In the last of its series, William Farrell, Managing Partner - Taiwan and South Korea, discusses at length how "The Board advises and the CEO manages"
I began this set of articles noting that Boards are central to effective corporate leadership, and strong boards are needed to provide guidance, particularly in times of crisis. I discussed the overall function of boards, looked at the role of Board Directors and took a closer look at key leadership roles on Boards namely: Board Chair, Vice Chair, Treasurer, and Board Secretary. One overall theme has emerged: The Board advises and the CEO manages. The Board hires the CEO to execute the board-approved strategic plan. The Board does not execute the plan; it monitors the company’s progress towards achieving the plan while ensuring required resources are available.
Perhaps stating the obvious, the relationship between the Board and the CEO is a critical aspect of successful corporate leadership. The starting point of this relationship is: The Board selects the CEO, and the CEO is hired to take responsibility for all management and operational issues of the company. Here are some guidelines to ensure an effective working relationship between the Board and the CEO:
- Ensure the CEO and the Board share values of the organization
- Develop mutually agreeable goals policies, and standards of performance for the CEO with input from the CEO
- Agree on the decisions that should be brought to the board, those on which the board wants to advise and consent, and those that are delegated to the CEO.
- Remain knowledgeable about the firm’s activities and performance in appropriate detail and in a timely manner and evaluate the results.
- React appropriately to the results by holding management accountable and reward or intervene when necessary.
Implementing these guidelines is not particularly difficult as long as the basic operating principle is kept in mind: The Board advises and the CEO manages.
Ensure the CEO and the Board share the values of the organization
One way to make this happen is to develop and implement a succession plan for the CEO. This is a common aspect of corporate planning and is a task assigned to the CEO, most often in coordination with the Board Chair, the Nominations and Governance Committee, or an ad hoc committee established for this purpose. Having a member of the existing senior executive team prepared to step up to the CEO role is one of the best ways to ensure the new CEO shares corporate values. Of course, there are instances when this solution is not available. The preferred successor is not quite ready for the role. Or perhaps the successor left the company for other opportunities. In the event that there is no obvious internal candidate, the Board will have to initiate a search for the successor. In that case, the Board will have to work through a robust selection process to identify and assess the best candidate available at the time. This selection process must include an agreed to set of criteria of required skills, experience, and the values required to lead the organization. Yes, a retained executive search firm is often best positioned to lead this effort.
Develop mutually agreed to goals, policies and standards of performance for the CEO with input from the CEO
The forementioned selection process should not only include a description of the required skills, experiences, and values required to lead the company, but also a clear description of the basic responsibilities of the role. The board and the CEO need to agree to the deliverables of the position in terms of general management and maintaining company operations. In addition, the Board and CEO should come to an agreement of strategic goals on an annual basis and/or a rolling 3-to-5-year strategic plan. In either case, when the Board and the CEO go through the annual planning process, one outcome should be an agreed to a set of goals for the coming year. These goals and the basic deliverables form the basis of the CEO performance evaluation.
Agree on the decisions that should be brought to the board; those on which the board wants to advise and consent, and those that are delegated to the CEO.
While the guiding principle is that the Board advises and the CEO manages, there are situations that fall in a gray area between operational and strategic. A CEO will want to have control over the company budget. It is good practice, however, that expenditures over a pre-agreed amount require Board approval, allowing the Board to fill its function of weighing in on strategic expenditures. The Board probably does not need to be informed of every M&A approach or opportunity. But again, those that meet certain criteria should be required to be brought to the Board before the CEO takes any other action. CEOs also prefer to manage company staff particularly direct reports – CFO, CIO, CHRO, CMO and others. Most Boards expect to have input on at least some of these roles, the CFO being the most common. Here the input does not necessarily have to fall to the entire Board as it can be delegated to the Finance Committee, Audit Committee or another appropriate sub-group of the board.
Such agreements should serve to establish a well-understood line between the responsibilities of the Board and the CEO. They also provide excellent points of interaction ensuring that the Board and the CEO focus on the important strategic decisions of the company.
