A Look at the Importance of Executive Evaluations
June 1, 2023 – We like to pick over the successes and failures of our political leaders, past and present, looking for answers, lessons, a bit of inspiration perhaps—or someone to blame. Politics is especially and immediately unforgiving of real or perceived incompetence; but, by comparison, corporate leadership teams face relatively little day to day external scrutiny. “And when they do, it is usually with the benefit of hindsight,” said a report from Sainty Hird & Partners. “Whether absolutely or relative to their peers, executive leaders and their teams – day-to-day management – are rarely measured objectively.”
Why? Sainty Hird & Partners explains that first, there’s motive: Executive evaluation is voluntary and, if done well, may reveal some uncomfortable truths. “And then there’s access,” the report said. “Over the past 25 years, the number of publicly listed companies has halved. Private ownership embraces opacity: It keeps vocal stakeholders and activists at bay, as well as the media and political opportunists. Only start-ups and scale-ups, preparing for funding rounds or exits, have a vested interest in trumpeting the quality, professional provenance, and performance of their executive team and directors.”
In addition, Sainty Hird & Partners notes that executive evaluations are not easy. “Board assessment is vital and has tremendous value, but for some is in danger of becoming a bit of a formality,” said the report. “Executive evaluation is – must be – more bespoke. It is simultaneously absolute and relative; it is necessarily complex, will usually have specific aims and is entirely voluntary, driven not by process or regulation but by change, whether unexpected and rapid growth or underperformance; by new ownership or by a simple need for validation. Whatever the catalyst, it requires full buy-in from those being evaluated.”
The report says that the reasons to bypass any routine maintenance are the same: cost, time and short-term inconvenience. “The temptation instead to wait until there is a big problem,” Sainty Hird & Partners said. “The irony is that now, today, with the economic tide further out – and quite a few found to be lacking a bathing suit – all companies, small and large, public and private, startup or established, could benefit from an independent evaluation of their management team.”
Executive Evaluations
Executive management evaluation analyzes a company’s present (and future) executive leaders. “It may be seen prima facie as a relative of board assessment and, to an extent, financial audit or any other independent external review,” the Sainty Hird & Partners report said. The firm says that at a fundamental level it seeks to answer two questions:
1) Is the existing executive management team fit to execute both the current and future business strategy?
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2) Can the executive management team be in any way improved?
“In a bit more detail, it is a process to assess a company’s management team, individually and collectively, and, by association, that company’s structure and culture,” the firm said. “The result is an overview of the quality of the management team and its structure absolutely, relative to its competition, and to the board’s business strategy. So, no wheel is being reinvented. Indulgent introspection, mumbo-jumbo and pseudo-academia is avoided.”
Why Are They Necessary?
The board and shareholders (and stakeholders) should feel the same way about an executive management team, who are arguably the most important of all employees, according to the Sainty Hird & Partners report. But who within a company is well-positioned to judge the executive team’s performance? “The board provides counsel, oversight, and governance and will choose and appoint the CEO,” the report said. “Regular, objective assessment of the CEO and the full executive management team? In truth, most boards are unqualified to do so and are more concerned about their own performance. An independent executive evaluation looks specifically at these leadership ‘assets’ and, as noted, is in part akin to a financial or board audit; but, unlike these, it is neither an established process nor a legal requirement.”
What Do They Achieve?
The Sainty Hird & Partners report says that a robust and effective executive evaluation provides data, commentary, and recommendations to shareholders and the board on a company’s leadership, structure, and culture. “The recommendations, most practical, some theoretical, seek to improve the executive management team – and thus the company – to the benefit of both shareholders and stakeholders,” the firm said.
The report outlines some specific outcomes including:
• Validation of the management team.
• Recommendations on restructuring or enhancing the existing management team.
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• Detailed qualitative and quantitative assessment of individual executives, absolutely and relative to the board’s performance expectations.
• Benchmarking the management team, individually and collectively, against industry and sector peers.
• Identification of the team’s ability/inability to adapt to future challenges and/or strategic shifts (including changes in ownership, listing, MBO’s, etc.).
• Identification of (and remedial recommendation on fixing) any misalignment between the board and management, and/or strategy and execution.
• Challenging job descriptions, hierarchy, succession plans, and methodology of performance measurement.
• Highlighting organizational issues around (for example) reporting lines, career aspirations, internal communication, corporate culture, and compensation policy.
When Should They Be Used?
