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CEO Coaching: Lessons from the Trenches

Aug 27

Posted in Board and Committee Leadership, Board-CEO Relations, CEO Succession Planning, CEO, Organizational Performance and Compensation | Comments Off on CEO Coaching: Lessons from the Trenches

Alcohol problems, drug use, sexual misconduct, financial misconduct, defensiveness, denial, berating of other senior management and directors, litigation, loss of key employees, toxicity and bulling. There is not much I have not seen when I am called in to coach the CEO. And CEO misbehavior happens in the highest level of corporate Canada. You may be surprised, but I am not.

Here are ten recent examples, disguised for confidentiality purposes: The CEO called a CFO a “moron” in front of the board and finance staff. Another CEO went silent, not talking to the Board Chair for a month. A CEO sat, arms folded, and did not say a word during an entire board meeting. A fourth CEO coaching regime occurred after a major failure, involving death and property destruction. A fifth CEO coaching was of a large manufacturing company, where the CEO’s effect on board colleagues was highly disruptive. In a seventh example, the CEO’s behavior was so disruptive that a major board rift occurred. An eighth example involved loss of key staff and an investigation into CEO conduct. A ninth example involved a CEO deliberately blocking board access to a potential successor and silencing of other senior management, from the board. A tenth example was a CEO of an iconic Canadian company shielding his compensation and expense arrangements from all directors, until I was called in by a regulator to investigate.

By the time I am called in, much of the damage has been done. But it doesn’t need to be this way.

The board’s most important job is hiring, paying and firing the CEO. Boards can get all of corporate governance wrong, but hire the right CEO, and be successful. Boards can hire the wrong CEO, and the company will fail even if the board has high governance scores.

The question that boards, prior to my coaching, often have for me is “Can the CEO change?” There are two things that are needed to change: awareness of the deficiency, and a willingness to change. I am optimistic, and usually have coaching success, but in a few instances, the CEO would not or could not change and I recommended firing the CEO.

Here are lessons for CEO coaching for any board:

The CEO’s coach is always hired by, and accountable to, the Board Chair and the Governance Committee, not the CEO.

For CEO coaching to work, the coach should understand board dynamics and report directly to the Board Chair, not the CEO. The Coach reports on coaching sessions, developmental plans, deliverables and progress, candidly and thoroughly, without the CEO present.

Prospective CEOs should be thoroughly vetted.

Normally, people’s personalities are stable, and the warning signs were visible long before the CEO was hired. A wrong CEO hire is always the board’s fault. Proper vetting now includes detailed resume checks, reference checks, professional background checks, social media and profile checks, personality testing against culture, exposure to all Directors, and multiple interviews in different settings, using external assistance. Put rigor and independence behind the CEO hire, base it on the strategic plan, and conduct an external search if only to test the market. Boards then make the mistake of not working closely with the new CEO after hire, and not onboarding them.

Collect your data and listen to employees.

CEO evaluation should always be 360 degrees, and include a board line of sight to views of direct reports in an anonymous fashion. Employee surveys should not be funneled by management, but should occur anonymously, reporting right into the boardroom. There are even software programs now that will collect employee meta-data for boards so bad news rises.

Link CEO behavior to pay incentives.

Frequently, I find the CEO has little incentive to change, as most of the pay metrics are financial and short-term in nature. In CEO coaching assignments, I normally restructure the CEO’s pay package to include non-financial metrics such as leadership, employee engagement, customer satisfaction, company culture, CEO succession planning, and/or board relations, or a combination of the above. Indeed, now, 75% of the value of a company are leading intangible measurements, such as the ones I mention, so pay metrics should reflect this. People behave the way you pay them. Boards often make the mistake of incentivizing aggressive, even unethical behavior. CEO pay should be tied explicitly, unambiguously, to ethical conduct.

Have the tough conversation with the CEO early on.

In two recent board meetings, I had to ask both CEOs to leave the room. The conversation completely changes when this happens. A board talks about CEO performance openly. When the CEO is called back into the meeting, there is a message delivered to the CEO by the Board Chair. The message is that the Board wants the CEO to succeed, and that behavioural and leadership issues need to be addressed. The CEO has to receive this message, the board needs to be aligned, and the executive session without management is the first step. Executive sessions should occur at each and every single board and committee meeting. To this day, remarkably, there are still CEOs who do not leave board meetings. The last thing a dominant or misbehaving CEO wants to do (and many CEOs are type As) is to leave the room.

Craft the CEO contract properly.

