Appraising CEO Performance

Board members need training and assistance to properly evaluate the CEO.

February 1, 2012 | Kathryn Tyler

Constructive feedback "is hard to give and hard to receive," says Glenn Gilkey, chief human resources officer at Fluor, a worldwide construction company headquartered in Irving, Texas. This is especially true when a board of directors evaluates a CEO's performance.

"CEO performance is mainly driven by the numbers: 'Did you meet the earnings target or safety goals for the year?' " Gilkey notes. But in his role he also has a lot of conversations with board members about how others in the company are responding to the CEO's direction, which ultimately contributes to the CEO's evaluation.

As a result, Gilkey walks a fine line when coordinating the efforts of the board and his boss. When Alan Boeckmann retired as Fluor's CEO and became the company's chairman, he called Gilkey and new CEO David P. Haxton into his office. "He said, 'Glenn, it's your job to tell David to call me if he does something that you don't think I would agree with. David, if Glenn comes to you with these issues, it's your responsibility to call me,' " Gilkey recalls. "David knows that I have confidential conversations with the board. Trust between all of us is extremely important. David understands that is my role, but it is nerve-racking sometimes."

Nerve-racking though it may be, HR executives have a role in training the board of directors on corporate governance and how to conduct CEO performance appraisals. And, it's tricky to balance the needs of the board with those of the CEO.

HR's Role

Experts say savvy HR professionals understand that they have counseling roles in five areas related to corporate governance and CEO performance appraisals:

Recommend a corporate governance consultant.

Dan Clark, founder and CEO of Dan Clark Associates LLC, a consulting firm in Tallahassee, Fla., says board members must understand corporate governance before they can conduct a CEO appraisal.

Patrick M. Wright, professor of strategic HR at Cornell University, says his interviews with chief human resource officers (CHROs) reveal "incredibly dysfunctional dynamics on boards because of the high status and self-image of all the members. Everybody is an expert, and all are used to being the leader who calls the shots," he says. "So throwing them together and asking them to work as a group isn't an easy task."

Offering training in board processes can help, but it isn't always easy. Some board members "think they are beyond training," says Mark Faust, principal at Cincinnati-based consultancy Echelon Management and author of Growth or Bust: Game Changing Secrets from a Leading Corporate Strategist (Career Press, 2011). He even warns against using the word "training" when talking with board members. Instead, he advises, use the word "consulting."

What should HR executives look for in a consultant? "Find someone who has worked with boards. This is not a job for a typical performance appraisal specialist because there is less importance placed on the mechanics and more importance placed on the dynamics," Wright says.

Remember to check consultants' references. "Find out if [the consultants] have expertise with nonprofits or for-profits. Interview people and find out if it is a good personality match," advises Simone P. Joyaux, principal of Joyaux Associates, a nonprofit-sector consulting firm headquartered in Foster, R.I., and author of Strategic Fund Development: Building Profitable Relationships That Last (Wiley, 2011).

Scout university-level courses for board members' continuing education.

"Our board members come from very diverse backgrounds," Gilkey says. "We arrange university-level classes based on the individual needs of the board member. Stanford has some good 'how to be a board member' classes and classes on how to better understand financial information."

Assist in developing performance appraisal tools and a CEO job description.

"Board members are busy people. Use a simple instrument that is easy to understand and interpret," Gilkey advises.

Clark, a former CEO of a credit union, adds, "I helped my board create my review. HR might partner with the CEO and the chair of the board to help them to establish a proper performance review process, if one doesn't exist." He suggests finding a sample CEO performance appraisal form online and modifying it to meet the needs of your industry and organization.

Gilkey says Fluor's 12 senior staff members receive appraisals based on the same form used to evaluate the chief executive officer.

Says Joyaux: "I expect HR to be experts in the legal and regulatory issues around performance appraisals."

Once a form and process have been created, be certain to get approval from the board of directors before instituting them. "Assuming an HR professional helped to craft the job description and design the performance appraisal process and tools, the board has to approve it. Then the process is launched. I would not have HR involved in tabulating the results," Joyaux says.

