Any day now, one of the most incredible milestone will pass without probably the notice it deserves: the total value of all stocks worldwide will surpass $100 trillion, a record. That's five times as big as the US economy (and 341 times, by the way, bitcoin’s value). The rally has been particularly widespread in 2017 with large US stocks are up, as a group, more than 20% and Chinese stocks are up nearly 50%.
But while skyrocketing stock prices are great for investors, they can produce a curious problem: how to evaluate CEOs? In a bull market, like this one which started in 2009, all CEOs tend to look like geniuses if the only metric that they are judged by is the stock price (or total shareholder return, if the company consistently pays out hefty dividends). That’s why experts say board directors should use more nuanced metrics. Some are hard financial measures, and some are softer more subjective ones.
Dennis Carey, a vice chairman of Korn Ferry who recruits board directors, CEOs, and their direct reports, says the first thing to watch how rival companies are doing. “Industry to industry comparisons are the most valid,” he says. That's because the CEOs in the same industry usually are facing the same obstacles to running their businesses. For instance, U.S. based mining companies all face the same environmental regulations and the same demand for materials. By comparing the CEOs performance to those of the peer CEOs the board can get a sense of whether shareholder returns are leading or lagging the industry pack “That’s the way wall street tends to compare CEO performance,” he says.
But a peer-to-peer stock price ranking is still just a financial metric. Other measures should be added to the mix, as well, experts say. “There are times when the stock price is performing relatively well that the CEO is still taken out by the board,” says Carey. Such a board decision may be based on the other somewhat subjective factors. The key things boards look for, other than financial performance, are whether the CEO “drives trust, transparency, communication so that everyone knows where the company is heading,” he says. Board members find out whether that’s happening by spending time with employees and executives, he explains.
Specifically, what the board is looking for is whether there is “general agreement and a good feeling among the employee base that the company is being led well,” says Casey.
There is also one more evaluation scale that is being pushed by the millennial generation and that boards are using more: social responsibility. Is the company behaving in a responsible manner or is it getting the board into trouble in the media or with other stakeholders? Or it could be the question of whether the company is loyal to its workers. “There needs to be a sense among the board members that if the company gets hit by shareholder activists that the CEO has been out thinking the activists and has considered alternative strategies,” Carey says.
More simply, has the CEO considered all the alternative strategies reasonably available and still decided that the current one is best? If so, then the CEO will likely be in decent standing with the board. “In the end, it all goes back to honesty and integrity,” says Carey.