There is a built-in tension between boards of directors and chief executives. That tension develops from the different constituencies each directly represents--shareholders for the board, management for the CEO--and at the end of the day, the unequal power enjoyed by each.

Boards can replace the CEO; the CEO is accountable to the board. This is a discussion about how to build an effective working partnership between the board and the CEO. It is a discussion grounded in reality; it is based on the practical experience gained by the author in participation as a member of the board in over 150 board meetings of public and private companies in the last five years.

The CEO's task is difficult. His or her position is the focal point for problems in need of solutions. The CEO's work is done in a dynamic reality where unknowns and uncertainties surround but give no respite from the need to decide now. This reality requires that the CEO have an effective partnership with the company's board so that the CEO can comfortable seek its advice and counsel and willingly and candidly supply it complete and even contradictory information concerning the operations of the company and its surrounding environment.

This partnership must be developed over time through working together to address and resolve critical matters in an atmosphere of mutual respect and with a commitment to mutual support. The CEO must view the board as an important and experienced ally in accomplishing corporate purpose. The boards must develop confidence in the CEO's ability to guide the company in furtherance of its purpose.

In a typical relationship, "the CEO proposes and the board disposes." The CEO and his or her staff are charged with the responsibility to keep the board informed of company performance, to advise them on important matters, and to do the creative work to resolve problems or recommend alternative courses of action. The CEO is responsible for development of a corporate purpose, the underlying strategies to achieve that purpose, and the day-to-day operations of the company in accomplishment of its purpose and in accord with its strategies.

Complete, timely, and relevant communication, combined with candid assessments and realistic appraisals of all matters that come before the board are the hallmarks of a confident and competent CEO. Managed information, biased assessments, and hopeful appraisals are the work of a CEO whose term is limited. This is because reality eventually overtakes even the most imaginative rationalizations; in those few situations where the CEOs choose to manage information, the board ultimately deals with reality anyway (and it may be a reality that is worsened from that originally concealed) while losing its respect for and trust in the CEO.

There are several fundamental realities in the board/CEO relationship that must be acknowledged in order to forge an effective partnership. As Cyril O. Houle notes in Governing Boards: Their Nature and Nurture, these realities include: ·

• Existence. As a practical matter, a board exists indefinitely; however, its components (members) may change. CEOs have finite existence.
• Orientation. A board has or should have a long-range perspective and should be concerned primarily with policy. A CEO with direct operational responsibility must focus on today's issues while keeping the long term in view. ·
• Commitment. A board devotes limited time to company affairs, whereas a CEO is full time. The company is the CEO's vocational priority and is usually central to his or her personal financial success. ·
• Action. A board acts as a body following discussion and/or debate using consensus or majority rule. A CEO acts individually, with inherent power to make and implement decisions. ·
• Staffing. A board has limited, if any, staff, usually relying on the work of the staff of the corporation which reports to the CEO. A CEO has control over the entire corporate organization. ·
• Knowledge regarding corporate issues. Board members have or should have extensive experience in business and life; however, their knowledge about important corporate issues is based on information largely supplied or approved by the CEO. A CEO has or should have detailed information and knowledge about any important corporate issues.

The work of the board can be divided into three categories: ·

• Routine, regularly scheduled work includes regular reviews of operating and finance performance, approval of long-term financial commitments such as capital investments and bank loans, review and approval of plans, regular measurement of performance against plans, and regular committee work (audit, compensation, nominating). ·
• Routine, nonscheduled work includes consideration of acquisitions and mergers, major financing decisions, and major litigation. ·
• Closely monitored work is required in the event of hostile tender offers, restructurings or turnarounds, insolvency, director or officer malfeasance, material unasserted claims, and selection or dismissal of a CEO.

The CEO and board usually forge their relationship through their interactions in routine work. Closely monitored situations are fairly self-evident. However, considering how difficult the financial climate is for a business today, some discussion of the board's role in execution of restructurings or turnarounds is appropriate.

One of the most difficult transitions to make is from business as usual to emergency conditions. How can a director tell if a company is in chronic trouble or is merely going through the normal ups and downs occurring in every business. The size and persistence of the evidence are clues that a company is moving into troubled conditions. (This, by the way, is why it is important that a CEO communicates with candor; late responses to situations that are going unstable almost always require more radical action and recovery from a relatively worsened condition.)

