Positive relationship between Board and CEO leads to corporate success

Relationship between the Board and management is crucial for the organization’s success.  The Board is expected to have independent and diverse views and its key roles in normal times involve strategic planning and governing the organization.  When problem arises, the Board must stand ready to take responsibilities and take actions quickly to resolve issues as well as prevent potential crisis to avoid adverse effect on the company and sustain good corporate governance standard.

Meanwhile, the management - usually includes Chief Executive Officer (CEO),  Chief Financial Officer (CFO), Chief Operating Officer (COO), Chief Information Officer, and other department heads etc. – is authorized to run their respective departments to ensure the company achieve objectives and strategic plans set by the Board without taking excessive risks.

To ensure effective achievements by the Board and management, the two parties, particularly the Board and CEO, should have positive relationship based on common understanding and collaborate closely with each other.  Many organizations recognize the significance of this matter and take serious efforts to drive constructive relationship.  Techniques listed below can be used as guideline to establish and strengthen relationship between the Board and CEO.  

1.    Ensure the CEO and the Board share the values of the organization

The development of CEO succession plan is one way to build positive Board/CEO relationship and share values of the organization.  The CEO usually performs this task together with the Chairman of the Board, Chairman of Nomination Committee and/or Ad Hoc Committee set up specifically for this purpose.  The collaboration between the Board and current CEO in succession planning will help finding if any senior management is ready to step up as new CEO.  It will also ensure the organization’s values are properly considered in the nomination while knowledge transfer and sharing process is systematically put in place for the new CEO. In case internal successor is not ready, the Board must start a fresh prudent recruitment process to indicate and assess the best candidates at the time in accordance with agreed upon criteria in terms of skills, experience, roles and responsibilities, and most importantly the shared values necessary for leader of the organization.

2.    Ensure the clarity between the roles and responsibilities of the board and management

According to Thai Institute of Directors’ (IOD) Guideline on Division of Responsibilities between Board and Management, the Board and management have different roles and duties.  The Board has duties to govern and determine objectives and purpose of the organization as well as other key policies while the management has duties to operate businesses in alignment with direction set by the Board.  Therefore, the Board and CEO must comprehend and comply with their respective roles, duties, and scope of responsibilities to avoid potential gap or overlapping.  This will help the Board and CEO build and maintain basic relationship between each other which will accommodate smooth operation and allow them to respond fully and appropriately with expectations from stakeholders.

3.     Develop mutually agreed to goals, policies and standards of performance for the CEO with input from the CEO

The Board and CEO normally meets to discuss strategic goals annually and/or every three to five years.  In the planning process of each year, the Board and CEO must achieve mutual agreement on goals and policies that will be implemented in the following year to lay fundamental framework for CEO performance evaluation.  This process will provide clarity on expectations of each other by the Board and CEO.  Besides opportunity for open discussion and competency examination, such meeting will also allow the Board and CEO to get to know and understand each other better.  A healthy relationship will lead to smooth operation and achievement of goals agreed upon by the Board and CEO.

4.     Agree on the decisions that should be brought to the board; those on which the board wants to advise and consent, and those that are delegated to the CEO

In principles, the Board has a duty to provide advice and the CEO is tasked to implement them.  However, some issues may fall in the grey area and difficult to specify if they are in the strategic or operating levels.  Normally, the CEO has a duty to control and manage the company’s budget.  But under best practice, any spending beyond pre-determined budget requires approval from the Board so that the Board can govern  strategic expenses appropriately.  In general, the Board may not necessarily be informed about all merger opportunities but any sizable deal beyond pre-set level is required to be presented to the Board before the CEO can proceed.  Although personnel management is under the authority of CEO, the Board may sometime expect presentations about roles and duties of personnel in key positions such as CFO, COO, CIO, and others etc.  Key agreements on issues such as those mentioned above must be clearly set to create common understanding about responsibilities of the Board and CEO, which will create positive relationship that will ensure both parties emphasize on making strategic decision of the company together.

5.   Be knowledgeable about the firm’s activities and performance in appropriate detail and in a timely manner and evaluate the results

Taking parts in discussion and being informed about the company’s activities and performance could help the Board come up with constructive advice for the CEO.  Therefore, the Board must be accessible to detailed information of the company’s performances including financial data and other indicators crucial for understanding the company’s trend and overall efficiency which may differ for each industry.  The CEO is required to submit these information to the Board within specific agreed upon timeframe while the Board must study and digest the data to offer advice and suggestion expected by the CEO.  Doing so will lay fundamental of positive relationship between the Board and CEO because if the CEO fails to provide accurate and timely data, the Board will not be able to perform its duties and cannot monitor CEO performance properly.

Netflix is an example of a company that has initiated new practices concerning information transparency and disclosure to the Board.  For instances, the Board can sit-in to observe monthly and quarterly management meeting while communication with the Board in short memo format via online channel allows the Board to ask questions or express comments right on that platform while the management can respond and edit message instantly like “a living document”.  It is believed that these innovations are vital in creating Netflix’s outstanding efficiency over the past years.

6.   Hold management accountable and reward or intervene when necessary

A successful Board is the Board that provides appropriate recommendation when needed and closely monitor aforementioned issues.  With effective indicators at hand, the Board can track when things do not go according to plan.  This is one opportunity for the Board to enhance relationship with the CEO and management by identifying problems.  The Board is not tasked to fix the problems but to point them out and collaborate with the CEO/management to seek resolutions.  In case the Board notices outstanding performance of the CEO and management, it may consider offering reward as deem appropriate.  However, there are two issues that the Board should be cautious and avoid including:

·       Avoid interfering or micromanaging

The Board has tendency to cross the line and take parts in the company’s operations, particularly with experienced executive directors who used to fixing the company’s problems.  Excessive interference could have drastic adverse effect and impact on the company’s success.  For example, it could harm the CEO’s image and efficiency while making the CEO lacks motivation and participation.  It could eventually lead to CEO resignation that will affect the overall organization.

·       Do not be too detached or hands-off

In certain cases, the Board may be too nonchalant or not participate enough.  If the CEO still has capability to manage, the company may still be able to operate and stay viable.  But should crisis occur and the Board stays off, the Board will not be able to tell if the CEO is pursuing the right direction or if the situation exceeds the capability of the CEO to handle and be held accountable.  Besides, it will also be difficult for the Board to evaluate the CEO performance because hands-off Board does not know the company’s performances in details and will not be able to indicate if the company has achieved the goals and strategic plans.  Even if the Board starts to feel something wrong, it will not be able to determine effective and timely remedy measures which could bring about surprising severe impact.

In this regard, the Corporate Governance Code for Listed Companies 2017 elaborated three levels of relationship between the Board and CEO comprising 1) Matters for which the Board has primary responsibility 2) Matters involving shared responsibility of the Board and management 3) Matters that the Board should delegate or not get involved with. This can be used as guideline and framework for the Board and management to better understand their respective duties and responsibilities, which will be useful for relevant parties in performing their roles. 

Source

Farrell, William J. Key Working Relationship: The Board and the CEO. [Online]. https://www.boyden.com 

Larcker, David and Tayan, Brian. How Netflix Redesigned Board Meetings. [Online]. Harvard Business Review. May 08, 2018. https://hbr.org 

Thai Institute of Directors’ (IOD) Guideline on Division of Responsibilities between Board and Management. [Online]. 2020. http://www.thai-iod.com 

SEC The Securities and Exchange Commission, Thailand. Corporate Governance Code 2017. Page 28-29

Benyada Kumlungsua
Training and Facilitators
Thai Institute of Directors