“There is a strong case for considering executive evaluation as a regular corporate health-check or, for the more pessimistic, preventative maintenance,” the Sainty Hird & Partners report said. “It does not need a specific positive or negative catalyst and there is certainly no bad time to employ it; but, in practice, a common denominator prompting an evaluation is some form of change in strategy, investment, ownership, sector disruption, succession, etc.” Sainty Hird & Partners provided the following examples:
Investment: Potential investors in a start-up or scale-up will consider the sector, the company’s competitive position, its financial performance, product, fit, etc. Few, however, devote resources to a comprehensive assessment of caliber and suitability of the management team, which may be the greatest determinant of growth and profitability.
Reorganization: A management team may be disrupted for many reasons, from personalities clashing to the need for a strategic pivot. A team might be hit by scandal or destabilized by an unplanned departure. Objective analysis and recommendations on optimal redeployment (or changes to) a team offers a more considered approach than the too common knee-jerk norm.
Finance Growth: Companies need to seek additional financing if/when a listing is not an immediate option (as now). An ability to showcase management and to evidence the resulting likelihood of growth potential increases the probability of a successful fund-raise. An independent evaluation provides investors with this reassurance.
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Outperformance: Changes in business and economic cycles mean that investors must consider not only asset allocation, but also the relative merits of individual companies within one sector. The sector might be unattractive, but unbiased evidence of exceptional management and a differentiated strategy (and the ability to execute it) can provide unusual, even unique insight.
How Do They Work
There is always a defined structure to any evaluation process, however bespoke, and there are some inviolable principles underpinning all evaluations, according to the Sainty Hird & Partners report. “It is vital to understand a company in detail and in context: where it is and was, and where it hopes to go on its corporate journey,” the firm said. “The practical methodology of an evaluation is always founded on an analytical and interactive process that enables both the hard and quantifiable and soft and more qualitative issues to be identified and assessed systematically. It is always and necessarily bespoke, but most commonly has five stages.”
1. The Brief. Sainty Hird & Partners explains that a company’s status, ambitions, expectations and competitive positioning must be fully understood. “Job specifications and roles should reflect these,” the report said. “The aim is not to question strategy, but to understand in detail what exists and why. The scope of an evaluation may then be defined and agreed by the sponsor and (if different) the executive team. It is crucial to have the support of all participants.”
2. Organization. The structure needs to be understood to establish precisely what skills and job specifications are needed and how they interact to execute the strategy, according to the Sainty Hird & Partners report. “Each role profile is reviewed, as is the team, in order to draw preliminary conclusions as to individual and collective suitability relative to internal and external requirements,” the firm said. “It is critical to integrate at this stage into the process any expected changes, contingencies and future requirements for each position and for the team.”
3. Individuals. Sainty Hird & Partners also notes that multiple, systematic, individual interviews and/or workshops assess each manager’s contribution to the company’s strategic and operational effectiveness (stakeholders) and profitability (shareholders). The firm explains that they evaluate strengths, weaknesses and development needs, as well as likely ability to meet future challenges. Individual evaluation has seven core themes: Agility; competence; culture; engagement; leadership; performance; and remuneration.
4. Team. “The sum of individuals’ contributions to the effectiveness of any team may or may not equate to the effectiveness of that team,” the Sainty Hird & Partners report said. “An evaluation aims to determine whether there is a differential and, if so, whether it is positive or negative. Either way, the evaluation’s aim is to raise the competence and effectiveness of the executive team as much as individually. The team is assessed as a function of its: accountability, alignment, complementarity, culture, diversity, engagement, gaps, leadership, remuneration, and vision. The harmony, effectiveness and profitability of a team may be measured, as with individuals, both absolutely and relatively (subject to availability of sector comparisons), and is scored empirically, which allows the plotting of a complex graph, demonstrating individuals current and likely future contribution to the team.”
5. Recommendations. Lastly, Sainty Hird & Partners notes that while the sponsor will be the first recipient of recommendations, full transparency and disclosure is key. “There should be scope for career-planning and an opportunity for self-development,” the firm said. “In short, the executive team must be involved in the entire process, not least its conclusion, because it is they who are implementing the recommendations.”
Sainty, Hird & Partners was founded in 1996 and its search capabilities span all products and functions within the financial and professional services sectors where the firm operates at all levels of seniority and experience. The firm works closely with clients to ensure that there is a diverse candidate pool, in order to provide equality of opportunity. As well as conducting regular assignments in the U.K. and continental Europe, Sainty, Hird & Partners has a long track record of completing placements in Asia-Pacific and North America.
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Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media
