The Mindset of Boards and the CEO

I recently read a number of articles having to do with Board governance and CEO evaluations that resonated, and I thought it would be useful to synthesize some of the concepts, which also have applicability to other C level executives.

The governance experts at McKinsey and the Financial Times Agenda magazine, which focuses on board and governance issues, essentially pose the question why, despite all the corporate governance reforms of the past two decades, many boards failed the test of the financial crisis of 2007 2008?  The after effects of this failure are very much with us today, penetrated by the issuance of still more intrusive regulation contributing to an aversion to business investment and risk taking, which leads to weak economic growth and persistently high rates of unemployment.

There are these authoritative sources contending that it isn’t regulation, or governance reforms, or even highly qualified board members that really matter.  Instead, it’s the right mindset and the right human dynamics – a collaborative CEO and directors who think like owners and preserve and protect their authority that creates the constructive tension between independent directors and management.  The absence or weakness in these dynamics are also problematic for executives who are not directors, but report to them, because it inhibits a positive and productive relationship with their boards. 

Boards that operate to their potential are remarkably similar.  They are characterized by constant but constructive tension leavened by mutual esteem between management and independent directors.  In assessing the human dynamics of an effective and efficient board, there are four factors that emerge as useful benchmarks.

1. Do directors think and act like owners?  Companies genuinely benefit from directors with an ownership mindset (and requiring ownership in the company at a meaningful level certainly helps to achieve this) where they have a passion for the company, think long term and for the benefit of all stakeholder groups, and take personal responsibility for its success.  Contrast this mindset with that of an outside director who is a passive participant and doesn’t view the role as one of constructively challenging management.  When searching for directors, they should be looking for energy and engagement, an independent cast of mind, and someone who is action oriented.

2. Should directors remain independent to preserve and protect their authority?  It’s ironic that an increasingly successful CEO, by virtue of that success, can threaten the authority of the board.  This is because such a CEO may encounter softer questioning from the board and a greater willingness for the board to acquiesce to outsized requests, such as acquiring a corporate jet or asking for excessive cash remuneration or equity.  To protect against authority erosion, the Chairman or the lead director, not the CEO, should maintain control of the board meeting agenda; interview candidates for open board seats; be mindful of maintaining rough status equality between board members, especially the Chairman, and the CEO; impose term limits for directors and the CEO; and systematically and actively managing the CEO succession process.

3. Is a collaborative CEO in place?  When interviewing outside candidates who are CEOs, it’s imperative that the Search Committee check with their current boards, if practical, to see if they share the right type of information with the board on a timely basis.  If candidates are not yet CEOs, the Search Committee should check with the current supervisor, peers and subordinates.  Boards should avoid candidates who seek to run the board (and board meetings) rather than collaborate and be accountable to it.  This situation also presents an opportunity to have the best candidates be assessed by an industrial psychologist or interviewed by a career coach to augment traditional interviews.  Ultimately, the CEO needs to be willing to discuss both successes and failures and take personal responsibility for results rather than blaming others.  A key test is whether the CEO diagnoses and brings emerging problems to the board before they hit the financials.

4. Has the board looked beyond the current numbers to the “tilt” of the out year strategic plans?  Does the CEO present the board with “stretch plans” that bring to bear all company resources and require real effort to make?  Or does the CEO propose “gimme” annual plans that are always exceeded and lead to artificially high performance compensation payouts.  Attentive and engaged directors will possess a strong understanding of the industry and its dynamics, so they can, effectively challenge management and out year objectives.

In summary, when it comes to ensuring that boards function well, governance reforms, legislation, and best practices may be necessary but on their own they are not sufficient.  Rather, a mindset underscored by behaviors and human dynamics between directors and management are essential to realizing the full potential of this critical and complex relationship.