On this page
One of the main functions of the Board is to select and appoint the most suitable CEO, to make sure that the CEO is properly motivated, evaluated and remunerated, and to replace the CEO if the results are unsatisfactory, the CEO retires or other circumstances, such as illness or death, make a change necessary.
Selection and appointment process
The nomination and appointment process is key to strong company performance and effective accountability. In a well-run company, the selection of candidates for the CEO position is therefore best conducted through the Board’s nomination committee, where one exists, or by the Board itself. The task of the committee is to carry out the selection process for the appointment and re-appointment of the CEO (and other senior managers) and to make recommendations to the Board.
The CEO must be selected on the basis of the company’s stage of development, future plans and ambitions. The profile will differ considerably depending on whether the company is in a start-up, growth, mature, turnaround or distress phase. The requirements for the CEO should be based on the company’s current and expected needs.
When preparing the search for a new CEO, the Board or its nomination committee must weigh the merits of an internal candidate against those of an external one. Selecting an internal candidate may bring continuity and stability, better alignment with the long-term goals, familiarity with the company’s culture and internal processes and stronger internal networks. An external candidate may bring a fresh perspective, an objective assessment of the company’s challenges, the ability to drive change, wider business networks, and specialised expertise and experience that the company needs at that particular time. In each case the Board has to consider the long-term goals of the company, its stage of development and the qualities the new CEO will need.
There are several important aspects to consider when onboarding a newly appointed CEO:
- Onboarding process – a structured introduction is one of the most critical factors in helping a new CEO to work at full speed as soon as possible.
- Regular feedback – make sure that the new CEO receives the right information early; do not wait until things have gone too far before raising an issue.
- Tolerance of mistakes – no one is immune to mistakes, least of all a person who has just joined the company.
- Respecting roles – avoid the temptation to micro-manage or to solve problems that are the CEO’s responsibility.
- Dealing with negative information and rumours – there will naturally be some displeased subordinates, and some of them may even try to undermine the new CEO by providing false, distorted or tendentious information.
Main employment terms and motivation
The main terms of the CEO’s employment agreement for the Board to consider are:
- Non-compete – the main function of a non-compete clause is to provide the company with greater assurance that its intellectual property, information on clients, confidential resources and proprietary information will not be made available to or used by a competitor.
- Non-solicitation – this clause assists the company in retaining valuable employees and reduces the risk of their being recruited by a former CEO who would use their knowledge for competitive advantage.
- Confidentiality – a clause that goes hand in hand with the non-compete clause and prohibits the former CEO from sharing the company’s confidential information, trade secrets and know-how with any third party, in particular a competitor, after the end of employment.
- Notice period – a clause setting the period of notice to be given by the CEO to the company, or by the company to the CEO, before termination takes effect. If no notice period is agreed, the statutory period applies, which may not suit the company’s needs.
Once the CEO is selected, the Board should make sure that the CEO is motivated and appropriately remunerated in line with market and industry practice, using well-established means such as performance bonuses, share options and fringe benefits (company car, health care, life insurance and similar). The motivation system aims to ensure the achievement of the company’s long-term goals.
Evaluation of performance
Evaluating the performance of the CEO is the responsibility of the Board, which often asks its relevant committee for assistance. The CEO is the link between the Board and the management team in the governance of the company, and the Board has an interest in the CEO being effective. As the Board and the CEO share responsibility for ensuring that the company meets its goals and objectives, the following aspects of preparing and running the evaluation of the CEO’s performance should be considered:
- the criteria against which the review is undertaken, agreed in advance;
- the use of common methods and tools for such reviews (360° feedback, company performance, stakeholder relations);
- a process run by the Board (its Chair) or a Board committee;
- an agenda for the review and the key issues to be discussed;
- sufficient time to prepare;
- an open and transparent manner (constructive criticism, areas for improvement, acknowledgement of achievements).
The purpose and benefits of evaluating the CEO’s performance include:
- aligning the CEO’s capabilities with the strategic direction of the company;
- spotting any potential management problems early on;
- setting appropriate goals for future growth;
- giving the Board greater objectivity about the CEO’s remuneration;
- promoting collaboration between the CEO and the Board.
The success of the CEO’s evaluation depends largely on setting the right KPIs at the outset and tracking the CEO’s performance against them. KPIs may be “hard”, based on specific metrics and therefore easily measurable (such as adherence to budget, financial performance or employee turnover), or “soft” and more difficult to measure (such as communication and personal qualities). The most widely used KPIs are SMART: specific, measurable, achievable, relevant and time-bound. Such KPIs enable the Board to make data-driven decisions, identify areas where the CEO or the company is falling short and take swift action to improve. Companies may choose other frameworks for setting the CEO’s goals and objectives, such as OKRs (objectives and key results), FAST (frequently discussed, ambitious, specific, transparent) or CLEAR (collaborative, limited, emotional, appreciable, refinable).
The CEO’s performance should be monitored and constructive feedback given on an ongoing basis (quarterly or at least twice a year). This alerts the Board to emerging issues and gives the Board and the CEO the opportunity to address them before they escalate.
Succession planning
Succession planning is critical to the continuity of the business and is increasingly recognised as a significant aspect of good corporate governance. It is the process of identifying and developing new leaders and key employees who can replace existing ones when they leave or retire. Failure to focus on succession planning may result in a weak, ineffective and insufficiently diverse senior management team, which in turn creates a risk to the company’s long-term success.
The aims and advantages of good succession planning include:
- ensuring that the senior management team consists of people with the right diversity of skills and talent needed to achieve the company’s business objectives and promote its long-term success;
- having a procedure for identifying and developing possible successors to the CEO and other key employees, which includes determining the experience, professional capabilities and personal characteristics needed for each senior management role and assessing candidates in the light of the company’s strategy and culture; and
- selecting the optimal candidates to replace the CEO and other key employees following their departure, whether planned or unexpected.
There is no one-size-fits-all way of approaching these issues, nor is there one specific succession planning procedure that would suit every company. The Board must therefore take into account the company's particular situation when formulating and implementing its succession planning policy.
To maintain continuous and efficient operations and a seamless transition of leadership, the succession planning process should be properly defined and implemented. A written succession plan is therefore highly recommended. It should at least include:
- the key (critical) management positions in the company;
- potential successors, their development plans and development opportunities;
- a step-by-step plan for emergency succession;
- alignment with the company’s strategy;
- legal and financial considerations;
- regular review and updating.
The succession plan and its execution should be reviewed by the Board at least annually.