The person advising on the CEO contract should not be the company lawyer, nor the law firm that advises management. These people have a vested interest in not making the CEO contract hard-hitting. Firing a CEO “for cause” should be defined and broader than fraud. Just as athletes and entertainers have morals clauses in their contracts, CEOs should as well. The reputational, morale, talent and financial damage from CEO misconduct, to the company and to Directors, can be significant. Misconduct should be properly drafted to include ethical and professional conduct, with a defined process to determine whether a CEO is ever offside, with which the Board and CEO agree.

Engage in CEO succession planning and be prepared to fire the CEO.

There is a direct relationship between CEO leverage over a board and the lack of CEO succession planning by that board. CEO behaviours can get worse when the Board has no immediate or near-ready CEO successor.

In one major company, I detected defensiveness by the CEO and disrespect of certain directors. I found out that the CEO refused coaching, and that the board was four years out from an internal candidate being CEO-ready. “This is your failure as a board,” I said. The CEO is taking advantage of you because you have no options.

Conclusion

Some of the country’s best CEOs have had personal coaching, and that has contributed directly to their and the company’s success. No one is perfect, and we all benefit from one-on-one feedback, peer assessment, mentoring, and motivating coaches and trainers. Boards should see CEO coaching as a wise investment, and in the longer-term so old habits do not return.

Richard Leblanc is a governance consultant, lawyer, academic, speaker and advisor to leading boards of directors. His recent book is entitled The Handbook of Board Governance. Dr. Leblanc can be reached at rleblanc@boardexpert.com or followed on Twitter @drrleblanc.

What a Board Expects from Management, and What Management Expects from a Board

Jan 27

Posted in Board-CEO Relations, Relationships and Communication | 2 Comments »

I recently trained a group of directors and CEOs from the banking and agricultural sectors in Texas and Arizona. We discussed mutual expectations on the part of the board and management. The following represents the output of these discussions, which could apply to a variety of boards.

What the Board Expects from Management

Here is what a good board is entitled to expect from management, in no particular order:

1.         No Surprises or Spin

There should be no surprises for a board. CEOs and senior management need to tell the board the true state of affairs, without the “spin.” Directors know when they are not getting the “real deal” from management. If the CEO manages the board, or holds cards too close to the vest, this is a problem for a board.

2.         Bad News Must Rise

The board needs to be the first to know when need be, not the last. Management needs to have systems, processes and incentives that promote full transparency and reporting, right up to the board and its committees. The board needs to be assured of this.

3.         Deep Expertise in the Business

The board wants to see expertise across the full management bench, with no gaps. A problem arises when the board sees a weakness with which the CEO does not agree. Some CEOs have had trouble adjusting to a “new normal” of boards opining on C-level positions and oversight functions (e.g., internal audit). If a CEO does not accede to a board preference, this will be a problem.

4.         Visibility of Management Thinking

The board should see proposed options from management, including what was rejected and why. Management’s thinking and assumptions need to be fully transparent to the board and open to critique. A red flag occurs when management’s thinking is not visible.

5.         Full Information

There should be no information funneling or blockage of any sort. The board is entitled to any piece of information or access to any personnel to do its job. Management should support full information flow, including information that does not support management’s positions.

What Management Expects from the Board

Management, in turn, has expectations of the board. They are:

1.         Candor

Directors need to be candid and speak their mind in board meetings, not have hidden agendas, nor speak inconsistently offline. If directors are inconsistent, it can cause a schism in board-management relations and trust. The board should speak with one voice and not send mixed messages to management.

2.         Integrity and Independence

Directors cannot be self-interested, nor use their position to self-deal. If a director promotes management capture to occur by currying favor with management, this will undermine management-board relations. Management is entitled to directors preserving their independence and not placing management in compromising positions.

3.         Direction

A good –and smart– CEO wants a strong board. A board of directors should direct management as and when necessary to prevent the CEO from making that one big mistake. The board should be in charge at all times and management should know this.

4.         React in a Measured Way

If management is to be transparent, the board needs to react proportionately. If there are leaks, or the board is constantly critical, the CEO will not bring ideas or concepts, or his or her real thinking to the board, but only a polished crystal ball for board approval. This tone will cascade to senior management. This could cause governance failure as the board is shut out.

5.         Trust and Confidence

Management gets demoralized when they feel the board lacks trust or confidence in them.

If a board does not have trust or confidence in its CEO, it has the wrong CEO. CEOs may react when this happens – “either you have confidence in me or fire me” for example. If the board as a whole lacks confidence in the CEO, the CEO needs to go. If only a small minority of directors do and cause dysfunction as a result, these directors need to go.