Be knowledgeable about the firm’s activities and performance in appropriate detail and in a timely manner and evaluate the results.
In my earlier articles I discussed some of the key responsibilities of Board Directors. Being engaged in Board discussions and being informed about company activity is one. In order for the Board and its members to provide guidance to the CEO, the Board members must have access to information detailing company performance. This, of course, includes financial data, but includes other metrics important to understanding trends in and overall company performance. These metrics will vary greatly from industry to industry. Regardless of what the metrics are, the Board must receive this information on a timely basis. The CEO is required to deliver this data on an agreed to schedule. The Board members are then obligated to digest the information to provide the feedback and guidance the CEO expects. This helps form the basis of a healthy and fruitful relationship. Failure to provide the timely and accurate information prevents the Board from fulfilling its obligations. Failure of the Board to absorb the data prevents the Board from properly monitoring the CEO’s performance and providing the strategic guidance expected and required.
Hold management accountable and reward or intervene when necessary.
A passive Board is not a successful Board. A successful Board is one that provides appropriate guidance when needed. Following closely from the point above, with the performance metrics on hand, the Board can see when things are not going as planned. This is an opportunity for the Board to address the CEO to determine what the problem is. The Board does not jump in to solve the problem, but instead points out the issue and works with the CEO to determine corrective action. By the same token, when the Board sees exceptional performance, it is appropriate for the Board to call this out as well and offer whatever reward or accommodation it sees as appropriate. The Board and its members ought to remain engaged on the strategic and big picture level.
Before I bring this to a close, I’d like to point out 2 common pitfalls to avoid. These follow from what I was discussing above, but I think it is helpful to call out these 2 common errors and to briefly note the problems that can result if not addressed.
Avoid interfering or micromanging
This is a reference to Boards that cross the line and get involved in operations. This tendency is easy to understand. Board Directors are experienced, successful executives that have faced and resolved numerous problems in their careers. The urge to step in and ‘just deal with it’ can be hard to avoid for some. But the consequences of such actions can be serious and detrimental to the success of the company. Here are a few possible negative results:
Undermine the effectiveness of the CEO
If the senior staff of the company or key customers or perhaps 3rd party service providers see or even suspect that the CEO is not making the important decisions, the CEO may lose the ability to lead.
Hard to hold to the CEO accountable
If the Board is making decisions for the CEO or actually involved in the implementation of important decisions, how can the Board judge the CEO on those decisions or the results?
Demotivates the CEO
If this behavior is uncorrected and continues for too long, the CEO can become disengaged and lack motivation.
Encourages high CEO turnover
Following directly from the point above, disengaged and unmotivated leaders are far more likely to seek opportunities elsewhere.
Lowers overall organization performance
A worst-case scenario is the Board – CEO relationship becomes dysfunctional. Board Directors are micromanaging but are not able to step in and run the company. Senior company executives are no longer certain from where to take direction. Also, CEO performance is no longer appropriately monitored. The company suffers.
Do not be too detached or hands-off
There are times when Boards may slip into being too passive and perhaps not engaged enough. In the short term, as long as there is a competent CEO in place, companies may be able to survive this, until there is a crisis. In the absence of that what are the results of this pitfall?
Hard to hold CEO accountable
If the Board is too hands-off, it is less likely to be aware of overall performance. Then the Board will have a hard time knowing when the CEO is actually managing the business properly.
Difficult to measure CEO performance
A Board that is not aware of the details of company performance, a Board that is not taking into account the performance metrics of the company will be hard pressed to determine overall CEO performance.
Challenge to ensure delivery of the mission of the organization
Boards that are too distant from the CEO and the company as a whole may not be able determine whether or not the company is meeting the goals of its mission. Even if the Board ‘feels’ something is amiss, without following company and CEO performance, how will the Board be able to prescribe effective corrective action?
That concludes the 3rd in this series of Board Basics with an overview of the very important relationship between the Board and the CEO. A good, healthy, and interactive relationship between the Board and the CEO is an important aspect of resilient leadership, particularly in times of crisis. Adhering to some basic principles go a long way towards setting the foundation for an effective Board and resilient corporate leadership.
