CEO-Board Relationships

Can it be the law of unintended consequences at work?  Does board independence raise the risk of adversarial relationships between boards and CEOs which in turn undermine companies’ business success?

Truly independent boards have resulted in many positive results.  A good independent board provides a positive challenge to management.  It spurs better long-term planning, and its oversight and monitoring and control over the compensation apparatus keep management productive and on its collective toes.  An effective independent board protects the company and shareholder interests through enhanced controls and understanding of risks that can sink the corporate ship.

However, for some boards, thoughtless independence can have a downside by impairing the bonds between board and CEO.  Mutual respect and understanding is a keystone for effective company performance.  Directors who mistake independence for adversarial conduct miss the point.  Governance works best when the relationship between board and CEO rests on trust and mutual respect.  While an independent board must challenge the CEO and management, independent directors must also be prepared to serve as advisors, sounding boards, and supporters of board decisions.  The CEO, who typically is also a member of the board has a dual role vis–a-vis the board as both employee and as a peer.  No one ever said that understanding that relationship and making it work is easy, but doing so is necessary.

While most boards handle the challenge successfully, some do not.  For those boards whose relationship with the CEO is frayed and adversarial, turning the situation around -  making the relationship collegial and constructive –  is a first order of business.

The key is better communication. CEOs need to reach out and listen to each director’s concerns, and each director needs to hear the CEO’s views out.  Better communication includes surfacing all issues and laying them out for discussion.  Sometimes this process shows that the CEO and board have irreconcilably different visions for the company and expectations for performance.  In that rare case, the board needs a new CEO.  However, for most companies in this situation, improved, open communication enables the CEO and the board to work together in furtherance of the company’s and shareholders’ best interests. With really improved communication, a board story that starts badly can have a happy ending.

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