Mismatch in the Boardroom
What’s the best way for boards to protect their standing and influence against an all-powerful CEO? By separating the roles of chairman and CEO.
The CEO’s plan was obviously flawed—why didn’t you say something? When it’s too late to reverse the bad decisions, viewing the wreckage of a product line or a pricing strategy or an entire company, eyes turn toward the board. And as we’ve seen in recent years, some boards are undeniably lackadaisical when it comes to oversight and guidance. But as any board member would acknowledge, it’s no small thing to challenge the CEO, especially when he’s serving as chairman as well. All too often, there’s a stature gap between the CEO and other directors, and that gap can seriously hinder boards’ effectiveness. Indeed, the consequences of boards’ failure to robustly challenge their “star” CEOs can be devastating.
Take Royal Bank of Scotland, which required a U.K. government bailout in 2008. Its board was accused of failing to stand up to illustrious CEO Fred Goodwin on his ambitious expansion strategy. At an Asian firm I served several years ago, the non-executive directors felt unqualified to question the chief executive, who was viewed as a visionary inside and outside the firm.
More recently, the board of brokerage house MF Global was reportedly starstruck by chairman and CEO Jon Corzine—former governor, U.S. senator, and co-head of Goldman Sachs—and thus may have failed to challenge him on strategy and other critical matters. Corzine aimed to transform MF Global from a broker executing on behalf of clients into an investment bank aggressively risking its own capital; the firm’s catastrophic bet on European sovereign debt led to its bankruptcy filing last October.
Perhaps because it isn’t an especially comfortable subject, relative stature among directors rarely comes up in discussion. But the issue can have a significant impact on board performance. My discussions with chairmen, as well as direct observations of boardroom dynamics, have revealed that CEOs often disregard the views of outside directors whom they perceive to be less qualified than they are. Correspondingly, non-executive directors who are in awe of, or intimidated by, a CEO can be too deferential to management.
Although this affliction is widespread, it appears to be more acute at the largest companies. For example, one U.K. senior board adviser has identified a CEO-board power differential between the largest FTSE 30 and mid-size FTSE 250 firms. At mid-ranking companies, where the board usually includes executives from bigger FTSE 100 enterprises, the CEO is typically less influential in the boardroom than his counterparts at the largest corporations, where the outside directors are of comparable, and sometimes lesser, standing than the CEO.
Imbalance in authority between the CEO and the rest of the board can arise in several ways. At some companies, the board might appoint a CEO whose accomplishments and renown are so much greater than other directors’ that they find it difficult to question his judgments. More commonly, a board may find its presence and authority diminish as the CEO’s star rises. At one leading industrial company, when the CEO was first appointed, the board’s dominance was clear and respected. As management delivered consistently strong performance in the ensuing years and the CEO’s stature grew, he consulted the board less frequently. By the end of his tenure, he treated board meetings as rubber-stamping events.
In these situations, the weakening of board authority often occurs gradually and may be imperceptible at first. Telltale signs, perhaps more apparent to outside observers or in hindsight, include less robust board questioning of management’s proposals over time and a readiness to agree to management’s demands on matters—for example, executive compensation—that the outside world would consider unreasonable. Boards usually realize the extent to which they have ceded their authority only upon a change of CEO or when something goes wrong, such as a crisis or scandal.
To serve as an effective counterweight to the chief executive, boards should ensure that the statures of their non-executive members are equal to or greater than the CEO’s. (It is also important that the relative standings of non-executives are comparable because vast differences among them can equally harm board dynamics—at one large financial institution, for example, the outside directors tended to defer to a colleague who had been a two-time prime minister.) At a U.K. retailer, the chairman has consciously recruited to the board individuals who are chairmen at other listed companies. That way, the board is more likely to be respected by the highly successful CEO, and non-executive directors will also treat each other with regard.
Relative stature between the chairman and the CEO is particularly important. As one U.K. senior independent director explained, “You need a person who can tell a CEO that he is acting like an idiot when necessary.” In Britain, chairmen are usually able to command the respect of management because they are often a decade or so older than their CEOs and have successfully led large organizations or distinguished themselves in other ways.
Because the authority of the board vis-à-vis the CEO fluctuates, term limits for directors should also be considered. This will ensure not only that fresh perspectives enter the boardroom but that suitably qualified and distinguished individuals populate the board at all times.
Correspondingly, since a highly successful CEO can disrupt board authority and dynamics over time, it may be sensible to limit the chief executive’s tenure. Perhaps surprisingly, some CEOs support term limits for their ranks. Former Medtronic CEO Bill George, for instance, endorses a maximum tenure of ten years. At a European company, the successor to a long-tenured chief executive acknowledges the risks that an increasingly dominant CEO poses to the board and the company — and has pledged to remain in this post for, at most, eight years.
One American CEO who imposed a ten-year limit on his own tenure felt that it helped him become a better leader. Because he couldn’t count on staying indefinitely, he worked with a greater sense of urgency and devoted a great deal of time to thinking about the long-term health of the company and steps he should take to sustain its success after his departure.
What’s the best way for boards to protect their standing and influence against an all-powerful CEO? By separating the roles of chairman and CEO. Even after years of corporate-governance experts’ urging, most U.S. companies still concentrate power at the very top—indeed, many firms reward a well-performing CEO with the chairman’s title. Nothing could more clearly signal a board’s acquiescence to a diminished role.
Simon C.Y. Wong is a partner at London-based investment firm Governance for Owners, adjunct professor of law at Northwestern University School of Law, and an independent adviser. This article originally appeared in the Winter 2012 issue of The Conference Board Review. Simon can be found on Twitter.