CEO Appraisal

Evangelical Council for Financial Accountability
This article provided by the Engstrom Institute

In a nonprofit organization, the chief executive officer is an employee of the board. The CEO is responsible for seeing that board policies and decisions have been carried out; the board, functioning according to the dictates of good governance, has a corresponding responsibility for reviewing the CEO's performance on a regular basis and setting performance requirements and goals. The CEO needs to know the strengths and weaknesses of his or her performance—what is going well; what indicates a weakness. Often the board fulfills its duty of review through a CEO appraisal (or performance evaluation).

Therefore, the major goals of a CEO evaluation are to ensure that goals set by the board are completed in the most efficient and effective manner, and to support the CEO in his or her performance. When the board clearly communicates performance standards and expectations, the CEO will be freed from wondering and worrying about performance and performance expectations and, will instead, be encouraged to focus energy on running the organization.

In order for a board to make a contributive assessment of the CEO, it must have a clear understanding of the organization's goals and a clear definition of the CEO's responsibilities. An organizational mission statement and a clear, detailed, written job description of the CEO will guide the board in its understanding.

From its understanding, the board must set goals—being sure to include specific objectives for the attainment of each goal. The CEO needs to be informed of the goals for the organization as a whole, the performance goals for his or her position, and the board's intent to perform a performance appraisal based on the goals.

Thus, an appraisal helps the CEO know where he or she stands and helps to facilitate strong communication between the board and management. The clear benefits of an assessment cause most CEOs to welcome regular assessment. However, even when an assessment could be misconstrued as being unsupportive or confrontational, it is a necessity for the health of the organization.

Types of Assessments

There are four major types of CEO assessments:

1. Intermittent or continuous observation is conducted mainly by the board chairman. As the board and the CEO work together, especially in new or local organizations, problems should be identified and corrected promptly. The board is given the responsibility of selecting a competent CEO, defining his or her job, and then allowing the individual to carry out the given responsibilities. While evaluating the CEO it is necessary for the board to assess whether it is acting in ways that encourage, instead of hinder the success of the organization and the CEO.
   
   
2. A deliberate periodic assessment of the CEO is conducted by either the board chairperson or other board members. When a board member other than the chairperson conducts the assessment, the views of the chairperson and various committee chairpersons should be included. This kind of assessment is generally conducted without staff consultation.
   
   
3. An annual board committee review is required by many organizations. The purpose is to review, in a more formal fashion, both the state of the organization and the performance of the CEO. The format is designed to allow the CEO to assess the accomplishments towards board-stated goals and to offer suggestions for future goals. The CEO should actively participate in the discussion. Discussions should include the board's assessment of the CEO's strengths and weaknesses and the appropriate response to the assessment. At the conclusion of this assessment, there should be agreement on the following year's goals and performance expectations.
   
   
4. The full-dress assessment of the CEO is frequently used by institutions of higher learning. In this approach an outside consultant is usually retained. While it is a costly method of assessment, it does place the assessment of the CEO in the context of the total governance of the organization.

Guidelines of Assessment

Whatever type of assessment is chosen, the following guidelines are helpful in implementing the assessment:

• The board should inform the CEO of its intention to assess the CEO.
  
  
• An analysis of the use of the skills and personality that placed the individual in the position of CEO should be part of the assessment. Part of the assessment should include self-assessment by the CEO. The board then can evaluate how the CEO views his/her job and determine any discrepancies between the CEO and the board's perspectives. The results should be shared with the CEO.
  
  
• An assessment is an appropriate time for the board to look at its own involvement in the organization; for example, are any of the management problems directly related to how the board governs?
  
  
• Frequency is related to the assessment's formality. A formal assessment may occur every few years, with more informal reviews in the interim.
  
  
• An organization may benefit from consulting an outside, objective source to advise on the process or to perform at least part of the assessment.

As stated earlier, the primary purpose of a CEO evaluation is to ensure that goals set by the board are completed in the most efficient and effective manner, and to support the CEO in his or her performance. When the board clearly communicates performance standards and expectations, the CEO can focus on running the organization rather than worry about performance and performance expectations.

This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer or other professional.

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