’s performance evaluation,” says Professor Larcker, while approximately a quarter of directors (24%) say that unexpected regulatory problems would also have no impact. By contrast, all directors (100%) say that their CEO’s performance evaluation would be negatively impacted by ethical violations or a lack of transparency with the board.

Stanford University’s Rock Center for Corporate Governance and Mr. Miles have collaborated on several research studies of CEOs and board directors, including the 2011 Corporate Board of Directors Survey and the 2010 Survey on CEO Succession Planning.

 For more information, please contact D Katie Pandes of the Stanford Graduate School of Business at 650.724.9152 or pandes_katie@gsb.stanford.edu.

 About Corporate Governance at Stanford

The Center for Leadership Development and Research at Stanford Graduate School of Business seeks to advance the understanding and practice of corporate governance and executive leadership. Stanford University’s Rock Center for Corporate Governance is a joint initiative of Stanford Law School and Stanford Graduate School of Business.

 About The Miles Group

The Miles Group develops talent strategies for organizations, teams, and individuals – focusing on high-performance, world-class leadership. The firm was founded by Stephen Miles, a recognized expert in C-suite and board effectiveness; coach to top CEOs and COOs; and keynote speaker to organizations around the globe. Headquartered in New York, The Miles Group advises top global corporations through CEO succession, executive transitions, board assessment and training, and talent development. The firm’s coaching and advisory services enable leaders to raise the bar on their own performance, as well as create an environment for success throughout the organization. For more information, visit www.miles-group.com.

• Are Current CEOs the Best Board Members? (PDF)

• Related: 2011 Corporate Board Survey from Stanford Rock Center and Heidrick & Struggles

By many measures, current CEOs should be the best candidates to serve on boards of directors.  They have extensive strategic, operational, and risk management expertise, as well as experiences and leadership attributes that are important for a firm’s long-term success.

 However, there is currently no widely accepted, rigorous study that demonstrates that current CEOs are better board members or that companies with CEO directors benefit in terms of improved advice or monitoring.  In fact, recent survey data suggests that active CEOs might not always be the best board members because of the time constraints of their full time job and personality attributes that may make it difficult for them to contribute constructively to a boardroom environment.

 We examine this issue in closer detail and ask:

 1.       Should companies reassess the importance of this criteria when looking for new board members?

2.       Does the requirement for CEO-level experience limit the pool of available directors, particularly diversity candidates who may be less likely to have this experience?

3.       If the availability of CEO directors is low, should professional directors be recruited to fill the gap?

4.       Do the positive qualities of a retired CEO deteriorate, or do they never become outdated?

 Read the attached Closer Look and let us know what you think!  

To receive monthly alerts about the Closer Look series, please email the Stanford Corporate Governance Research Program at corpgovernance@gsb.stanford.edu. You can also follow more corporate governance news at http://twitter.com/#!/StanfordCorpGov.To see all of the Stanford Closer Look series, click here.

STANFORD, CA –A new survey from Stanford University’s Rock Center for Corporate Governance and Heidrick & Struggles has uncovered surprises about who makes the best board directors: it’s not necessarily the current CEOs that most companies seek out.

• 2011 Corporate Board of Directors Survey  (PDF)

• 2011 Corporate Board of Directors – Executive Summary (PDF)
  

“The popular consensus is that CEOs make the best board members because of their current strategic and leadership experience,” says David Larcker, corporate governance expert at the Stanford Graduate School of Business and at Stanford’s Arthur and Toni Rembe Rock Center for Corporate Governance. In the 2011 Corporate Board of Directors Survey, when asked about potential problems a full 87 percent said active CEOs are too busy with their own companies to be effective directors. A third of the respondents said active CEOs were “too bossy/used to having their own way.”

“It’s great to have sitting CEOs on a board, but companies need to be aware of the costs associated with having them,” says Stephen Miles, Vice Chairman at leadership advisory firm Heidrick & Struggles. “Because active CEOs are so busy, they might be unavailable during a crisis or have to cancel meeting attendance at the last minute. They also have less time to review materials. For some, the demands of their full-time job make it hard for them to consistently be as engaged as they need to be.”

Analyzing responses from 163 directors of public and private companies across North America, the 2011 Corporate Board of Directors Survey reveals how directors think about the composition of the board and the effectiveness of various types of board members. Key findings include:

Despite the fact that sitting CEOs are highly sought-after for board seats, 79% of directors said that, in practice, active CEOs are no better than non-CEO board members. “Companies need to differentiate between a CEO who brings caché to the board and one who will actively contribute real work as a director,” says Miles.

