(Appeared in Agenda Magazine, March 2015)
By Dr. Solange Charas, Board Member & CHRO at Integral Board Group
Shareholder activists' increasing scrutiny of corporate governance means boards should focus their attention on the effectiveness of their CEOs and the C-level executive team. Yet there is a disturbing situation at hand: The majority of directors find that their CEOs' most critical shortfall is their ability to manage their C-suite.
To reverse this trend, boards need to assess the effectiveness of the CEO and the C-level executives as a whole rather than a combination of individual actors, and to do so in a data-driven rather than a subjective manner.
A Stanford University report supports this call for action, as it reveals that 85% of directors consider their organization's biggest weakness to be the CEO's ineffectiveness in mentoring his or her direct reports. This finding could be the cause of the increased level of CEO terminations. Indeed, CEO attrition among the S&P 500 companies went up from 8.4% in 2013 to 10.2% in 2014, according to a forthcoming report from The Conference Board.
The failure of the CEO to generate a high-performing C-suite team can kill shareholder value creation. Research from the University of Chicago and MIT reveals that top positions, when weighed individually, explain less than 5% of the firm's bottom-line performance. Meanwhile, when teams are high-performing, the result is a 20% lift to bottom-line results, according to my doctorate research, which specifically measures the C-level executives as a unit. The research also identifies a very high correlation between C-suite team intelligence and the organization's ability to outperform rivals. Making matters worse, poor team intelligence in the C-suite isn't neutral in its effect; it is value-detracting. C-level executive teams with low team intelligence show year-over-year declines in financial performance and tend to underperform relative to competitors.
In this environment, boards with a business-as-usual attitude about measuring C-suite team effectiveness are unlikely to generate positive outcomes. The traditional approach used by the majority of boards evaluates the performance of the CEO and each of the top executives against their individual goals and corporate performance. Some of the most common attributes assessed are execution of strategy and vision, managing innovation and technology, and risk management quality. However, directors have also been known to review management and leadership attributes as well as operating results.
But few, if any, performance plans include a C-suite team-level assessment. Such a review could highlight the CEO's ability to lead the executive team toward desired outcomes. Meanwhile, the board's evaluations are often subjective, based on observations and not on a formal, unbiased, data-based assessment. The Stanford University study nonetheless shows that boards have come to realize intuitively that ignoring the impact of the team on outcomes sacrifices financial performance.
As awareness of team intelligence grows, boards must expand their performance assessment criteria to include an objective evaluation of how well the CEO is managing the C-level executives. Directors should ensure that such an analysis captures performance at the team level and is not just an amalgam of individual assessments. The assessment used in my doctorate research was based on Nobel laureate Joseph Stiglitz's theory of information asymmetry as well as various team theories. The research shows that team intelligence has a large and statistically significant relationship to financial outcomes.
If directors accept that teams drive economic value creation, then assessing the C-suite team's effectiveness and addressing shortfalls is a powerful way to improve results. First and foremost, shareholders would benefit from enhanced enterprise value or share price. Directors would achieve effective governance to ensure economic value creation, and CEOs would also receive a more objective assessment of their executive team's management abilities. Finally, executives and potentially all employees would benefit from higher levels of incentive compensation, and perhaps engagement, generated by enhanced corporate performance.
Solange Charas is also a board member at Able Energy and an Adjunct Professor in the Master's Program at New York University's School of Professional Studies