A Numbers Game

Image by iDoux
Image by iDoux

That boards of directors often fall short in their duties isn’t news to most of us. (We’ve written about it, too.) But a recent study casts even more light on the problem.

As Ira Sager explained last week in Bloomberg Businessweek: New research from Stanford and the Miles Group has “found that boards focus on financial performance as the most important metric when evaluating the CEO.” And what does that leave out? Oh, a few little things—like customer service, workplace satisfaction and innovation.

Unfortunately, Sager noted, even board members know that many executives are doing terribly on all these fronts. Yet these criteria are considered in fewer than 5% of evaluations. “That may be because most CEO compensation metrics are tied to the financials, which are easier to track and of interest to investors,” Sager suggested. “It’s simply harder to measure customer service, employee satisfaction and innovation.”

As we’ve exploredPeter Drucker proposed his own “scorecard for management,” which went far beyond the financials. His preferred yardsticks:

1. Performance in appropriating capital

2. Performance in people decisions

3. Performance in innovation

4. Performance in long-term planning

“In each of these areas, the performance average of management can be shown,” Drucker wrote. “In each, management can greatly improve its performance once it knows the record.”

Meanwhile, as we’ve discussed, Drucker also thought that corporate boards had a lot to learn from an unexpected source: the most exemplary nonprofits. “Many nonprofits now have what is still the exception in business—a functioning board,” Drucker asserted in a 1989 Harvard Business Review essay. “They also have something even rarer: a CEO who is clearly accountable to the board.”

Drucker pointed out that nonprofit board members tend to have a deep knowledge of the organization because many of them have served as volunteers. “Precisely because the nonprofit board is so committed and active,” Drucker wrote, “its relationship with the CEO tends to be highly contentious and full of friction.” By contrast, Drucker added, “it is the rare big-company board that reviews the CEO’s performance against pre-set business objectives.”

At least objectives that go beyond raw financial measures.

How do you think boards of for-profit companies should go about appraising management performance?