Balanced Scorecard and CEO Oversight

The Balanced Scorecard approach provides boards a range of variables to measure success. With a mixture of financials, strategic values of the organization and others, this provides more confidence in their assessments. When boards and CEOs collaborate to establish these measurements, it also helps clarify the plan for all involved.

By Kevin Smith

Board members: how comfortable are you in your role as evaluator of your CEO? More and more I’m hearing discomfort among directors about how they assess the performance of the CEO. And it’s no wonder, the more complex the industry gets, the more information the board has to digest, the more difficult it is to keep up with … well, … everything! Add to that the fact that very often, credit union board members don’t come from the financial services world in their professional backgrounds. Of course, none of this means that these are bad directors, or that they don’t offer a world of value to the strategic thinking of the credit union. But it DOES mean that directors these days need to make sure they’re using the right tools, and getting the right kind of information/education to keep them current to good work in an efficient amount of time.

Kaplan and Norton’s Balanced Scorecard

One suggestion is that boards and directors make strategic use of a balanced scorecard in order to properly assess and reward the CEO’s performance. The original concept of the balanced scorecard was developed by Robert Kaplan and David Norton. The idea is to link a number of variables that are measurable as “critical success factors.” The variables and range make sure that the success of the organization is not simply dependent on one or two areas that may be gamed, or that might leave out an important area. For example, only measuring ROA could cause a leader to pursue only things that increase that measurement at the expense of say, healthy capital levels, or employee morale and turnover rates.

Kaplan and Norton’s BSC relies on four perspectives:

1. Financial
2. Customer
3. Internal Business Processes
4. Learning and Growth

Credit union boards can and should work together with the CEO (and senior management) to establish critical success factors that they align with the strategy of the credit union. This is customized, not a template, and it doesn’t have to be just four. And the factors should be a mixture of things that represent the values of the organization, not necessarily simply ratios that are easy to gather. These factors are, at times, a little bit more subjective. And that’s okay. For example, a need for “increased brand awareness” may require some finesse and input from the marketing folks to establish a measurement that adequately captures that goal. Get creative!

Boards can weight these factors according to importance. They need not be equal. Remember that “balance” is the operative word here.

The Value of the BSC Approach

This approach will help boards in a variety of ways when managing the oversight of the CEO:

• Establish two-way communication about priorities and values
• Clarify measurements that they track throughout the year (not just at “annual review time”)
• Provide a more objective mechanism for establishing the success of the CEO in achieving the strategic goals for the year (and subsequently a monetary bonus)
• Give board members confidence in their oversight role that goes beyond, “we feel like he/she did a good/poor job” and “how good/poor?” and a “gut level” response.

This approach also forces boards to take up an approach that is less likely to allow them to procrastinate and only provide feedback to the CEO once a year (or *yikes*, less). It’s a system that efficient and tremendously valuable once it’s set up and in place.