Clear goals and objective evaluation of progress toward those goals can enhance both organizational and individual performance. For both nonprofit and investor-owned organizations, appointing the CEO, establishing his or her performance expectations, and assessing the CEO's performance in relation to those expectations are among a governing board's most fundamental and important duties. Evaluating the CEO's performance against pre- established expectations in a fair, consistent manner is beneficial for all parties and widely recognized as a hallmark of good governance.
Previous national surveys suggest that a large majority of governing boards formally assess their CEO's performance in some manner. For example, a 2009 study by the National Association of Corporate Directors found that 86 percent of public company boards evaluate their CEO's performance annually. Similarly, a 2007 study of hospitals and health systems by the Governance Institute found that 91 percent of the governing boards follow a formal process for assessing their CEO's performance.
However, the fact that a performance evaluation process is conducted does not necessarily mean it is done well or perceived as beneficial by the employee. A CFO magazine survey of 2,000 employees in several large public companies found that only 39 percent believe their performance reviews are effective. A 2008 Center for Healthcare Governance study of CEOs in health care organizations found that 82 percent were not given performance expectations when they were hired; 66 percent of the CEOs reported there was no formal evaluation of their performance after their first year in the CEO position. Without pre-set, mutually understood expectations, performance cannot be evaluated objectively. These and numerous other studies have raised serious questions about the quality and efficacy of CEO evaluation processes in the health care field and other sectors.
Community Health Systems
A study completed in 2009 examined governance structures, practices and cultures in nonprofit community health systems located in 41 states. The study included a survey of CEOs (with responses from 123 of the 201 systems in the study population) and on-site visits to 10 of the highest-performing systems.
With respect to CEO evaluation, complete data were available for 114 community health systems. The study found that written performance expectations routinely were established for 104 of the 114 CEOs (91 percent), either by the community health system board (83 CEOs) or by the system's parent organization (21 CEOs). As would be expected in an environment in which health care providers face increasing resource constraints and quality concerns, the performance expectations for virtually all of these CEOs include specific targets regarding their system's financial performance and patient care quality. By way of contrast, the performance expectations for only 66 percent of these CEOs addressed leadership team development.
The 83 CEOs whose local boards formally evaluate their performance in relation to pre-established, written expectations were asked their opinion about the evaluation process that was in effect at the time of the survey. The results are presented in the table on the previous page. On an overall basis, 72 percent of these CEOs felt the process "provided clear performance expectations and assesses actual performance fairly."
This view is held by all of the CEOs who lead high-performing systems. It is shared by 73 percent of the CEOs in mid-range performers and 38 percent in low-performing systems. The difference is statistically significant. These data clearly raise questions about the efficacy of the existing expectation-setting and performance evaluation protocols in these organizations.
In total, these findings suggest there is room to enhance the effectiveness of CEO evaluation processes in many community health systems. The health care landscape is changing rapidly, and provisions of the Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 will be taking effect. In this dynamic environment, it is imperative for governing boards of health care systems to select and appoint highly capable CEOs, work with them collaboratively to set clear, written expectations, and then objectively and fairly assess the CEO's actual performance against these expectations. Every board of directors, in concert with its CEO, periodically should take a fresh look at its existing approach with the goal of continuous improvement in evaluation policies and protocols.
The entire report, "Governance in High-Performing Community Health Systems," on which this article is based, is available online and can be downloaded without cost at www.americangovernance.com.
Lawrence Prybil, Ph.D. (firstname.lastname@example.org), is a member of the National Board of Advisors, Center for Healthcare Governance, and professor of health services management at the University of Kentucky, Lexington. Ammon Fillmore, M.H.A., is an associate attorney at Hall, Render, Killian, Heath & Lyman, Indianapolis.
Sidebar - About This Study