Governance Perspectives
Boards and CEOs: towards a more productive relationship
In our recent white paper, the Center for Governance explored the neglected governance issue of whether CEOs should also be board members. This article takes a more general look at board-CEO relationships, and argues that many may be in need of a reset.
The board-CEO relationship is a crucial aspect of governance. When it is working well, the company is well placed to leverage the collective intelligence of both senior management and the board, with positive consequences for decision-making. In contrast, dysfunctional board-CEO interactions (including between the CEO and the Chair) are a red flag, and may well presage underlying problems at the organization.
The board has two main roles when it comes to the CEO. Firstly, it holds the CEO accountable for the performance and conduct of the organization. Secondly, board members support the CEO by giving them the full benefit of their advice, experience and expertise. They may also assist with social connections and access to resources.
Getting the balance right between these two activities is not always easy. Their relative prioritization is rarely the outcome of an explicit discussion or conscious decision. Often, the relationship develops organically – as a result of the personalities of individuals or the prevailing business culture. However, sometimes board members may bring to the table quite specific philosophies concerning the nature of the relationship between a board and a CEO.
Two ways of thinking about CEOs
Attitudes towards CEOs can polarize into two broad camps. On the one hand, there are people who venerate CEOs (especially successful CEOs) as the key drivers of business performance. CEOs are corporate ‘heroes’ without which an organization is unlikely to succeed. Such an attitude is particularly characteristic of the US corporate governance system, and is often internalized by the CEOs themselves.
To provide one example, US car manufacturer Tesla recently made the controversial decision to award CEO Elon Musk restricted stock worth around $29bn. Clearly, the Tesla board views Musk’s continued leadership of Tesla as the key success factor for their enterprise. And they are prepared to pay big for his services – the largest amount that has ever been paid to a CEO in history! Despite the potential dilution of their shareholdings, investors seem to share this point of view; the share price rose significantly when the deal was announced.
A more skeptical view of CEOs is often implied by governance theorists. Schooled in agency theory, they tend to see an overly dominant CEO as a source of risk. According to this perspective, CEOs need to be carefully monitored and incentivized to make sure that they remain aligned with the company’s purpose.
Aspects of these two philosophies can shape the way in which boards pursue their relationships with CEOs in real life. Boards that hire ‘great men’ CEOs tend to act as cheerleaders and be highly supportive. From the CEO’s perspective, this is the dream relationship.
But this dynamic may fall short in terms of robust oversight. If things go wrong for the company, critical commentators will say that the board and the CEO were a little too friendly. The board may be blamed for mismanaging the relationship.
The agency theory approach brings the opposite danger: boards turn into corporate policemen and view the CEO through a lens of mistrust. This might superficially appear to be a more ‘robust’ approach to governance. But taken too far, it can be counterproductive. CEOs may respond by becoming defensive or demotivated. Most importantly, they may be less willing to share emerging concerns or vulnerabilities with the board - for fear that this will evoke criticism or blame.
CEOs need more support from the board
A recent study by Spencer Stuart suggests that the ‘board as policeman’ paradigm may be closer to the reality of many global boards than that of the ‘board as cheerleader’. According to their findings, only 22% of CEOs feel confident in the ability of their boards to support them. Interestingly, the boards themselves are much more sanguine: 43% of board members are confident that they are meaningfully supporting their CEO.
CEOs say they want a much more meaningful relationship with their boards than they are currently experiencing. It isn’t enough for the board to just provide oversight. CEOs want a strategic partnership which enables them to tap into the specific expertise and deep knowledge of board members. Board members should be available for them to brainstorm problems and potential solutions.
A poor relationship between boards and CEOs can also occur due to a lack of knowledge on behalf of board members. The agenda of board meetings may also be a factor - many CEOs argue that they are often too focused on short-term performance issues and leave little opportunity for strategic discussion and debate.
These findings are consistent with other research that has recently been published by Board Intelligence. In their latest Board Value Index survey of UK and US board members, 34% of executive directors said that their boards added no value whatsoever – a shocking finding! According to the survey, boards are too focused on compliance-type issues and the analysis of past performance rather than strategic discussion or forward looking brainstorming.
How should boards respond?
As a board member, how should the above discussion affect the relationship with your CEO?
Firstly, it makes sense to look more closely at the current state of the relationship – possibly as part of a board evaluation exercise. Where does it sit on the continuum between monitoring and advisory? Most boards are unlikely to sit at the extreme ends of that continuum, but they may be more biased towards one rather than the other.
Secondly, what kind of board-CEO relationship does the organization ideally need? The studies cited in this article suggest that many boards err too much on the side of monitoring rather than adding value through advice and good counsel. Could this be the case on your board? One tell-tale sign might be the reluctance of the CEO to be entirely open about certain issues. Or the relationship may feel rather sanitized, and only involve the discussion of ‘good news’.
The most skillful boards will find a way to reconcile their various roles without sacrificing one for the other. In the words of one senior board member: “You need to support the management, and you need to hold people to account. But holding people to account does not mean mistrusting them or undermining them. It’s about having a conversation about how they can do things better. And you can hold people to account with a smile.”
Governance should not be something that the board ‘does’ to the CEO. It’s a two-way relationship. Both boards and CEOs need to determine how to work well together. A board is not there to sit in judgement over a CEO, like in a court of law. It’s a dynamic human relationship which needs investment from both sides.
Dr. Roger Barker
Chief Research and Thought Leadership Officer
Center for Governance