Effective CEO Evaluation by Philip Bateman

“A leader has one job; to access others genius, and liberate their own. If they get this, it engenders respect and this can create miracles.” - Ted Hummerston Independent Management Consultant

How can you effectively evaluate the performance of a CEO?

The performance of a CEO is intrinsically linked to the organisation within

which he or she operates. A set criteria is therefore impossible to apply. It is well recognised that CEOs of ‘great’ organisations have common success factors amongst which is the ability to make informed decisions.

The author therefore

suggests a common standard for assessing the capacities of the information sources supporting the CEO.

This report explores the theory in context to Bravo Charlie.com.au Prepared by Philip Bateman

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Introduction Bravo Charlie provide Sales, Marketing and Governance services to aid globally focused, environmentally conscious startup companies become “Investment Ready”. By taking selected products and services to global markets for investment, manufacturing and marketing, we also provide a channel and networking system that allows overseas investment in Australian markets. Each opportunity will require the presence of an effective CEO, one that is capable of running a highgrowth, globally focused enterprise from relative startup, using the process of: 

Alignment within the organisation



Sourcing expertise from outside the company



Insight into emerging customer needs - Krinsky and Jenkins (1997)

As such, Bravo Charlie requires the best possible measurement by which to track each CEOs performance. What is a Chief Executive Officer? n. Abbr. CEO The highest-ranking executive in a company or organisation, responsible for carrying out the policies of the board of directors on a day-to-day basis. n. Lead-er 1. A person or thing that leads. 2. A guiding or directing head, as of an army, movement, or political group.

Source: Oxford Dictionary, 2006

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These definitions are presented to highlight that CEO and leader are synonymous and the terms can be used interchangeably. CEO = Company? For our purposes the CEO and the company shall also be considered one and the same. In context the CEO in question is representing a globally focused, high-growth venture. Supporting this Nohria, Joyce and Roberson completed a groundbreaking, five-year study on the management practices that produce superior results entitled ‘What Really Works’. Excelling at the primary management practices of strategy, execution, culture and structure represented the fundamentals of business. Further, specific competence in two of four from Talent, Mergers and Partnerships, Leadership and Innovation were requisite for success. Being aware of and responsible for the progress within these areas is therefore an intrinsic part of what it means to be a CEO. What does a CEO do? An effective CEO is someone who can: 1. Play a pivotal role in setting the company’s direction – this requires the CEO to be innovative and looking for ways of improving competitiveness, to lead short-term and long-term planning processes and to focus on customer satisfaction when making decisions. 2. Act as the firm’s chief communicator – this person promotes communication within the company and is able to keep its members focused on the goals and challenges faced by the organisation. A good communication also promotes the company’s vision to people outside of the company. 3. Set the tone of the company’s culture – this is done by encouraging innovation as well as accountability.

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4. Lead the executive management team – the CEO must also continually work to improve the executive management team. 5. Properly manage corporate resources, both human and financial – this means ensuring that the proper measurement and control practices are in place and that there is a balance between the long-term and short-term goals. 6. Shape the company’s structure and processes to fit the strategy and culture sought by the board. 7. Demonstrate he or she is serious about continual learning – this means the CEO is constantly looking for ways to improve the company’s and his or her own performance. Source: Kiel and Nicholson, 2004 How do they do it? How a leader operates could be categorised on a scale of great, good, ineffective and bad. Bad Leadership In reverse, bad leadership is defined by Zaleznik (1977) as falling into seven groups; 

Incompetent



Rigid



Intemperate



Callous



Corrupt



Insular



Evil

General English terminology gives accurate reflection of each ‘bad’ group as defined by Zaleznik, further investigation being beyond the scope of this document.

