When Should you Overrule the CEO? What's the Best Way to Do it?
from
November/December 2002
Robert Mellor, 59
Chairman and CEO, Building Materials Holding Corp., San Francisco
Outside directorships: Coeur d’Alene Mines, Ryland Group
If a company that has built its reputation in a particular industry turns off in another direction, and you’ve laid out the risks but the CEO is hell-bent for leather, I think you’re obligated to say, “Hey, I’m a director. I can’t support what you’re doing.” You can’t give the CEO carte blanche. You’re responsible not to the CEO, but to the shareholders.
Robert Smialek, 58
Former CEO, Applied Innovations, Dublin, Ohio
CoorsTek, General Cable
We have done so on boards I’ve been involved with. One in particular was where the CEO strongly urged an acquisition and we, as a board, didn't think it was a good idea. In retrospect, it turned out that we made a very good decision. It does create some tension within the board, but with good communication you get over the rough spots. Some boards are very much like a rubber-stamp committee. That’s not conducive to good business.
|
Succession Planning
55.1% - Somewhat Effective, ineffective, very ineffective 44.9% - Effective, very effective |
Trude C. Taylor, 81
Principal, TC Associates, Pasadena, California
Plantronics, Qualstar
Overrule the CEO only when you are dead sure he’s wrong either morally, ethically, legally, or strategically.
Howard Picking, 64
Chairman, Picking Co., Johnstown, Pennsylvania
AmeriServe Financial
We’ve done it a few times on major issues—say, you can’t accept a budget or certain phases of a strategic plan. It’s tempting to try to do sometimes when you have a young CEO, but that doesn’t let him grow in the job. He’s more likely to follow along, but you have to make sure you don’t take off his arms and legs in the process.
Chuck Yamarone, 43
Executive Vice President, Libra Securities, Los Angeles
Continental Airlines, El Paso Electric
It must be something that is clearly not in the best interests of the company and shareholders, not just a difference of business judgment.
Bernard G. Rethore, 61
Chairman Emeritus, Flowserve Corp., Irving, Texas
Amcast Industrial, Belden, Dover, Maytag, Walter Industries
You can only overrule a CEO in the boardroom, and what I mean by that is that ultimately it must be done in a meeting of the board as a whole, and it has to be about a serious subject which, if not overruled, would seriously threaten the enterprise. What kinds of things might trigger that? Any case where there’s a serious breach of fiduciary responsibility or the law. Also what I’ll call blatant misjudgments, such as the pet acquisition to which the CEO is absolutely committed but which makes no sense at all for the enterprise.
Ronald Ramseyer, 60
President of Direct Marketing, Bass Pro Shops, Springfield, Missouri
Blair Corp.
As an outside director, you do it when there is a gross inconsistency with the strategic objectives. What you must have is clear support from other members who have the skill and expertise to support your positions. What’s most important is not to go into it without having an alternative plan or advice on how to proceed.
Hal Logan, 57
CFO and Director, TransMontaigne Inc., Denver
Graphic Packaging International, Suburban Propane Partners, Union Bankshares
You should overrule the CEO when you disagree with a policy or course of action, if you feel strongly about it. Generally, the most effective and polite way to do it is to pull aside some of the other directors and the CEO and express some concerns, and try to build a consensus on your point of view. The second way is to vote no and make a strong negative statement and insist that it be put into the minutes.
Tom Dattilo, 51
Chairman and CEO, Cooper Tire & Rubber Co., Findlay, Ohio
Harris
If you do it, do it immediately. Do it on the spot, directly.
William H. T. Bush, 64
Chairman, Bush-O’Donnell & Co., St. Louis
DT
Industries, Engineered Support Systems, Lord Abbett Family of Mutual
Funds, Mississippi
Valley Bancshares, Wellpoint Health Networks
When there’s evidence that he is either taking a risk that’s unwarranted or approaching anything illegal or improper. We had a CEO who was covering up fraud. He was fired.
Daniel Berg, 72
I
nstitute Professor of Science and Technology, Rensselaer Polytechnic Institute, Troy,
New York
DQE Inc.
I’ve had one example where the CEO was just running far ahead of the board and had to be pulled back in. It’s a delicate thing, because you don’t want to discourage the CEO, but you don’t want commitments made that the board’s not going to back up, either. He was trying to negotiate a merger, an acquisition, with another company, and we were saying, “Whoa. Slow up. Get us involved. We’ve got a lot of questions.” The CEO was taken aback. He was brought back to earth and he was upset at the moment, but I think he grew as a result. The acquisition did not go through.
