Managing the Relationship with the Board of Directors – A CEO’s Crucial Task
It is a common misconception that the CEO and board maintain a boss and employee relationship. In practice, the board is there not to tell the CEO what to do or supervise their every move but to advise, challenge and test the validity of the CEO’s plans and actions. Ultimately, if the CEO performs poorly, the board will depose them. This decision is rarely taken lightly, and the board will commonly support the CEO until it can no longer do so.
Without venturing into the territory of describing the role of the board and the constituent directors, including their fiduciary responsibility, it is clear to most who have spent time around boardrooms that directors are there to act in the interests of the company and its shareholders, as well as the wider set of stakeholders. The assembled skills and experience of the board are meant to support the company and promote its success, and an effective board should be highly engaged in the activities of the company and across many aspects of CEO’s role.
The relationship the CEO fosters with the board is vital to the organisation. As the primary driver of the vision and strategy, and the person promulgating the cultural values throughout the workforce, a strong dynamic between the CEO and board helps establish close alignment on key matters and heightens the probability of success. A CEO must adopt a thoughtful approach to building relations with individual directors and, most importantly, the board. If the CEO ineffectively manages their board, it can lead to growing tensions that risk undermining overall business performance.
The upward management of the board by the CEO is incredibly challenging and demands extensive amounts of time, and sometimes patience. This article explores the key elements that contribute to a successful CEO-board relationship, including communication, transparency, trust-building, alignment, and board diversity.
Clear and Transparent Communication
Clear and transparent communication is one of the cornerstones of a healthy CEO-board relationship. The CEO must regularly inform the board about the company’s performance, challenges, and opportunities. Boards dislike surprises, and timely and advanced notice of important or material matters is good practice. Transparent communication fosters trust and enables board members to provide valuable insights and support. Regular board meetings, supplemented by written reports and presentations, help facilitate open discussions and allow the CEO to receive feedback and guidance on various aspects of the business.
While transparency is an important feature of the relationship, it must be said that inexperienced CEOs can be guilty of too frequently ‘thinking out loud’ in the presence of the board. This can quickly and dramatically erode a CEO’s credibility and undermine their authority to lead in the eyes of the board. A CEO must trust their board members and, among them, be willing to seek good counsel. However, too many instances of socialising underdeveloped ideas or revealing gaps in fundamental know-how can drain a board’s confidence in the CEO.
Aligning Goals and Expectations
CEOs must work closely with the board to establish common goals and expectations. The CEO ensures everyone is working towards the same vision by aligning strategic objectives, risk tolerance, and performance metrics. Goals and targets must be well documented, maintained over agreed and appropriate timelines, and progress monitored and revisited frequently. This alignment minimises conflicts and misunderstandings and creates a unified front when addressing critical issues, especially with investors and stakeholders.
All teams benefit from assessing performance, and boards are no different. While the board may conduct annual or regular reviews of the CEO’s performance, the CEO should ensure that the board is undergoing performance evaluations. Managing the board is a difficult task, made more complicated if the board is underperforming in its duties or is perceived ineffective. Gaps in skills or experience can expose a company to risk. Equally, a lack of engagement on the part of select directors can lead to poor board dynamics or dysfunction, directly impacting the CEO in their ability to achieve business objectives.
Building Trust and Credibility
Trust is the bedrock of a strong CEO-board relationship. The CEO must demonstrate integrity, competence, and accountability to earn the board’s trust and confidence. Being transparent about both successes and failures, admitting mistakes, and taking responsibility for the outcomes will enhance the CEO’s credibility. Additionally, the CEO should foster an environment where board members feel comfortable sharing their perspectives openly.
For example, in early-stage companies, the board will likely be populated with investors. This imposes multiple challenges on the CEO, but clearly, maintaining credibility among your investors, who may also provide future financing, is paramount. Fulfilling the CEO role, cognisant of the transparency and ownership mindset previously outlined, is important, but the CEO must also be an effective diplomatic operator who can carefully influence and align opinions, reducing the inherent conflicts that arise between investors with different objectives and time horizons. In such circumstances, a close relationship with the Chair of the board can be crucial, or with other influential independent directors.
Selective Board Composition
A CEO is often heavily involved in director recruitment. In early-stage biotechnology companies, for example, the CEO would perhaps only have select opportunities to bring in additional independent directors that could contribute to the board overall, given that many board seats will be occupied by investor directors from venture capital firms or possibly scientific founders who continue to want a key say in the direction of the company.
The CEO must be very considerate in the way they build their board. On balance, the board needs to be functional and effective, with the right mix of diverse experience and skills to support the company long-term. Selecting effective directors who will work with the CEO and management and lean into the challenges faced by the company will enhance the likelihood of the CEO having positive interactions with the board.
The tenure of directors should be proactively managed. Companies grow and evolve, and their needs change, sometimes dramatically. Few boards can remain relevant in these circumstances without refreshing the board with new skills and experiences that better align with the strategic direction and needs. The CEO needs to actively assess, communicate, and manage these changes.
Proactive Engagement
Successful CEOs actively engage their board members beyond the formal board meetings. This engagement could involve one-on-one discussions, seeking advice, or inviting board members to participate in important company events. By fostering a culture of collaboration and inclusion, CEOs can tap into the board’s collective wisdom and leverage their expertise to address challenges effectively.
Different CEOs have varying opinions on the level of access management should have to the board and the degree to which the board has access to the business and employees. Managed properly, these interactions can lead to much deeper levels of engagement and contribute to the confidence and trust that the board has in the CEO. It can also lead to uncovering opportunities or challenges that the CEO and management are yet to identify fully.
The role of a CEO can be a lonely existence, with few people to call on for discrete conversations. Creating good connections with the directors can be invaluable in leading the business, but possibly more impactfully, in approaching the CEO role and growing within it. Directors can become effective mentors, guiding a CEO in their career, and increasing directors’ vested interests and overall engagement levels.
Risk Management and Compliance
CEOs must work closely with the board to identify and manage risks proactively. Board members have a fiduciary duty to oversee the company’s risk management and compliance efforts. The CEO must ensure the board is well-informed about potential risks, regulatory changes, and emerging challenges. The CEO demonstrates the organisation’s commitment to responsible governance by presenting well-researched risk assessments and compliance reports.
With the advent of ESG and the need for the board to be across the associated risks of ESG factors, the CEO needs to be involved in making these assessments, not least because of their central role in driving strategy. The company may miss opportunities to create value without a clear understanding and good alignment between the board and the CEO. Worse still, the value could be destroyed. The CEO needs to understand the company’s range of stakeholders, the impact of external factors on the business, and the implications of their strategic and operational decisions on stakeholders and the environment. Constructive interactions with the board allow the CEO to actively participate in these considerations and ensure the board is attentive to the risks.
In conclusion, the CEO’s approach to managing the board of directors is critical to an organisation’s success and value. Of course, the Chair of the board or Lead Director, when independent from the CEO, has their role in leadership too, but a CEO must support the Chair in effectively managing the board from the vantage point of the Chief Executive. CEOs can foster a productive relationship with their boards by adopting clear communication, trust-building, alignment of goals, and proactive engagement. Moreover, embracing board diversity and promoting risk management and compliance underscore the CEO’s commitment to governance excellence. Ultimately, a collaborative and transparent CEO-board relationship enhances decision-making, supports sustainable growth, and positions the organisation for long-term success.
