The Big Idea: New CEOs should take the time to learn about corporate governance.
Consider subscribing to “Directors & Boards”, “Agenda”, “Directorship”, or “Corporate Board Member”.
Terminology for the new CEO
- Nonexecutive Chair: a chair who is an outside, independent board member
- Executive Chair: lacks the independence from management, is sometimes the company’s outgoing CEO
- Lead Director: outside, independent board member, chairs executive sessions, liaison between CEO and directors
- Executive Sessions: required by SEC of public companies, board meets without CEO
Eight components of a high performing board
- Board Composition: most important but not the only component
- Board Leadership: chair needs to run an effective meeting, know who/when to call on members for balanced input
- Board Information: don’t overlook the importance of well-organized board packets
- Board Dynamics: meetings should be positive, productive, candid, vibrant, respectful
- Board Agendas and Meetings: balance presentation and discussion 50/50, focus the agenda
- Board<>Management Dynamics: candor and mutual respect, thought partner > audience
- Board Committees: chair needs to run these meetings well, needs support from company executives
- Board Processes: discussion of strategy, risk, succession planning
Traits of a high performing board:
- CEO believes that board adds value (and can provide specifics).
- Individual board members believe they add value (and can provide specifics).
- Individual board members are always looking to improve.
- Board meetings are open and vibrant.
- Company achieves good results — financially, operationally, and strategically.
- A great board should steer a company towards positive performance and value for shareholders.
Board/CEO dynamics to avoid:
- Imperial (CEO runs the company, board is filled with old buddies)
- Entrenched (board maintains the status quo and resists change)
- Hostile (no trust in either direction)
CEOs should not hesitate to discuss an emergency CEO succession plan, aka the hit-by-a-bus scenario.
CEOs should engage the board early in the strategy process, instead of presenting the final strategy in the board meeting.
Outside directors cannot engage effectively if they lack information. Find the gaps and help fill them.
SEC requires three committees for public companies:
- Audit Committee: financial audit, risk oversight, financial controls.
- Compensation: sets compensation for CEO and for board members.
- Nominating/Governance Committee: board composition, recruitment, orientation, evaluation, exit.
Not required but common committees:
- Strategy Committee
- Finance Committee
Not as common committees:
- Executive committees were more popular a decade ago. Useful in quick response crisis situations.
Recruit before you shoot: focus energy on expanding the board before expending energy pruning the board.
Avoid the trap of naming an individual during board expansion. Keep focused on skills and experience.
If you need to get rid of a boardroom bully or a constant contrarian, it’s the job of the Lead Director (or the Nonexecutive Chair) not the job of the CEO.
Director peer reviews are the preferred way to evaluate director performance. They are conducted with discretion by the Lead Director (or the Nonexecutive Chair).
Common pitfalls for CEOs to watch out for:
- A failure to understand and address all eight components (above.)
- Asking for greater openness between the board and the CEO but responding in a way that is defensive or critical. Cuts both ways.
- Delegation of board changes that require leadership from the CEO. Eg. Board packets, board agendas.
Common trust-breakers
- The Garden of Eden: everything is presented as positive and wonderful.
- Only One Solution: only one solution presented or considered.
- Heard It Through The Grapevine: directors should never learn about an important development by reading it in the morning newspaper.
- Let Them Eat Cake: outwardly dismissive and disrespectful towards board members.