This post also appeared as a guest article on the Chartered Management Institute’s blog and on the Bradford University School of Management blog.

A  potential client asked me to provide some recommendations for the performance measurement by main board members of a newly appointed operating unit managing director.  It would be fairly simple, one would think, just get hold of some tough, hard-nosed measurement metrics and let the MD survive or fail accordingly!

However, as I looked back at my own board experience and further researched this whole subject area, it occurred to me that, whilst very important, the ‘tough’ metrics tell just part of the story.  If MD success is about developing sustainable rather than short term business performance, then there are many other ways to measure their success or potential.

Here are what I think are the four key types of measurement of MD performance and potential.

1. ‘Hard’ measurements of MD performance and potential

Let’s start with some of those ‘hard’ measurements- beloved by many board members, especially those with a typical FD background.  Here we can look at

–          typical measures such as return on capital invested, revenue and profit – often by product, service, employee, project, client or sector

–          service measures such as on time delivery and returns

These are fundamental but only tell part of the story. The increase or decrease in ‘hard’ metrics is likely to be in part down to the result of the management style of the MD.

2. ‘Soft’ measurements of MD performance and potential

With ‘soft’ measurements, we can start to understand the views of stakeholders. How do employees work as a team?  If they don’t, then success (if it exists) will be by its very nature short term.  A good MD will have satisfied employees so we need to look at labour turnover and absentee levels.  If both are high then again whatever the profitability, the long term prognosis will not be great.  And then what about the profile of the business?  Industry or service awards can be a good benchmark as is the reputation of the business within both the sector and the relevant community.

3. ‘Personal’ measurements of MD performance and potential

Just what sort of a leader is our MD (here we need to differentiate between leadership and management)?  How willing is the MD to develop his/her performance and, from the board’s perspective, is he or she following the personal development action plan – providing one has actually been laid down by the board in the first place?  Very importantly, is the MD’s relationship with the main board positive?  Is reporting clear and on time?  Does the MD’s style lend itself to the expectations of the main board?

4. ‘Strategic’ measurements of MD performance and potential

How has the MD delivered against strategic and operating plans developed and presented to the board?  How have these been represented in front of customers? Without customer satisfaction/retention the business is unlikely to go far.  This is where it’s not just a matter of making good profits – it’s a matter of making good profits though treating customers properly.  We also need to look at where the business is going in the future.  Is the MD performing well through constantly taking costs out of the business?  Or is the MD actively looking at innovating into new markets or with new products?  Does the MD encourage working with the future in mind?  And finally, does our MD actively contribute to the overall future direction of the company as well as his/her operating unit?

The trick is to bring all these measurements together in a coherent manner. There are helpful tools such as Kaplan and Norton’s Balanced Scorecard which links together financial performance, internal processes, customer satisfaction and learning and innovation.  It is also worth benchmarking against industry standards.  Within “our” industry what are the key standards we would expect from, for example, competitive MDs?  And how does our MD stand up against these?

So measuring performance of the MD is no simple matter.  Stick purely to the ‘hard’ metrics and the MD could become yet another top flight football manager – lauded because of good short term results but not really respected because the supporters were always bored watching defensive play and competitors can easily understand how to out flank the strategy.  One slip up and he has gone!  That is not what we want with our MD.