Who’s Running the Show? CEO or Board?
The board of directors is increasingly seen as the accountable body for ensuring ethical, responsible behavior from companies. But we still seem to be witnessing some pretty spectacular failures in corporate governance.
To me, this isn’t at all surprising. The board has very little influence over what the management team does on a day-to-day basis. If they put the wrong incentives in place, or they don’t have strong, independent monitoring mechanisms to help them, then all they can rely upon is the integrity and competence of the CEO.
I have long held the view (and nothing has happened recently to convince me otherwise) that boards have limited control over what really goes on. I’m sure that many professional directors will disagree with me on this… but that would most likely be a reflection of their ego, rather than reality.
Just think about this for a minute:
- Directors spend very little time (if any) in the business,
- I’ve even seen directors come onto a major board in an industry they’re not familiar with, and then not even bother to visit the company’s operating sites to work out how the company runs
- How can they possibly understand the business?
- How can they know what the key value drivers are?
For many directors, a board seat is about status and power… which isn’t particularly conducive to good governance. And to further dilute their effectiveness, the only lens through which they can view the business is the lens that management presents: board papers, meetings and, eventually, results (which is a rather untimely lag indicator).
In Ep.248 of the podcast, I looked at an interview with one of Australia’s leading board directors, Alison Watkins. I don’t know Watkins, but I do know that she has significant experience as a director of Bluechip companies.
Her experience is that the relationship between the CEO and the board is changing.
She cites the move from a pure financial focus, to a much more holistic focus on reputation, impact, and sustainability. I’m sure she’s right about this. If there’s one thing I know about board directors, it’s that they are fanatical about ensuring their reputations remain intact. I’m sure they are reflecting societal standards more now than they ever have. I;m also sure that this is breeding a new level of conservatism in these companies.
Watkins also claims that “the days of the all-powerful CEO are over”. That would surprise me greatly for a few reasons. The first is the problem of information asymmetry. CEOs have greater access to information than their board, and this, in and of itself, is likely to keep CEOs in the box seat.
I’m not sure that the balance of power has shifted back to the board too much. If it had, we’d see less anecdotal evidence of CEO and senior executives skiing off piste, and I think there’s still plenty of anecdotal evidence to suggest that’s not the case.
Part of me also thinks that human nature doesn’t fundamentally change. CEOs know they need to play a different game, but they are typically the smartest people in the room when it comes to optimizing their position. Managing the board relationship is a core skill, which I’m sure many have mastered… and they’ll be able to effectively move with the changing perceptions without ultimately ceding power to the board.
Or is that too cynical?
It’s possible that there’s been a shift in the Board / CEO relationship in the last 5 years. Let’s face it, societal standards are shifting, and the screws are tightening on directors, with their personal exposure increasing. This is forcing the board to pay closer attention, so that it doesn’t end up becoming this week’s headline.
But, I still can’t help thinking that the information asymmetry and the lack of time spent in the business still makes it incredibly difficult for a board to exercise its governance duties effectively, without the cooperation of a high integrity CEO.
If the CEO is open, transparent, and courageous, you’ll be able to build an incredibly effective governance structure around that relationship. If not, the board is ultimately at the mercy of the management team.