Include board members in every action related to the CEO's performance review process. When Joyaux served on the board of directors for a large international nonprofit organization, she participated in a performance appraisal for the chief executive officer. "I was displeased with some of the things the CEO was doing. The board members were invited to send notes for the official performance appraisal. I expressed my concerns. My assumption was that these comments would be put together and we would see the summary and vote on the overall appraisal," she says.

"I went to the next board meeting to find the [executive] committee had put the comments all together, extended the CEO's contract for three years, and given her a bonus and an increase in salary," Joyaux says. "I said, 'But, wait. We, the board, didn't get to approve the ultimate summary.' Then, we were told if we wanted to change it, there would be a lawsuit."

Joyaux says this performance appraisal process represents a failure of corporate governance. "Corporate governance is a collective activity," she explains. Ideally,"it's a group activity, and the board chair doesn't have any more authority than any individual board member."

Answer questions related to CEO performance when asked.

"Our lead board member may ask me about the CEO's performance," Gilkey says. "The CEO needs to understand that. The board looks to me for information on the soft stuff—how are the CEO's direct reports dealing with his strategy? Are they following him or resisting him?" However, Gilkey reminds his fellow chief human resource officers to "Make sure the CEO knows what you're doing. The CEO is still your boss."

Onboard new members.

HR professionals should take the lead in developing materials and training to help orient new board members, says Connie Curran, CEO of Best on Board, a health care governance consultancy in Chicago.

Introduce new board members to the industry in general and the organization in particular. What is distinctive about the company? What is important about its culture?

At Fluor, there is a lengthy onboarding process for board members, coordinated by HR professionals. "We walk them through the strategy for each business group," Gilkey says.

Fools Rush In

Faust advises HR professionals to observe the political landscape carefully and tailor training to the board's needs. "Position your help as an advisory, research role," he says.

Any training suggestions or offers of assistance must be worded diplomatically and must be seen as part of your work for your boss, the CEO.The approach may depend on whether the CEO is also the chairman of the board. Increasingly, the trend among companies is to separate the two, but a majority of companies—55 percent—still have one person serving as both the CEO and chairman, according to Board Practices, The Structure of Boards at S&P 1500 Companies, 2011 Edition, a survey of 13,755 directors by the ISS Governance Institute.

HR leaders also need to make sure the CEO understands that a performance review conducted by a corporate governance board is different from one conducted by a single executive. The difference lies mainly in the need for the board to have a unified voice.

Experts advise HR executives to avoid these pitfalls:

Telling board members they need performance review training.Instead, note that performance evaluations are different when corporate governance is involved. Most board members are competent executives, meaning the vast majority of them have conducted performance reviews. Thus, it is unnecessary—and potentially offensive—to suggest that they need training on how to conduct reviews. The CHRO "would probably be looked at negatively if he were to suggest training in CEO performance appraisal," Wright says.

Conducting board governance training personally. A CHRO needs to be certain that the CEO understands that he or she does not intend to conduct any corporate governance training personally—because of an inherent conflict of interest—and that a consultant will be used for this purpose.

The conflict of interest arises because the HR executive works for the CEO. To train the individuals responsible for appraising one's boss creates an awkward and potentially destructive situation. The chief human resource officer "tends to have a special relationship with the CEO, particularly as a confidant," Wright says. There might be suspicion that the HR leader was trying to gear the training to somehow benefit the CEO. Don't actually deliver training on corporate governance, he says; onboarding for board members can cover company and industry issues in general.

Being unfamiliar with corporate governance. HR professionals may want to learn more about corporate governance to support their board in modeling good governance behaviors.

HR professionals may want to learn more about corporate governance.

"I came from the operations side of our business, so when the CEO asked me to run HR, I took an online class at Harvard that walked me through board members' responsibilities. I took it to understand how boards run and the roles and responsibilities of different committees," Gilkey says. "Get good at seeking out that information—and learn it." Gilkey advises his peers to regularly read literature from The Conference Board.

Another tip: "Meet individually with the board members. Build trust with them so that if they have a question, they are comfortable coming to you. I am a safety zone for them. That's a good thing to be," Gilkey says.

If HR executives can demonstrate knowledge—and be approachable—while circumnavigating potential political pitfalls associated with balancing the needs of the board with those of the CEO, they will be able to receive votes of confidence from both.

The author is a freelance writer and former HR generalist and trainer in Wixom, Mich.