CEOs of companies that have experienced public ethical lapses are seen as far more “tainted” by the scandal than their boards are. “While only 37% of directors believe that an ex-CEO of a company that experienced substantial accounting or ethical problems can be a good board member, 67% believe a director of a similarly-plagued company can,” says Larcker, the James Irvin Miller Professor of Accounting at Stanford GSB. “Some directors do see value in having a CEO who has experienced – and hopefully learned from – mistakes in judgment. But far more are concerned about the stigma and perception issues in bringing aboard a CEO like this.”

Boards are struggling to evaluate whether prospective board members will be a good fit for the company. “Fifty-one percent of directors see it as moderately difficult and 20% see it as extremely or very difficult to gauge whether a prospect will be a good addition to the board,” says Miles. “Boards are clearly finding it a challenge to determine someone’s ‘fit.’ A single person can ruin a great board, so boards need to spend considerable time evaluating this very subjective quality.”

More than half of directors think that board turnover is too low. “The challenge of getting rid of board members is that there is a widespread assumption of board ‘tenure,’” says Larcker. “You may want to bring them on for three to five years, but they end up staying for ten. While egregious problems might be taken care of more quickly, it is much more difficult to get rid of an underperforming or irrelevant director who just happens to stay on too long.”

Forty-six percent of companies do not engage in succession planning for their board of directors. “Just as we found in our study last year that companies are seriously lagging in CEO succession planning, boards aren’t doing a great job of planning for board succession either,” says Miles. “Sixty-six percent of directors do believe that board succession planning is an important best practice, but only 54% actually do it.”

Nearly 20% of lead directors are chosen by the CEO or chairman. “For obvious reasons, CEOs should not choose the lead director,” says Miles. “The CEO should be asked for input, but the ultimate choice needs to be made by the board.” Forty-seven percent of respondents said that their lead director was elected by the independent directors, but this number should be much higher.”

More than 80% of board members are somewhat skeptical of the value of “professional directors.” “Even though there has been a call among some for increased use of professional directors – those who make it a full-time job to sit on boards – most directors don’t think that professional directors are any better than traditional board members,” says Larcker. “While some respondents believe that this group’s diversity of experience is an asset to a board, many are concerned that professional board members are too busy with other directorships to be effective.”

As companies think about who to bring onto the board that can deliver the greatest value, Larcker and Miles offer the following suggestions:

1                 Re-think appointing the “name” CEO to the board. “Yes, a company gets great publicity when it recruits a big name onto the board,” says Professor Larcker, “but you really need to think about what this person will actually deliver in value. If they are too busy or if they don’t fit the culture or have the right chemistry, it might not be worth it.”

2                 Weigh “failure” when evaluating a prospective board member. “Obviously, personal ethical lapses should preclude someone from being chosen as a director, but there might be value in someone coming from a company that failed,” says Larcker. “Boards need to understand what this person’s contribution was to the failure. Did they learn important lessons, or are they likely to repeat past mistakes?”

3                 Tread carefully when evaluating professional directors as board candidates. “It’s important to remember that boards must have a good, working relationship with their CEO in order to build value,” says Miles. “Ideally, a professional director comes from a background of multiple leadership positions where he or she has a deep understanding for what the CEO is going through. For these reasons, retired CEOs have the potential to make great professional directors. They can have a constructive dialogue with the CEO and can really contribute strategically and operationally.”

4                 Take the lead director position much more seriously. “You should conduct a succession process for your lead director just as you would for a CEO or board seat,” says Miles. “The lead director should be the most respected member on the board – a first among equals. The nominating/governance committee needs to run this process and make sure that the best director is in the position. It should never be rotational as not every director is suited for this leadership role.”

5                 Evaluate and refresh your board. “Of course most board members think they are above average,” says Larcker. “It’s human nature. However, the evaluation process should be structured so that companies get a clear understanding of who is adding real value and who is not. It is time to move beyond check-the-box board reviews and start to seriously evaluate the board’s effectiveness and its individual directors. Once you have this information, the chairman or lead director has to be ready to have the difficult conversation about how a director can improve, or whether it is better for them to step down.”

To speak to David Larcker contact Helen Chang. To speak to Stephen Miles, contact Jennifer Nelson, Heidrick & Struggles, (404) 682-7373 or jnelson@heidrick.com.

• 2010 CEO Succession Planning Survey (PDF )
  Heidrick & Struggles Rock Center for Corporate Governance

Stanford GSB News,  June 2010. More than half of companies today cannot immediately name a successor to their CEO should the need arise, according to new research conducted by Heidrick & Struggles and Stanford University’s Rock Center for Corporate Governance. The survey of more than 140 CEOs and board directors of North American public and private companies reveals critical lapses in CEO succession planning.

“The lack of succession planning at some of the biggest public companies poses a serious threat to corporate health – especially as companies struggle toward a recovery,” says Stephen A. Miles, Vice Chairman at leadership advisory firm Heidrick & Struggles and a global expert on succession planning. “Not having a truly operational succession plan can have devastating consequences for companies – from tanking stock prices to serious regulatory and reputational impact.”