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Ineffective Leadership Ineffective leadership denotes a situation where the desired change has not been produced. These can be for reasons that include “missing traits, weak skills, strategies badly conceived and tactics badly employed. Ineffective leadership falls short of its intention” (Kellerman, 2004). Good to Great When looking to the line between good and great leaders, Jim Collins’s work defines the organisational competencies, as well as the qualitative aspects of the leadership that move a company to being labelled as ‘great’. From organisational perspective CEO compensation, change management initiatives, mergers and acquisitions, even technology all had relatively minor roles in lifting a company. Success was instead attributed to disciplined people, disciplined thought and disciplined actions. Remembering our earlier definition of a CEO, responsibility over these elements is therefore part of being a ‘great’ CEO. Qualitatively Collins found his CEO success cases displayed an unusual mix of intense determination and profound humility. Long-term investment in the company and its success often characterised by a climb through the companies ranks were part of the process, as well as a confidence that personal ego and financial gain were secondary to the long-term benefit of the team. These are key factors in how Jim Collins defines a ‘great’ leader, what he calls the ‘Level 5 leader’. In context we are looking at ‘Great’ leaders - AKA an interview with Ted Hummerston: During my research I interviewed a world leading management consultant. We spoke on the subject of evaluating CEO performance, agreed that an obvious factor was financial return and then explored the makeup of a ‘great’ leader, primarily through anecdotal reference.

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“In Jim Collins work ‘Built to Last’, Humility and an unswerving conviction about where they are taking the company were defined as qualities ingrained in the great CEOs”. Ted and I shared the premise that a CEO is the company, defining success as; “Getting the right people on the bus, and then taking the bus somewhere". When Ted visited Orica and met the CEO for the first time, it was a life changing moment for him. He was amazed by the CEO’s capacity to attract high quality people, and went on to define a key question HR should be able to answer for staff “Am I going to be in a learning environment?” On the effectiveness of a CEO; “You could say the core ability of a CEO is to ensure robustness of the operation. They do this by being able to articulate a vision which captures the imagination of the people that come to the company“. On the line between Good and Great; "The distinguished CEO’s were people who went to the mirror in times of failure and looked into their own eyes, in times of success they went to the window and looked for who they could attribute the applause. The CEOs who were not so just went to the mirror in times of success, and in times of failure went to the window to find an employee responsible. As an example, the legacy of John McFarlane (CEO of ANZ through to 2007) will be characterised by the culture he has created". A qualitative and quantitative look at CEO performance It can be said “A manager is concerned with how decisions are made and how the communication flows; a leader is concerned with what decisions get made and what he or she communicates (Zaleznik, 1997)”. From my interview time, a clear and consistent message was that “at its essence, it is about culture.”

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To drive a culture it needs people, and as such bringing a team together is of major importance. Ted stated that a good CEO understands people, when sourcing team members they know; 

What is it that brings fulfilment



What makes them buzz



What motivates them



What really works for them

Anecdotally travelling through South America with a newly appointed Orica CEO for an extended period, seeing groups of ten to twenty people, two to three groups a day every day for a number of weeks; He described a good CEO as having the strength of character to visit each of his global branches in person, understand the needs of his people and work from the ground up on cultural alignment. Specifically this was done through determining the line in the sand required for profitability, what they termed ‘18% RONA’ (return on net assets). To gain complete buy in from every member of the company, RONA was translated into terminology relevant to its place of reference. If workers were in the packing department, 18% RONA became X number of boxes per day. In the production environment, X barrels, for delivery, X drop offs etc. Everyone unilaterally knew their '18% RONA'. Thus operational involvement and respect was engendered throughout the organisation. Why was this so important? The RONA statement was a strategic line in the sand for the organisation. It was a financial metric that supported a cultural maxim held by the organisation: "If we can't be first or second in this market, we should sell the business." This example demonstrates the ‘people skills’ a leader needs to effectively translate a financial metric.

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Ted went on to support his earlier reference to Collins and the CEOs ‘unswerving conviction to where they were taking the company’. The CEO of Orica would face the head of each division stating “I am coming back in 12 months time and closing all divisions operating under 18% RONA.” When the time has passed a CEO of character and strength will listen to the division head say "I didn't make eighteen percent, but I made sixteen and a half!". He will respond with "I appreciate the work you have put in. We have to shut the plant”. ..ok, so what about the money? Kiel and Nicholson previously defined the fifth component of the CEO role as; Properly

manage

corporate

resources, both human and financial As financial metrics and cash flow are the lifeblood of a business, a keen awareness of them and ideally constant improvement is part and parcel of a CEO position. Is that it for the CEO then; Culture and Finance? No. Not by far. Nohria expands on the fundamentals of business in the diagram to the right.

