Clashing with the CEO
from What Directors Think 2003
SURVEY SAYS: Doctor No
How directors rate their boards’ ability to challenge management:
49.1% - Very effective
38% - Effective
8.8% - Somewhat effective
1.8% - Ineffective
2.3% - Very ineffective
CEOs who are not open in their communication, CEOs who don’t value the input of their board, CEOs who view the board as a necessary evil. In those situations, the board has to be more active and ask more questions. The board has an obligation to evaluate the CEO on an annual basis and build a network of information about that individual, based on their own observations and input from the other corporate officers.
Steven L. Gerard, 58
Chairman and CEO, Century Business Services, Cleveland
Fairchild Corp., Joy Global, Lennar Corp., Timco Aviation Services
In order to be effective, a CEO has to be a good listener. If he’s not, it’s very difficult for the board. It prevents you from providing constructive feedback to the CEO. If you’re in that position, you need to voice your opinions loudly, be it formally or informally.
David C. Farrell, 70
Retired Chairman and CEO, May Department Stores, St. Louis
Emerson Electric
CEOs who think they own the company and all its assets are a problem. You must continually point out that they serve at the pleasure of the board.
William M. Kearns Jr., 68
President, W.M. Kearns & Co., Morristown, New Jersey
Selective Insurance Group
On one of the boards I serve on, the CEO doesn’t like to be questioned. My solution is that you can’t be intimidated. You have to stand your own ground, or resign if matters don’t change.
Humberto S. Lopez, 57
President, HSL Properties, Tucson, Arizona
Capitol Bancorp, Pinnacle West Capital, Suncor Energy
If you have a CEO who doesn’t listen, that would be very problematic for a board. Likewise if you have somebody who presents arguments in a very biased way, or makes recommendations without thoroughly exploring the pros and cons of any and all alternatives, because he doesn’t want to jeopardize his predisposed decision. In those cases, you investigate the problem and then sit down with the CEO as a board or a section of the board, and you talk it out until the issue is adequately resolved.
Charles M. Brennan, 61
Retired Chairman and CEO, MYR Group, Rolling Meadows, Illinois
Dycom Industries
The most difficult is the imperial CEO. The imperial CEO makes most major decisions, and the buck stops there. You need to use patience, persistence, tact, and independent judgment to make that CEO deal with the board on equal terms.
William Lerner, 68
Attorney, Washington, Pennsylvania
Cortland Trust, Micros-to-Mainframes, Rent-Way
A CEO who cannot take criticism or who has an authoritarian personality would be very difficult for a modern board to work with. Modern corporate governance is based on a model of collaboration and collegiality between the board and CEO that requires a peer relationship. An authoritarian CEO would be troubled by the need to share information and be respectful of other people’s opinions. In one case, it ultimately led to the CEO’s termination. Because he was so disrespectful of the board and so unwilling to respond to inquiries, we could no longer allow him to continue.
Craig W. Cole, 53
President and CEO, Brown & Cole Stores, Bellingham, Washington
Puget Sound Energy
A CEO controls the information the board receives and gives the board its objectives, so even if he’s Caspar Milquetoast, he’d be formidable with those tools at his disposal. And most CEOs I’ve known haven’t been Caspar Milquetoasts. Most CEOs are not distinguished by the smallness of their egos. Most CEOs have substantial drive. Most CEOs tend to be doers rather than thinkers—they want to get things done. Most CEOs want to manage by the numbers rather than by intrinsic values. Most want to pick numeric objectives and reach them; that’s one of the problems with our system, and it’s a significant one. Too many CEOs think that if it can’t be measured, it doesn’t matter. Too many don’t pay attention to the backbones of their companies—not the suits, but the people on the factory floor. I never liked quantitative objectives. If you can give someone an objective, they can usually pretty well meet it. But they may meet it by fair means or by foul, or by cheating, as we know now.
Mandating the separation of powers between the chairman and the chief executive is one way to begin to give boards a better way to handle difficult CEOs. Would that revolutionize the world? No. We need wholesale changes in attitudes. We need more independence for the compensation and audit committees, which we’re starting to get under Sarbanes-Oxley. But executive compensation is going to be a tough nut to crack, because CEOs are so vastly overpaid now. If you reduce the increase they get each year, you’re still starting at too high a level.
In the last 20 years, CEOs have been promising us 11.5% in earnings growth, and they’ve given us 6%. Meanwhile the economy has grown by 6.5%. So these mighty lions of capitalism haven’t given us as much as the GDP. They are greatly overrated as a group. And the idea that, at an average pay of $15.1 million a year, they are irreplaceable is one held by those who have only the faintest understanding of how business works.
