Board Governance Best Practices– Review the CEO Annually

In early October, the Working Group on Director Accountability and Board Effectiveness will release an expanded version of "A Simple Guide to the Basic Responsibilities of VC-Backed Company Directors."

During the summer, in addition to working on this new content for the white paper, we also expanded the Working Group itself and will be announcing nine new members from across the United States and from Israel.

In addition to new information related to the process for annual CEO review, important content additions include new material on the importance of internal controls and detailed recommendations on the logisitics and optimal processes associated with individual director and board self evaluation.

The original "Simple Guide…" points out that boards should conduct a formal annual performance evaluation of the CEO.

An excerpt on the importance of CEO evaluation follows from the new Guide:

"Anecdotal evidence in the venture capital industry suggests that the CEO is the least reviewed employee of the typical venture backed company.

A VCBC board is highly unlikely to support the notion that the CEO should adjust employee salaries or issue new options grants without first reviewing individual employee performance. Why should the board be held to a lower standard when it comes to reviewing the CEO’s performance? The importance of having in place a process for board review of the CEO cannot be overstated. Having this process in place facilitates an effective mechanism to promote the proper management of expectations between the board and the CEO.

An annual CEO review process does not need to be cumbersome, and it need not be associated with compensation adjustments for the CEO. It should be viewed as an opportunity to make sure that the CEO and the board are on the same page with respect to the CEO’s current business plan objectives and priorities. It can be particularly useful to combine the CEO review by the board with a 360 degree review of the CEO by all of his direct reports.

Some process recommendations to consider:

· Create a common, short, written questionnaire to be used by the directors and by the direct reports.

· Separate the reviewers:

o Designate a non-management director to circulate the questionnaire to each of the non-management directors

o Designate either an outside consultant or the head of human resources to perform the same aggregation function for the CEO’s direct reports

· The board reviewer should consolidate the director questionnaires into a single document that is shared among the directors. This document should represent a consensus view by the directors.

· The designated director should coordinate with the consultant or HR person conducting the 360 review and receive a written synopsis from the team reviewer which summarizes the comments from the direct reports." …

There is more to this section– but you will have to wait until October to see it– stay tuned.

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