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Archive for the ‘Board-CEO Relations’ Category

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

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

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.


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