John C. Bogle, 74
Founder and Former Chairman, Vanguard Group, Valley Forge, Pennsylvania
Instinet
The most difficult kind of relationship a board can have is when a CEO has significant ego needs that have to be met. Those tend to be more difficult than business problems. When you’re invited to sit on a board, one of the many things you take into account is what kind of environment has been established, what the corporate culture is like. But you should also consider, Can I relate to the CEO? What are the ego needs there?
Steve Frank, 61
Retired Chairman, President, and CEO, Southern California Edison, Rosemead, California
LNR Property, Unova, Washington Mutual
Let me start with a disclaimer: The CEO I am describing is an amalgam of people I’ve experienced over the years. For the most part, I have dealt with CEOs who are world-class executives and excellent leaders.
That being said, I have found I cannot meet my standards for board service when the CEO has not made the transformation, in his own mind, from principal owner to chief employee now privileged to serve a public company whose shareholders are now owners. Hanging onto a founder’s or entrepreneur’s mentality as a public-company CEO makes it impossible for the board to serve anyone but the CEO. I have seen this attitude at the root of organizations that have not grown or have had their natural growth sabotaged at some point.
Then there is the CEO with an insatiable need for control. By their very nature, CEOs must be strongly willing to take on authority and responsibility. However, if they have not learned to share leadership with their team and their board, they will put a stranglehold on the organization.
Pettiness is another damaging characteristic. There is a saying that it’s amazing what can be accomplished when nobody cares who gets the credit. If the CEO needs to be the originator of all good ideas, the source of all success, the board will be very hampered in making a contribution or having its role well defined or valued.
Also, a board cannot deal with a CEO who is to any degree dishonest, unethical, discriminatory, or devious.
With the exception of the ethical and moral issues, a board can often mentor a CEO through personal foibles. For example, if a CEO needs to dominate the meetings, the board can request time for discussion on all issues presented; ask to have the appropriate executives and staff present issues on a regular basis; provide feedback at the end of every meeting, in open recap or in writing; and otherwise coach the CEO on the reality of his role.
The most effective way I have seen of dealing with the relationship between the CEO and board is to have either a lead director or another director who is well respected by the CEO take on the formal role of coach, being the advocate to the CEO of the board’s position and to the board of the CEO’s point of view. The board could also provide support for the CEO to work closely with an outside organizational consultant or psychologist.
If I find a CEO personally difficult to deal with, I take it upon myself to communicate with him directly and discreetly. Fortunately, the behavior I find disturbing is often subconscious on the part of the CEO, so while perhaps surprised at my observations, he welcomes the chance to address the issues. I almost always learn as well a great deal about how I am coming across in ways that might hamper my effectiveness. In cases where the CEO’s behavior was more deep-seated or in fact conscious, and not only continued but became more blatant, I made the choice to leave the board. That has not happened often, but it has occurred.
Elizabeth A. Sanders, 58
Principal, Sanders Partnership, Sutter Creek, California
Denny’s, Washington Mutual, WellPoint Health Networks, Wolverine World Wide
You want a CEO who does not inhibit discussion or the raising of issues and allows other members of management to speak openly to a board. If you’re dealing with a CEO who withholds information or squelches debate, you push harder. You try to achieve openness in your discussions. And if it doesn’t happen, you have to consider whether you should continue to serve or whether you should leave the board.
William E. Stevens, 60
Chairman, BBI Group, St. Louis
McCormick & Co., MEMC Electronic Materials
The biggest problem I’ve seen with CEOs is that most of them think they’re God’s gift to the human race. They know everything and don’t like to be challenged. It’s almost like a regal situation. You deal with that by not being afraid to disagree and go through all the issues. But it’s tough sometimes, dealing with a person who doesn’t like to be criticized.
Richard F. Bonini, 65
CFO and Director, Doral Financial Corp., New York City
It’s the CEO who thinks he controls the board. The CEO works at the pleasure of the board. If the board abdicates that responsibility, the system will not work. We can pass all sorts of laws, but they won’t matter if a basic understanding of that duty is not there. Boards who fail to fulfill it have failed in their jobs.
Lester A. Hudson Jr., 64
Holder of the Wayland H. Cato Jr. Chair of Leadership and Professor of Strategy, McColl Graduate School of Business at Queens University of Charlotte, Charlotte, North Carolina
American Electric Power, American National Bankshares
I was a director of a publicly traded company whose board was controlled by the chairman to the extent that it became a useless entity. I am no longer on that board.
Bruce R. Albertson, 57
President and CEO, Brown Jordan International, Pompano Beach, Florida
MDU Resources Group
High-flying, high-performing, egocentric CEOs are the hardest to deal with. The only way to handle them is to get the directors to play their appropriate role of checks and balances—or get a board that will.
Christie Hefner, 51
Chairman and CEO, Playboy Enterprises, Chicago
MarketWatch.com
