Chapter 3 Flashcards
T 1.1 What frequency/timing does NACD suggest for CEO reviews? What are the 2 topics that are important?
- Recommended frequency is annual (before the next fiscal year begins!?) plus a mid-term check-in
- 2 topics are performance evaluation of the CEO (duh) AND alignment of the CEO profile with the skills the company requires (forward-looking)
T 1.2 What should the CEO review be based on/consider?
- It should be based on the CEO job description and objectives
- It should consider broad outcomes, including financial and nonfinancial metrics (correlating with executive compensation ?!)
T 1.3 What should be the process for the annual evaluation of the CEO? (5 steps)
Step 1: CEO shares self-evaluation with the committee leading the CEO evaluation
Step 2: the committee prepares their own evaluation, considering the CEO’s self evaluation and their own analysis (and potentially additional data, like a 360)
Step 3: the committee discusses their evaluation with the full board; ful board approves it
Step 4: the director leading the process gives the review to the CEO
Step 5: the director leading the process discusses outcomes of the discussion with the CEO with the full board (incl. resulting next steps)
T 1.4 What are the 2 types of CEO succession plans that a company should have?
- Emergency succession plan
- Long-term succession plan under normal circumstances
T 1.5 What are the 7 factors that boards often consider when evaluating CEOs/candidates?
● Integrity: How the CEO makes decisions and how he or she responds to difficult situations
● Vision: How well the CEO can envision new paths for the company
● Leadership Abilities: How staff responds to the CEO’s effectiveness as a leader and team builder, including diversity of the workforce and leadership team
● Performance: The ability to meet both financial and nonfinancial goals
● Succession Planning: The match between CEO and senior management competencies and company needs, both current and future
● Fitness: Physical and psychological strength and stamina
● Relations: The quality of relationships with board members, shareholders, and other stakeholders
T 1.6 When a new CEO has been selected, what are the disclosure and communications requirements/best practices?
When the CEO is selected, the company needs to file a Form 8-K with the SEC to announce a change in leadership
In addition, the board’s process for selecting the CEO should be disclosed to shareholders, such as in the proxy statement
T 1.7 When boards develop the parameters for qualifications and requirements for CEO candidates, which dimensions do they often consider?
- Company strategic imperatives
- CEO competencies to carry out strategy
- Behavior, culture, and values the new CEO should demonstrate
- Goals and financial targets for the new CEO
T 1.8 When a new CEO has been hired, what are 6 best practices for the board to help with CEO assimilation? The board should…
- Articulate its expectations about what information and decision should be shared with them
- Review performance goals and expectations for first 18 months
- Give the CEO briefs from the committee chairs
- Appoint one director as the CEO’s champion to meet periodically with the CEO 3and develop an orientation plan.
- NOT micromanage the new CEO
- Accept changes to the leadership style
T 1.9 What are 3 common challenges boards in the CEO succession process (and what should boards strive for in each dimension)
- Internal vs external candidates: ideally - have strong internal pool BUT balance out process by also considering external candidates (but don’t fall in love w externals too easily)
- Managing internal competition: be aware of unhealthy competition (“horse race”) and faction formation; employ a transparent and objective selection process; also - consider retention tools to keep internal candidates that weren’t selected
- Considering culture fit: Issue - CEO a culture champions (for better or worse!), and selecting a poor culture fit can negatively impact value creation; best practice - define organization’s culture/skills and evaluate CEO candidate against it
T 1.10 What are red flags in the CEO selection process?
● Lack of internal candidates for the CEO position
● Continuing poor or mediocre performance by the company
● Departure of promising top management candidates
● Crisis created by personal or health issues that should have been known and addressed by the board
● Retirement of the CEO delayed due to the lack of a successor
● Time-based succession planning scheduled around planned retirements instead of performance-based succession planning
● Targeting of the company by shareholder activists, and/or negative reports by analysts or financial or trade press
● Excessive focus on compensation and dramatic changes in performance measures
● CEO attempts to control the board by restricting access to top management or discouraging executive session meetings of the outside directors
T 1.11 What are 4 pieces of guidance around CEO succession planning and evaluation
- Evaluations - when and how: annual CEO evaluations PLUS a mid-year review; use financial and nonfinancial metrics; consider 360-degree evaluation
- Succession planning - when and what: Make CEO succession planning an ongoing process; have short-term and long-term succession plans (3, 5, >5 years)
- Talent pipeline and selection: have internal pipeline but also consider external candidates during selection; manage dynamics of internal competition
- Disclosure: disclose the board’s CEO succession process to shareholders and describe key elements such as the CEO candidate profile and the board’s role in talent oversight
T 2.1 How are executive compensation packages structured (and what is the underlying compensation philosophy)?
- Comp packages today are largely based on performance, with guaranteed base pay being only a small percentage of the package, and with the remainder being composed of stock and/or linked to specific performance goals.
- Goal is to link exec comp to drivers of long-term value creation for shareholders
T 2.2 For public companies, how/where do boards articulate the pay-for-performance link to shareholders?
