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Tuesday, February 18, 2014

Getting Back to Basics: Road Rules for The Board of Directors & CEO




Much has been written about the legal responsibilities of the Board of Directors. However, the ways in which the Board can be most effective in contributing to the success of the CEO, the management team, and the enterprise never receive enough attention. It is a two-way street and some road rules do apply.

First, the role of the Board is to
advise, support and counsel the CEO in ways that will enhance the value of the enterprise. For the right start, members should be selected carefully, keeping in mind the expertise they will bring to the board. In order to perform its role, Board members must understand the basics of the business and the critical factors that make it successful as well as the possible pitfalls. If they have experience in your industry, it helps. If not, they will need to educate themselves by seeking information at Board meetings, visiting sites, learning about direct competitors, and reading a variety of company (such as consumer research) and industry materials.

At the same time, the Board should monitor and review the performance of the top management team, particularly the CEO and CFO. It must determine whether the CEO is effective in accomplishing the agreed upon strategy ­ is the CEO achieving the appropriate level of success for the business? It is incumbent upon the Board to support the CEO without interfering and without undermining the CEO¹s authority. Depending on individual expertise, Board members should look for ways to offer that expertise at meetings (or privately) to the CEO, while guarding against “micro” managing. The ideal time to offer advice is when called upon to do so by the CEO.

The Board provides a “formal” evaluation of the CEO once a year and should also offer constant feedback to the CEO with open and free dialogue. If the Board finds that the company is at risk, it becomes their thorny responsibility to determine whether or not the CEO should be replaced.

The CEO’s role in creating an effective and productive Board of Directors requires attention and effort. The CEO needs to educate the Board about the business and give them every opportunity for exposure and to receive input from his/her top management team (CFO, COO, CMO). Good communications with the Board require more than just a monthly financial report. Ideally, the CEO will send a concise monthly narrative update to the Board on key matters and issues. This balanced report is important and the “no surprises” rule is crucial to developing and maintaining a sound relationship between CEO and Board.

My experience on Boards leads me to caution against hasty actions that may be potentially inappropriate. Too often, Board members become aware of problems or issues and immediately volunteer suggestions as solutions, without sufficient background. Also, it is common for some members to assume that if they are unaware of management¹s actions, there has been no action. Always ask what is being done about a problem and listen carefully before deciding if one’s advice can be useful.

The most important areas of involvement for the Board concern the execution of the immediate and long-term plans laid out by management, which reflect the vision of the CEO and have been approved by the Board.

Reviewing the strategic and marketing plans, annual P&L budget, capital spending, cash flow, new unit growth, as well as diversification and acquisitions are priorities. The Chairman of the Board ideally provides feedback to the CEO as to the Board’s views after each meeting and whenever blind spots arise.

Board meetings are, of course, the most frequent and routine interaction between the Board and management team. Regularly scheduled Board meetings, planned a year in advance, encourage the Board to participate. The agenda should not be standard for each meeting, but should reflect and encompass what the CEO believes is timely, relevant, and significant for the Board’s complete information. The Chairman or a “lead director” should provide input on the agenda in order to include any matters that the Board wants to review. An information package should be sent out in advance of the meeting so that members will be prepared for the discussion.

In summary, an effective Board depends on both the Board and CEO exercising certain disciplines, mostly involving communication, on a regular basis. The Board must offer support without interfering in management’s role while also monitoring the CEO and management team’s performance. In order to best perform its monitoring role, the non-management Board members need to meet in an executive session after each meeting. The Board should also use executive sessions to evaluate its own effectiveness and adopt methods to improve the quality of its work.

The effective Board is one that is alert to the state of the business, analyzes with positive intentions, and works creatively with the CEO. If your Board can effectively apply these rules of the road, you are more likely to avoid bumps.

What do you think? I¹m open to ideas. Or if you want to write me about a specific topic, let me know. 



2 comments:

  1. Thanks for your thoughts, Max. Having just established an Advisory Council for a university-based center, I can attest that there definitely is a learning curve for getting the most out of board/council members. I'll draw on your wisdom and experience.

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    1. Thanks for the comment, Sam.

      Max greatly appreciates your feedback. He hopes the article provides value to you and your board. And he wishes you well.


      Ted

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