Board’s must take responsibility for managing the leadership of their organisations. The ASX Limited Board Charter states that it is the Board’s responsibility to “Appoint and assess the performance of the Managing Director and CEO, and oversee succession plans for the senior executive team.”
What constitutes performance? In recent research we conducted performance was generally considered to be financial. There is no denying that an organisation’s finances are hugely important but they can only ever be an historic measure. Lead measures are essential and there is no lead measure more critical than the leadership ability demonstrated by the CEO and the senior executive team. Two case studies clearly illustrate this:
Company A, a nation wide, well established financial services company that had a strong balance sheet, good profitability and a solid financial history. The Board were happy. What the Board didn’t know was the CEO, who had been appointed 18 months previously, was struggling. His strong and directional approach that had served him so well in the past was not working. He felt he knew the answers but others in the company did not agree. Staff were frustrated by what they believed was his micro managing. Decisions were being made that adversely impacted customers. When this all became apparent 18 months later the company’s financial performance had dropped considerably and the CEO had just resigned.
Company B, another national company. Again strong financials, again a CEO who had been appointed 18 months previously and again a very happy Board. However this Board still chose to have their CEO’s leadership appraised by us. To the surprise of the Board the CEO appraisal highlighted a number of red lights. Staff, and in particular senior staff, did not believe in or trust the judgement of the CEO. The CEO was acting unilaterally in a number of areas where he did not have the expertise. New systems weren’t achieving the needed outcomes. Staff morale was plummeting. Needless to say a very robust conversation took place between the CEO and the Board. Within three months the Board and the CEO agreed to part ways.
While neither of the above case studies have a perfect outcome, Company B were made aware of the poor leadership early enough to do something about it, and thus the impact on their financial position was negligible. Company A struggled before being acquired.
Appraising a company’s leadership annually is simply good risk management, it is part of good corporate governance. It is because Boards are responsible for financial performance that it is essential that they appraise and develop the leadership performance of their CEO and senior executives. Unfortunately too few Boards do this effectively.