In the Compensation Discussion and Analysis (CD&A) section of the proxy statement mandated for all public companies
T 2.3 What are 6 basic elements of a company’s executive compensation design?
- Compensation Philosophy
- Elements of Executive Pay, incl. both fixed elements (base salary, pension and benefits, and any perquisites) and those that are at risk
- Performance Metrics
- Benchmarking and Peer Groups
- Clawbacks
- Performance Measurement and Goal Setting
T 2.4 What are 5 key challenges associated with setting executive compensation?
- Board discretion: boards have discretion (up or down) but should limit exercise of discretion and need to communicate to shareholders when/why discretion was used
- Using total shareholder return (TSR)
- Pay Ratio Rule: SEC’s CEO-to-median-employee pay ratio disclosure rule
- Severance Protection and Golden Parachutes
- Compensation Consultants (challenge or solution to challenges…!?)
T 2.5 What are 4 guidelines for Setting Executive Compensation?
- Philosophy: Use comp plan to communicate the company’s values, goals, and mission to employees. Mirror company’s strategic objectives and promote long-term value creation. Fairness and consistency through all levels
- Components and their relative value: Balance LTIs with short-term operational goals, support the strategic plan; keep a majority of CEO pay as “at-risk”; Incorporate both financial and nonfinancial metrics; use peer group and market data
- Communication to executives: ensure that they understand what constitutes success. Mitigate the potential for adverse risk-taking
- Communication to shareholders: communicate link to long-term strategy. Apply board discretion to executive payouts with caution and disclose rationale
T 3.1 What are 6 key components of HR oversight (and key considerations for each)? [starting with 3x roles]
- Role of the board: ensure the strength talent development program, monitor the development of identified potential successors
- Role of committees: several committee stakeholders…!
- The Role of the HR Function: strategic architect for talent, enables the board in its talent oversight
- Hiring philosophy: have philosophy and evaluate goals to actual hiring practices
- Incentives:
- Assessment and reporting
T 3.2 What are 7 questions that boards can ask management re talent?
- Talent and risk: how is the talent strategy connected to the risk profile?
- Employee engagement and employee value proposition: How is the company ensuring high employee engagement?
- How compelling is the current value proposition?
- Measuring and incentivising talent development: How is t.dev. measured, how does the company perform? How are incentives used? for international companies, how effectively are local leaders developed?
- Mgmt commitment: Are leaders truly engaged in talent development and performance measurement? As directors, how do we know?
- Board leadership by example: particularly re social issues like DEI; Competitive benchmarking: who we are benchmarking against, and how do we compare?
- Evolution: how has our talent mgmt approach changed over time
T 3.3 What are 3 challenges in providing oversight for talent development?
- The Future of Work - particularly re: impact of technology evolution AI), hybrid?
- Compensation Equality and Diversity Below the C-Suite - CEO pay ratio rule, DEI
- Assessment of Employee Engagement
T 3.4 What are 6 LAGGING metrics for assessing talent development?
- Turnover of executive positions
- Turnover below the executive level
- Length of time in current role for current C-suite executives
- Demographic profile of current employees
- Difference in retention rates between high and low performers
- Results of employee engagement surveys
T 3.5 What are 4 LEADING metrics for assessing talent development?
- Succession readiness: How many internal candidates are ready now/ready in 203 years to fill key executive positions
- High potential employees: What is their share, how are we developing them and what is their career mobility?
- Strategic skill match: Percentage of employees with skill sets identified as necessary for long-term strategy
- DEI: Demographic profile of candidates
T 3.6 What are the NACD’s 9 imperatives for effective oversight of talent development?
- Establish multiyear, multilevel internal talent pipelines
- Talent development oversight is a responsibility for the full board
- The board should apply the lenses of of strategy and risk
- Management should include talent in discussion of every strategic initiative
- The board should consider including talent oversight and succession planning into governance guidelines, G&N committee charter, CEO JD, CEO LTIP
- Talent pipeline and talent strategy should be supported by hiring philosophy, employee retention and incentive programs, corporate culture
- Onboarding programs are necessary for all employees (even internal hires)
- The HR function is the strategic architect for talent development
- CEO succession planning should be a continuous and rigorous process. Include 3rd-party perspectives in this process!
T 4.1 What is NACD’s definition of organizational culture (in their 2017 blue ribbon report, based on MIT’s Edgar Schein)?
Organizational culture is “a series of assumptions individuals make about the groups in which they participate, visible through:
- artifacts (including public statements, organizational structures, and key processes)
-stated goals and aspirations and
- basic (i.e., taken-for-granted) beliefs”
T 4.2 According to NACD, what are the 8 influencers on an organization’s culture? [3 buckets]
- Bucket 1, rules and expectations (3): explicit and implicit rules, norms of behavior and interaction, compliance and ethics policies
- Bucket 2, processes (3): recruiting and training activities, processes for decision making and prioritization (including budget setting), communication and information flows
- Bucket 3, other reinforcers (2): incentives, leadership styles
