BoardSource has long noted that one of the 10 basic responsibilities of all boards is to support and evaluate the chief executive. Another is the hiring of the chief executive. The first is a given — or should be. The second, thankfully, is not a regular board responsibility — at least, I hope not! But after working more than 30 years in the nonprofit sector, I would offer that these two are the most important responsibilities that a board must address, and address well.
Keeping an effective CEO engaged and happy shouldn’t be hard. The Ethic of Reciprocity (often referred to as The Golden Rule) essentially states “Treat others as you would like to be treated.” In a professional setting, management best practices help us understand that when we treat others well, we get the most productivity and reduce turnover.
That said, no matter how well we treat a CEO, he or she is not going to stay forever. It’s inevitable: One day, the CEO will walk out the door and on another day, a new CEO will walk in. What we can do, however, is keep our effective CEOs as long as possible and then manage CEO transition well.
According to BoardSource’s Leading with Intent: A National Index of Nonprofit Board Practices:
- Half of all CEOs intend to leave their posts within the next five years, yet only one-third of nonprofit boards have an executive succession plan.
- One out of five nonprofit boards have not conducted a formal performance evaluation of its CEO.
- One out of four nonprofit boards have not done their due diligence on setting executive compensation in terms of gathering comparable data and documenting their process and decisions.
Boards cannot afford to wait to address these issues until they receive a CEO resignation letter, have to let a CEO go, or, in the worst-case scenario, learn of an unfortunate turn of events that would preclude a CEO from returning to work. Boards need to act proactively for the good of the organizations they serve.
Here are simple yet concrete steps that a board can take now to prepare for the inevitable.
Make sure your governance house is in order
While Leading with Intent had lots of good news to share, the bottom line is that nonprofit leaders give nonprofit boards a “B minus” grade in overall performance. A correlation may be made between this and a CEO’s desire to stay with a particular organization. Because effective CEOs are in high demand, those who are good will likely lean toward employment with organizations that demonstrate a track record of strong board performance.
Ensure an effective and annual CEO performance review process
Typically a CEO receives the best feedback when all board members are asked to complete a performance assessment tool, which should be based on the CEO’s job description and stated performance goals. Results should be compiled so that the data reported is not attributable to a specific board member, ensuring candid reflection, and presented in a written format as well as a verbal discussion. In addition to praising and/or providing constructive feedback to the CEO, the results of a performance evaluation also should be used to set performance goals for the coming year and be shared with the full board.
With CEOs reporting as follows, boards have an opportunity to improve in this area:
- 26 percent of CEOs indicate that they are not satisfied with the process used to evaluate their performance.
- 23% percent of CEOs indicate that their evaluations are not based on performance goals mutually agreed upon by the board and CEO.
Ensure a fair and formal process for setting executive compensation
Here’s some more Leading with Intent data:
- 25 percent of CEOs are not satisfied with the process used to set their compensation.
- 25 percent of CEOs indicate that their total compensation package does not use data from comparable organizations.
- 35 percent of CEOs say the full board does not approve and adequately document the process used to determine CEO compensation.
Best practices suggest — and because of the increasing scrutiny of the nonprofit sector with regard to executive compensation as well as the updated Form 990 self-assessment of justification for executive compensation — the board ensure the determination of CEO compensation through a process that benchmarks such compensation against established comparables. And a written report of this process should be kept as part of a CEO’s personnel file. A surprising finding is that sometimes a board discovers through this process that it is underpaying the CEO — another retention risk.
Put the topic of succession planning on your next board meeting agenda
According to Leading with Intent, only 34 percent of boards have a written succession plan! Why is that when 50 percent will be confronted with replacing a CEO within the next five years? Executive transition is not just about finding a CEO who fits the current and future demands of the job. It also should focus on minimizing the risk and capturing all of the opportunities that a change in leadership offers. Put this on the board meeting agenda now and keep it as an agenda item until a succession plan has been established.
Develop an emergency succession plan
What would your board do if your CEO announced later today that she was moving to Tahiti? What would be the boards’ agreed-upon action steps? And is current key information compiled and stored in a safe place?
A board has the opportunity to think ahead and actually plan for unexpected CEO departure. And this can be done while the current chief executive is in place, maximizing timeliness and efficiency and minimizing organizational trauma. CompassPoint has posted an Emergency Succession Plan template that will help a nonprofit organization recognize that planning for unplanned or temporary leadership change is a best practice—in line with other plans nonprofits regularly complete — and can bring order in a time a time of turmoil, confusion and high-stress.”
Boards have both an opportunity and an obligation to get CEO transition right. I encourage you to get started today.