How to Improve Corporate Governance's Most Important Relationship
For a company to function effectively, the management team and the board of directors must be in general alignment. When problems brew between the board and the C-suite, the reasons can often be traced to poor relational competence.
Relational competencies have been studied in business from their linkage to employee performance1 to narrower matters like their impact on supply chain resilience2 . My contributions to this topic are in the realm of relational competencies boards and management teams need to work together effectively.
In approaching this topic, I tapped a network of CEOs and board members I met as a Senior Fellow of the American Leadership Forum-Silicon Valley, beginning in 1998, and subsequently while serving as its CEO from 2000 to 2008. The nature of the work afforded me the opportunity to gain the perspective of those serving on management teams of public and private companies, nonprofit organizations, and those elected to serve on public boards. All of the exchanges I was privy to in that role were held in confidence, and the specific examples I share here are with explicit permission to do so.
The troubles that lead to runaway management teams
People with executive team and/or board governance experience tell of instances when the management team and the board of directors were decidedly at odds. Those speaking from the director's perspective cite arrogance of the CEO as a root cause of runaway management teams in the stories they relate. Perhaps not surprisingly, those who are CEOs cite board members who function "out of position" or hold conflicts of interest that prevent effective governance even when disclosed as contributing factors to the board's perception that a management team is out of control. Where you stand, as is often the case, depends on which chair you are sitting in.
Examples shared here are from a broadband wireless company, network security company, electronic point-of-sales business, all based in the Silicon Valley. CEOs and board members alike were seasoned—CEOs with over 20 years in the role and directors who have served on multiple boards, one on as many as 15. Board directors have often served or serve concurrently as CEOs of other companies.
What directors identify as arrogance can be grouped in three buckets: inexperience, strategic direction differences, and deceit.
Lack of experience can be mitigated if the CEO identifies it and compensates for it. CEOs who lack self-awareness fail to acknowledge their own lack of experience or blind spots. Typically, directors feel ignored and interpret this as arrogance on the executive's part. This lack of self-knowledge and humility can result in everything from high executive turnover that negatively affects the company's performance; to forced mergers, which likely benefit shareholders; or bankruptcies, which usually are not beneficial to shareholders in the short term.
Directors identify CEOs who fail to bring information forward or refuse to execute on specific directives. In one example shared with me, this led to firing the CEO after a dozen years in the role and increasingly poor performance as the company lost market share to new entrants. In this case, the CEO and the board had a clear difference of opinion about the company's strategic direction. Ultimately, a board will prevail even if a marketplace does not respond as clearly as did the one for this electronic point-of-sale company.
Boards can remove CEOs they feel are taking the organization in the wrong direction strategically. Because this is understood, CEOs who turn a deaf ear to repeated cues about strategic direction from a board will appear arrogant and give board members concern even if the marketplace is not moving as quickly as this one was.
Deceitful CEOs may withhold information, recognize revenue that is not substantiated, or promote other unethical business practices in the pursuit of short-term financial performance objectives. It can be hard to pinpoint the reasons for these choices—certainly hubris could be at play if the CEO feels he simply does not need to follow the rules set out for others, but stories in this realm often include elements of inexperience or strategic disconnect as well. A CEO without the ability to build a strong senior team, or to know which questions to ask, or to formulate policies that reflect corporate values can come across as deceitful.
Sometimes a CEO will believe strongly in a certain strategic direction that differs from the board's stated strategy. This can lead to perceptions of deceit if she sits on information about lackluster results tied to that direction believing they will improve and hoping to buy herself some lead time on implementing her preferred strategy. In this case, the board may feel that the CEO is making claims she cannot substantiate or has placed too much emphasis on her own worth, as perhaps is the case if she believes the strategic direction she is fixed on is a more prudent path than the one being called for by the board.
Board members can always ask themselves what information is not at hand and request additional information if their instincts suggest that the CEO is concealing something. The board has the legal right to request information, and management cannot suppress it once it is requested. Boards can draw on multiple points of view in making decisions. This strength of shared governance can be an asset to CEOs who understand it this way and remain open to input.
So far, the examples shared are from the board director's perspective: The failure is management's and the root cause is seen as arrogance. When CEOs are asked to identify issues that contribute to management and the board being at cross purposes, they point to one of two areas:
- directors who are "out of position," most likely playing the role they have or have had as CEO at another company
- fundamental conflicts of interest, which even if disclosed, prevent the board member from truly placing the interests of the organization above his own personal interests, or the interests of a group he represents, such as investors.
The examples of being out of position I share come from two different media companies. At one, a senior executive had a personal relationship with an employee working directly for him. The CEO handled the situation the way he felt best for the organization, which was to retain the executive. The board attempted to override his decision by requiring the offending executive to be terminated, and the CEO was left feeling that the board was decision-making in his domain--the hiring and firing of his own senior team.
A second example of position issues comes from a public media company with a representation of original ownership families on the board, a common board make-up in traditional media companies before the dot com explosion. In this case, family dynamics and generational wealth preservation for the family often influenced the direction the board wanted to give the CEO, a relative. In many ways, the CEO was more effective at representing all shareholders' interests broadly than was the family-laden board. This board suffered both from being out of position—getting engaged in operational matters, for example—and, interest conflicts—concerned primarily about meeting the family's financial objectives and not returns to all shareholders.
