In the first instalment of this series, I shared with you the immense value of enterprise governance as a performance enhancement tool for SMEs and privately-held companies, and how it grows your bottom line.
The board of an enterprise is responsible for ensuring that the chief executive is held accountable for his or her own performance and for the enterprise as a whole.
If you are the chief executive and founder of the business or a shareholder-manager of your company, this can be a confronting idea. How should a board define what performance means for the enterprise? What process should they follow? The fundamental overriding principle is that you should be performance managed like any other employee.
A board is responsible for the performance management framework of the enterprise, and the chief executive’s performance is but one part. This framework should specifically address the following aspects:
1. A clearly defined position description for the role of chief executive
Even though you may have founded the business or are a shareholder-manager, unless you spell out what you are responsible for, you will not easily determine the areas you need to pay attention to. This is more likely in areas that you avoid or that require development, such as financial analysis or team development.
2. A remuneration package that includes a performance-based element
It’s easy to justify your dividend (if you get one) as a performance reward. It’s not. If a significant portion of your remuneration or bonus is linked to performance, you will undoubtedly deliver a higher level of value.
3. Personal and organisational performance KPIs
The enterprise’s strategic objectives should drive and define your KPIs. This ties the company’s performance to yours.
4. A formalised performance review process
If there is no performance process in place, identify some key organisational performance metrics to start. Twice a year, the chairman should review your performance against those measures – the first engagement to review performance and set targets and the second as an interim review.
5. Informal and regular reviews with the chairman
At least once a month there should be some form of engagement between chairman and chief executive, supported by a standard agenda that provides focus and structure, even if the meeting is less formal than a board meeting.
6. Coaching and support on areas of development
This is not ad hoc activities determined throughout the year, but a planned focus on your own development, linked to specific areas, such as the strategic focus of the enterprise or industry, governance, management and strategy expertise.
7. A succession plan, even if it is a long-term plan
The biggest failing of business founders is to build a business that cannot be sold or leveraged without them. This aspect of the framework, driven by the board, is critical to shift the risk of this dependency and unlock true value.
A board should not attempt to have all these pieces of the puzzle in place from the get-go. The implementation of governance, including chief executive performance management, is a step-by-step and structured process, based on the business’s priorities.
Directors must determine what is critical at that point in time and what will deliver the greatest value to the enterprise and its stakeholders.
As an independent chairman, I have found that observation changes behaviour. The board’s role is to provide a fair approach to chief executive performance management that also creates accountability. Just observing performance in a structured way will already steer the company towards greater performance as a whole, and better profits as a result.
Related: When Investors Join Your Board