6.         Knowledge of the Business

Management expects directors to invest the time to understand the business fully, especially if they are not from the sector. Otherwise, these directors will be of limited use to management strategically and their opinions will not be taken seriously nor be credible. Management gets frustrated by dated, legacy directors who have outlived their usefulness. Boards should know when this happens.

7.         Meeting Preparation

Management expects each director to arrive fully briefed and ready to discuss and should be able to rely on this. Otherwise, the engagement level degrades and gets sidetracked. The chair of the board should set these expectations and lead by example.

8.         Asking Good Questions

Lastly, management knows that the best directors ask the best questions that cause them to really think. If directors have a hobbyhorse, or ask inane questions in the eyes of others around the board-table, their credibility will suffer. These directors should go.

Many of the above topics are not visible from outside a boardroom. Nor can they be, for the most part, regulated. But they all contribute to the quality of the board-management relationship, board decision-making, and whether the organization is well governed.

CEO Succession Planning – The Number One Job of the Board, But Poorly Done

Aug 14

Posted in Board-CEO Relations, CEO Succession Planning | Comments Off on CEO Succession Planning – The Number One Job of the Board, But Poorly Done

I received a call from a board chair the other day. He wanted to see pay arrangements for his company’s C-suite executives to confirm that potential CEO successors heading business units were properly compensated. He felt entitled to this information but wanted to check with me first.

I said that the board should see any compensation of any individual within the company, as the board deems appropriate, to ensure that individuals are not taking inappropriate risks, based on new regulations (PDF, at page 8093). I have written about implementing risk-adjusted compensation.

That the board had not seen, much less approved, the pay and leadership development of potential CEO successors is a risk. TSX boards are responsible for succession planning under the regulations. If potential CEO successors are not compensated properly, they may be retention risks. Leadership development blockages may exist, but the board has no way of knowing this without a viable plan.

CEO succession planning is poorly carried out in many boards because CEOs drag their feet and ineffective boards accept this. The choice of CEO is the most important decision a board makes. Leadership can make or break an organization.

The reasons for poor CEO succession planning are simple. The current CEO is conflicted and so is the board. CEOs are conflicted because they are planning to replace themselves, which no one wants to do. Boards are conflicted because they are assessing their own work, namely their decision to hire the CEO in the first place.

Problems and solutions for poor CEO succession planning

Here are some of the telltale problems, solutions and red flags for poor CEO succession planning:

Problem: Dominant CEOs refuse to plan or unduly influence the process

Solution:

The board should own CEO succession planning, not the CEO. The current CEO’s views are important but should not over-ride. If a CEO is not being helpful, CEO succession planning should form part of incentive compensation, with specific objectives. CEO succession planning should start the day the new CEO is hired.

Red flags:

  • Chair and CEO roles held by the same person (see my recent paper on separate chairs);
  • a CEO who is a founder;
  • large pay gaps between the CEO and direct reports;
  • limited board exposure to high potential talent;
  • limited management bench strength; and
  • other signs of CEO entrenchment.

Problem: Boards of directors do not make CEO succession planning a priority

Solution:

The board should have a private session without the CEO to discuss and assign the leadership and scope of CEO succession planning. A robust CEO and leadership development plan from management should be requested. A board committee of independent directors should oversee the identification of executives matched to paths and time-frames, and make recommendations to the board.

Red flags:

  • A board that is not independent;
  • low director turnover;
  • minimal external benchmarking; and
  • lack of knowledge and information.

Problem: CEO succession planning relies on informality rather than concrete plans

Solution:

The next CEO profile and development leadership ladders for near, mid and long-term high potential talent, both internal and external, should be documented. Boards should understand the availability, quality, action plans, and special compensation arrangements for candidates. The board should provide input on, approve, and regularly discuss the CEO succession plan.

Red flags:

  • Plans are seen as personal rather than good governance;
  • limited resources and advisors for the board;
  • limited proxy disclosure of CEO succession planning; and
  • lack of even immediate successors.

No one is irreplaceable or will live forever

Directors often tell me when I ask about their biggest mistake that they waited too long to replace a CEO. Poor succession planning can adversely affect the morale and performance of any organization.

Organizations change and strategies change. Generally, people don’t, so the skills of a CEO and even directors may be outdated or not suited for the organization as it evolves.

CEO tenures have gotten much shorter.

You can’t replace someone without a viable alternative.  It becomes a lot easier for a board to “pull the trigger” when proper succession planning is done.  If there is dissatisfaction with CEO succession planning, that is the fault of the board.