Stanford Graduate School of Business Professor David Larcker adds, “We found that this governance lapse stems primarily from a lack of focus: boards of directors just aren’t spending the time that is required to adequately prepare for a succession scenario.” Professor Larcker is a senior faculty member of the Rock Center for Corporate Governance, a joint initiative of Stanford Law School and the Stanford Graduate School of Business.

The 2010 Survey on CEO Succession Planning, conducted this spring, surveyed CEOs and directors at large- and mid-cap public companies in the U.S. and Canada, with 10% of respondents also from large private firms. Key findings from the survey include:

• While 69% of respondents think that a CEO successor needs to be “ready now” to step into the shoes of the departing CEO, only 54% are grooming an executive for this position. “This statistic, combined with the finding that more than half couldn’t name a new permanent CEO if the current chief became incapacitated tomorrow, is a total disconnect,” says Mr. Miles. “It’s hard to imagine that the CEO would be ‘ready now’ if he or she is not being groomed today.”
• A full 39% of respondents cited that they have “zero” viable internal candidates. “This points to a lack of talent management and not paying enough attention to your ‘bench,’” says Mr. Miles.
• On average, boards spend only 2 hours a year on CEO succession planning. “The full boards of respondents’ companies meet, on average, five times a year. Succession planning is discussed at only two of these meetings, at one hour apiece,” says Professor Larcker. “The nominating and governance committee – who often take primary responsibility for succession planning – did not fare much better; respondents reported that only four hours of meeting time is typically devoted to this topic each year.”
• Only 50% have a written document detailing the skills required for the next CEO. Professor Larcker thinks this seems rather low: “If nothing is written down, how do we know that the board really understands what these skills should be?”
• Seventy-one percent of internal candidates know they are in the formal talent development pool, but there is regular communication (typically yearly or bi-yearly) for only 50% of these internal candidates. “There is a large communication gap, which can cause retention issues,” says Mr. Miles. “Executives who don’t know they are even in the running to be CEO might be easily lured elsewhere, where they believe they have room for advancement.”
• The majority of firms – 65% – have not asked internal candidates whether they want the CEO job, or, if offered, whether they would accept. “Many firms simply assume that their top choices want the job, but that is not always the case,” says Mr. Miles. “More and more, we see executives who don’t want to be in the spotlight as the CEO, given the extreme public scrutiny associated with the position. Making this assumption without checking can cause real problems down the road.”
• Once viable internal candidates for the CEO job are identified, 60% of firms think that the external search should continue at the same pace. “This is a big mistake,” Mr. Miles warns. “Companies lose strong candidates when they keep the outside search open too long even though they have perfectly capable internal talent.”
• While 69% of respondents think they have an extremely strong or very strong understanding of the capabilities of internal candidates, only 21% have extremely or very well established external benchmarks to measure their skills against. “It is another disconnect between perception and reality,” says Professor Larcker. “How do you know that a candidate is strong unless you compare him or her against the marketplace?”
• Only 50% of companies provide on-board or transition support for new CEOs. “This is the most important job at the company,” Professor Larcker observes. “Not having the support in place for on-boarding the executive can put the entire organization on unstable ground.”

With companies still at risk due to their lack of succession planning, Mr. Miles and Professor Larcker offer these top-line suggestions for boards:

1. Recognize that succession planning as practiced by most companies gives a false sense of security. “Even though boards have made progress in this area in the post-Sarbanes-Oxley world, most companies’ succession planning still isn’t even close to being good enough. Make sure that the board devotes meaningful time to this exercise, rather than simply checking off the box of a meeting agenda. Boards need to ask themselves: could they really name someone today, or is everyone in the succession plan always 1-3 years out from being viable?”
2. Focus on making succession plans operational. “Companies need to move from the ‘names in boxes’ approach that gives them a false sense of security to truly developing ‘viable’ candidates. Plans aren’t worth the paper they’re printed on unless there is a robust inside/outside process that ensures they are both developing and knowledgeable of all candidate pools – internal and external.”
3. Demand experience from board directors. “Regulators such as the SEC are recognizing the importance of a rigorous succession process, and firms should seek lead directors and/or nominating and governance committee chairs with sufficient experience in this area to ensure that it is adequately addressed. We are typically better at the things we have practiced before, and this is no place for someone to be ‘practicing’ for the first time.”
4. Pay attention to your bench. “Open lines of communication with potential internal candidates minimizes surprises down the road. When it comes time, you don’t want your #1 contender to turn down the job.”
5. Keep the “runners up” happy. “We see otherwise terrific executives who may not have been chosen as the CEO’s successor left hanging with no explanation. If you want to retain these executives, tell them why they weren’t chosen at this time and why they are still valuable to the company.”