George MacKenzie, 53
Former CFO, P.H. Glatfelter Co., York, Pennsylvania
C&D Technologies, Central Vermont Public Service
Clearly, when there are issues about integrity or ethics, the CEO should be overruled. And if the CEO doesn’t go along with it, I think it’s incumbent on the board member to resign.
Michael DelGiudice, 59
Senior Managing Director, Millennium Credit Markets, New York City
Barnes & Noble, Consolidated Edison
Hopefully, you never have to actually overrule the CEO. Good boards try to reach a consensus first. The CEO makes a case, the directors moderate it as they see fit, and the company moves forward. The only exception to that is in cases in which fundamental ethical or legal issues arise.
Stanley C. Van Ness, 68
Partner, Herbert Van Ness Cayci & Goodell, Princeton, New Jersey
FirstEnergy, Prudential Financial
At Prudential, it’s pretty much a situation where the CEO will lay out a proposal and then, in 90% of the cases, there will be no objection to it. But there are situations in which he’ll make a proposal and some members of the board will question it. There’s never a show of hands, but he can sense some disquietude, and he’ll abandon the idea, come back with an alternative plan, or approach it from another direction at a later time. If he doesn’t have virtual unanimity, he’s not going to move in that direction.
Lloyd Hill, 58
Chairman and CEO, Applebee’s International, Overland Park, Kansas
It’s clearly to be done when there is some evidence, or even intuition, that the best interest of shareholders is not being met. I’ve been on boards for 12 years, and if something doesn’t pass my smell test, I’ll say, “You’re not getting my consent.”
Norman S. Edelcup, 67
Senior Vice President and Director, Florida Savings Bancorp, Pinecrest, Florida
Baron Funds, Valhi
When the CEO has demonstrated that he has put his personal interests ahead of corporate interests, he should be overruled. He should also be overruled if he has attempted to move the corporation in a direction that runs counter to the long-range objectives established by the board.
Daniel W. Derbes, 72
President, Signal Ventures, Solana Beach, California
WD-40
The
only time I’ve had occasion to overrule a CEO was on a compensation
proposal that appeared to be out of line with board guidelines. The
proposal went to the board compensation committee and on to the board
without a recommendation. The board met in executive session and
concluded that the proposal did not have merit. The board then brought
in the CEO and gave its reasons why it was disapproving the proposal.
The matter was referred back to the compensation committee and was
later dropped by that committee and the CEO.
Other circumstances for possible overrule? There are times when the CEO might bring a project to the board involving large capital expenditures or an acquisition or a major new strategic thrust which, after discussion, the board elects not to go forward with—either because the projected rates of return are not sufficient or the risks are too high or there’s a public-relations issue that makes the board uncomfortable.
Deborah A. Coleman, 49
Co-Managing Partner, SmartForest Ventures, Portland, Oregon
Applied Materials, Synopsys
I don’t think it should ever get to the scene where, in western movies, the shooters are shooting at each other. When I disagree with the CEO, I’m not afraid to speak up in meetings, but I generally prefer to follow up with one-on-one conversations. Actually, the CEOs I work with tend to be active in getting input and advice before decisions are made. Obviously you’d have to overrule a CEO if there’s anything illegal or unethical going on. I’ve never seen it happen, because I’ve been on very proactive boards.
Michaela K. Rodeno, 56
CEO, St. Supéry Winery, Rutherford, California
Silicon Valley Bancshares
Let’s say the CEO buys something that doesn’t make any sense, without telling anybody what he’s doing. Or he starts fooling around with the earnings and playing with the stock price. These seem to be grounds for overrules. Basically, you think about overruling when a concern is shared by more than one board member, when there has been ample discussion and the consensus is that the CEO is making a mistake or is about to make a mistake or has made a mistake that needs to be corrected. Then you go to the CEO with it and see where you go from there.
Joseph L. Bower, 64
Donald K. David Professor of Business Administration, Harvard Business School, Cambridge, Massachusetts
Anika Therapeutics, Brown Shoe, Loews, New America High Income Fund, Sonesta International Hotels
Overruling a CEO is very complex. If done formally as a vote—as opposed to effective argument that the CEO sees has persuaded a significant part of the board—it is tantamount to firing the CEO. There are certainly times when the board believes the timing of a move is wrong and urges delay strongly enough that a wise CEO postpones. But actual overruling is tough. They did it at Coke, and Douglas Daft remains, but he’s been a much less powerful CEO after that.