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How are CEOs currently measured? Kiel and Nicholson (2004) state â&#x20AC;&#x153;The CEO evaluation will utilise both quantitative and qualitative measures. Evaluation will be judged against the approved strategic plan.â&#x20AC;? Strategic plan hey? Logic dictates the strategic plan is the responsibility of the CEO and as the company grows, defining the characteristics of success in each area would fluctuate massively. A strategic process that can conceivably underpin the role of the CEO and the board is shown below;

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So.. goals move? Yes. Greiner (1998) defines Organisational Practices in the Five Phases of Growth as: Category Management focus Organisational structure Management style

Phase 1

Phase 2 Efficiency of operations Centralised and functional

Phase 3 Expansion of market Decentralised and geographical

Phase 4 Consolidation of organisation Line staff and product groups

Phase 5 Problem solving and innovation

Individualistic and entrepreneurial

Directive

Delegative

Watchdog

Participative

Control System

Market results

Standards and cost centers

Reports and profit centres

Management Reward Emphasis

Ownership

Salary and merit increases

Individual bonus

Make and sell Informal

Plans and investment centers Profit sharing and stock options

Matrix of teams

Mutual goal setting Team bonus

Greiner goes to state that those in control of an organisation must: -

Know where they are in the developmental sequence.

Recognise the limited range of solutions.

Realise that solutions breed new problems.

CEOs and the board work with these factors through execution of the strategic plan. The plan drives the growth process, which moves the goals and thus the metrics. The big picture We now have a comprehensive picture of a ‘great’ CEO, as well as the massive amounts of information they must work with to achieve their goal. Evidentiary reference has also been made to support an inability to create a ‘standard’ set of metrics to evaluate a great CEO’s effectiveness. It is a logical progression that quality of decision making supports a ‘CEO being a success’.

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Tools for Success The author suggests that as a CEO is reliant on the decision making process and quality of information provided to them, a company should ascertain best practice levels of knowledge, certification and skills training associated to every position held within its company. Ultimately this approach should be applied to every level of contact that occurs with the organisation, from suppliers through to affiliates. Realistically it is most feasible for companies to directly assign HR or similar to assess current best practice levels of industry certification. As this knowledge base aggregates skill training paths will become apparent, staff retention can be improved through educational transparency and ideally sources of competitive advantage will arise. In summary This process has clearly identified several criteria associated to a ‘great’ CEO. It has determined a broad range of organisational responsibilities that rest with the position, identified the spectrum of organisational change facing a company, as well as providing real life examples of execution. It is hoped that an individual can be assessed as to whether or not they are an ‘effective performer’ based on this research, and once identified, the quality of the information passed to them can be assessed against best practice levels of knowledge where possible.

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Bibliography Kiel, Nicholson, 2004, Boards that Work - A new guide for Directors, McGraw Hill, North Ryde. Kellerman, B 2004, Bad Leadership: What It Is, How It Happens, Why It Matters, Harvard Business Press, Boston Mas. Kets De Vries, M 2001, The Leadership Mystique: a user’s manual for the human enterprise, Prentice Hall, Upper Saddle River. Nohria, Joyce, Roberson, 2003, ‘What Really Works’, Harvard Business Review, July, pp. 43-52. Zaleznik, A 1977, ‘Leading and Managing: Understanding the Difference’, Harvard Business Review, pp. 97119. Greiner, L 1998, ‘Evolution and Revolution as Organisations Grow’, Harvard Business Review, May-June, pp. 55-67. Obholzer, A 1997, ‘The Leader, the Unconscious, and the Management of the Organisation’, Harvard Business Review, pp. 197-216. Kellerman, B 2004, ‘The failure factor in leadership, Harvard Business Press, pp. 72-105.