When the board and/or CEO become concerned that a transition requiring recovery is taking place, then their behavior must change. This change must be commensurate with the urgency of the situation and include, at a minimum: ·

• More frequent board meetings (perhaps monthly) ·
• Implementation of strategies designed to survive the short term to get to the long term ·
• Strong operational focus to reduce costs, increase cash flow, and preserve financial well-being as long as possible ·
• Employment of specialists, as appropriate, to stage unusual future actions (such as financial restructurings) in advance of need ·
• Feedback systems to monitor in "real time" the effectiveness of actions undertaken

In ordinary circumstances, the board and CEO spend time working in one or both of the first two routine areas before "Category III" matters arise. Forging an effective partnership and gauging strengths and weaknesses is easier done when a business is proceeding as usual and the board and CEO are dealing with routine and recurring business issues, regardless how challenging. Category III situations are stressful and usually time driven; they often test the strength of even the most effective partnership between a board and its CEO.

Effective and enduring partnerships are a function of expectations and reality. No board promotes or engages a person to be a CEO without great confidence in the person and high expectations regarding the CEO's performance. In essence, the CEO starts out in a position of trust and respect, which is enlarged or diminished by the reality of the CEO's performance. Since that performance is measured against initial expectations, the keys to future success and the success of the CEO's partnership with the board are: ·

• Understanding the board's initial expectations ·
• Learning the company ·
• Helping the board adjust to expectations in the face of corporate realities

These three acts by the CEO--understanding, learning, and adjusting--are the keys to developing an effective partnership between the board and CEO. To ensure clear understanding, CEOs and directors should agree in writing on the following: ·

• Corporate purpose ·
• Grants of authority from the board to the CEO ·
• Matters about which the board expects to be consulted and when ·
• Matters about which the board expects to be informed and when

To demonstrate effective learning and to adjust the board's expectations (up or down), the CEO should prepare and give to the board, as soon as possible and at regular intervals thereafter, the CEO's assessment of the company's operations, appraisals of executive managers, and keys to achieving the corporate purpose and plans--strategic, operating, and others--to further that purpose. The CEO must also provide the board with tools that allow it to easily and regularly track company performance against expectations.

Mutual respect is also key to formation of an effective partnership. It leads to the sharing of knowledge and exercise of power, all in furtherance of corporate purpose. The key to sharing knowledge effectively is well-organized, timely, relevant, and accurate communication of information or data and analysis from the CEO to the board. It is not the density of the information that counts; it is the clarity and intelligibility that makes for effective communication.

It makes sense to pay particular attention at regular board meetings to those behaviors that can lead to a loss of confidence in the CEO with a corresponding decline in the effectiveness of the board/CEO partnership. From the board's perspective, the following "red flag" behaviors can lead to diminished confidence in the CEO: ·

• Infrequent meetings ·
• Difficulty with timely financial reporting ·
• Inability to forecast--revenue or expense surprises ·
• Adverse balance sheet changes ·
• Number of days in accounts receivable or inventory or absolute growth
• Borrowing short and buying long ·
• Diminishing cash flow or unexplained changes in cash flow ·
• Lack of a "next-best alternative" ·
• Failure to reinvest in business ·
• Chief executive officer's lifestyle change ·
• Lack of market and competitive data and focus ·
• Changes in "humanware"--high management turnover ·
• Rapid growth or contraction ·
• Failure to walk on the dark side (consider worst case)

Conversely, a board can lose its stature in the eyes of its CEO with the following behaviors: ·

• Limited take-aways from board members ·
• Lack of enthusiasm on the part of the board ·
• Board lack of interest in important matters ·
• Failure to understand the consequences of proposed actions ·
• Unacceptable commitment (not prepared in advance; failure to anticipate issues and alert the CEO) ·
• Situational response to issues as opposed to principled, consistent response ·
• Problematical attendance

A CEO may fear--with reason--that a board may micromanage if it asks for and/or gets information in too much detail. In actuality, micromanagement is negatively correlated to the board's confidence in the CEO. When this confidence is high and board knowledge of company operations is high, the board will delegate management easily. When confidence is high but knowledge is low, the board will assume an oversight role, delegating with questions. When confidence is high but knowledge is low, the board will delegate less. When both confidence and knowledge are low, the board will stop delegating and start to micromanage.

All things considered, an effective partnership results from a well-defined role, mutual respect, and excellent communication. As always, it is easier to develop these elements during periods of relative calm. It is, therefore, important to pay attention to them now. Working together, directors and CEOs should charter the board/CEO partnership. Write it out. Adapt the charter to the real people involved, not some idealized set.

Directors should make sure that the CEO has a clear understanding of the board's expectations of him or her, that the CEO demonstrates effective learning, and that the CEO assists the board to adjust to new realities.

Keep the lines of communication wide open. Operate as though the partnership were made up of equals enjoying mutual respect. Through exercise of these principles, the partnership should develop into one that is balanced and effective, to the benefit of the company, its shareholders, and the board and management serving them.

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