In Silicon Valley, the web of relationships between executives, investors, and advisors provides a backdrop to conflicts of interest in governance. Friendships and former professional relationships are tapped frequently when placing board members. It is challenging for organizations to take the counsel of board members who bring a helpful perspective—like that of investors—but a perspective that might also represent a conflict best captured as a timeline issue. If the board member is looking for returns on a shorter time horizon, for example, than a management team looking to build value over time, the CEO and his team are likely to view this as a conflict of interest that is preventing the board from serving all shareholders equally.
What can be done to improve relationships between board and management teams?
My recommendations fall into three areas: investing in the relationship itself, using tools available to facilitate the work that boards and management teams need to do together, and deploying a strong, independent lead director.
To understand what I mean by investing in the relationship itself, think of business situations where companies received what they believed to be unfair or inaccurate coverage in the media. Company executives used to ask me, in my days as a business executive at the San Jose Mercury News and Contra Costa Times (now Bay Area News Group), how to get a reporter to listen to their perspective. I always asked them if they knew the reporter covering their industry before the story about their company was written. Usually the answer was no. Executives had not invested time in meeting journalists who regularly covered their industry, company, or region before they found themselves the focus of unwanted coverage.
Similarly, CEOs and boards who find themselves at odds identify upon reflection that they, too, have not invested in the relationship in advance of the disconnect. In fact, they might acknowledge this lack of a relationship is a cause of the CEO and board's inability to be effective partners. What does such investment look like for the committed, but busy, executives serving as CEOs and as directors on boards?
My best advice likely sounds overly simple and obvious. It is to spend time working together on something meaningful to the company. People get to know one another by working together, setting goals, and accomplishing tasks. Current board governance provides ample opportunity for significant work to be accomplished in audit committees, for example, drawing on the skills and input of management and the board. Some companies are adding committees around information security, connecting a set of professionals in information technology to board members who bring experience and advice from other organizations and sectors, in order to address the challenges together.
CEOs who view committees as a necessary burden rather than a chance to really plumb the depths of the resources board directors bring to the table miss a chance to invest in their board relationship. Board directors looking for minimal time commitment, harder and harder to find in a post Sarbanes-Oxley and Dodd-Frank world, are also undermining the relationships between directors and senior management by giving short shrift to the chances to do meaningful work together.
One way boards and management teams work together is to draw on any one of a number of tools available for boards and management teams in the governance realm today. Some of the most common are compensation surveys and/or consultants to advise compensation committees on practices, attorneys who can help boards conduct meaningful evaluations of the board's own performance, and organizational consultants who can provide tools for leadership development and evaluation of senior executives.
At the Markkula Center for Applied Ethics at Santa Clara, we have developed a tool called the Ethical Culture Assessment. It is a mechanism designed precisely as a tool to advance a dialogue between boards and management teams about the ethical culture of the organization. Culture is king these days in terms of influencing ethical practice and legal compliance in companies. Sarbanes-Oxley identifies that corporate boards of directors have the ultimate responsibility for creating ethical cultures as a means to reduce legal risk and should invest some time in gaining insight to the company's culture to do this effectively.
Finally, a development that should enhance the relationship and support the development of ethical practices is the emergent role of the independent lead director. This role, which can be free from both chair duties or executive duties, places a member of the governance structure itself, a board director, in a position to focus on governance including: the board's performance, the relationship with the CEO, clarifying roles and responsibilities and providing leadership in crisis situations3. (3)
Not quite half of the S & P companies, 47 percent, have a separate CEO and chair of the board, and of those that do, 90 percent also have a lead independent director. Companies choosing to combine the roles find the lead independent director alleviates many of the concerns raised about the combination. For those that separate the role, the chair is still not always independent and these companies derive benefits also from the appointment of a lead independent director.
Perhaps the best way to summarize these suggested approaches is to simply acknowledge the value that investing in relational competencies brings to the work boards and management teams must accomplish together. Though sometime seen as a softer skill set, relational competence is also an essential skill set.
Ann Skeet is the leadership ethics director at the Markkula Center for Applied Ethics.
1 The Relationship between Interpersonal Relational Competence and Employee Performance: A Developmental Model, The International Journal of Interdisciplinary Social Sciences, Volume 6, Issue 3 Leanne Carter, Macquarie University, NSW, Australia, Peter Murray, University of Southern Queensland, Queensland, Australia, David Gray, Macquarie University, NSW, Australia
2 The influence of relational competencies on supply chain resilience: A relational view DOI: 10.1108/IJPDLM-08-2012-0243 Andreas Wieland, Kühne Foundation Center for International Logistics Networks, Technische Universität Berlin, Berlin, Germany, and Carl Marcus Wallenburg, Department of Supply Chain Management, WHU – Otto Beisheim School of Management, Vallendar, Germany http://www.ilnet.tu-berlin.de, Emerald Group Publishing, Limited
3 Practical Law, a Thomson Reuters Legal Solution, Lead Director, Understanding and Filling the Role
4 Spencer Stuart Board Index, November 2014