Long-Term Relationship
By Kevin B. Kelly

Full confidence between corporate boards and CEOs requires trust, candor — and lots of strategic communication.

Tony Earley understands the delicate board-CEO introductory dance more than most, and he realizes the pressure to build a good relationship right out of the gate is more important than ever before.

“The old stereotype of directors sitting around having a drink and smoking a cigar is long gone,” says Earley, a Ford Motor Company director and the immediate past chairman and CEO of PG&E Corporation, a large public electric and gas utility based in San Francisco, who also served on the boards of MASCO and Comerica.

“There are no easy tips,” he explains about building trust with the chief executive. “And it’s become more difficult as the stakes have increased.”

Today’s directors shoulder responsibility for everything from the company’s cybersecurity strategy to its sexual harassment policy. Engaging deeply and mulling difficult topics requires building trust not only with other board members but also with the entire management team — especially the CEO.

As a board member, the process of getting to know your new CEO can have make-it-or-break-it implications. Start off on the right foot and you’ve paved the way for a mutually beneficial partnership that can drive business performance for years. Get it wrong and you’re looking at a future filled with tension. Or worse.

So how do you do it?

First, directors have to establish straightforward expectations and communication channels. Both management and directors need a clear understanding of their roles, and how interactions are going to work. Often, C-level executives join boards as independent directors and mistakenly assume they’ll run the show as they always have.

“Some people want to show how much they know,” Earley explains. “But they have to understand their job is not to run the company, it’s to provide oversight. They’re part of a team.”

As Joel Trammell wrote in a thoughtful analysis for Inc. magazine last year, “A board that consists of mostly subject matter experts — e.g, CIOs, CSOs, CFOs — can quickly evolve into an operating entity.” A CEO has to feel he or she is in charge while also being able to solicit the board for counsel.  

That’s something Kelly Romano knows well. A year ago she joined the board of Dorman Products, a national leader in automotive aftermarket parts distribution. It was right at the moment the board was tackling a CEO succession plan. The board eventually selected Dorman CFO Kevin M. Olsen, who assumed the role of president in August and will add the title of CEO in January.

It was a great opportunity, Romano says, for the board to think not only about the future leadership of the company, but its own role. “There’s always that balance to strike,” says Romano, who owns a consulting firm in Sarasota, Fla., and previously ran multiple large global businesses for UTC Corporation. “We all come from operational roles; now our roles are about governance. Kevin uses us as a sounding board, but I think we have already done a very good job of empowering him, of saying, ‘Go for it.’ I think that’s critical.”

How often to communicate? Some boards meet weekly with the CEO during crises, while others set a recurring monthly breakfast meeting or establish a habit of informal check-in calls. But the frequency with which boards and CEOs communicate, governance experts agree, is less important than ensuring that such communication is substantive.

“Boosting effectiveness isn’t just about spending more time,” says Rodney Zemmel, a managing partner at McKinsey & Co., who has studied board-CEO relations extensively. “It’s also about changing the nature of the engagement between directors and the executive teams.”

A certain level of disagreement is healthy for both the board-CEO relationship and the company as a whole. Yet despite their importance, many tough conversations never actually happen: according to a recent McKinsey global survey of more than 1,100 directors, only 56% say the boards and management teams constructively challenge each other in meetings, a 4% decline since 2015.

Making sure such discourse occurs doesn’t mean directors should stand up in board meetings and spring objections on a CEO. Instead, it’s the board’s responsibility to let the CEO know about issues or concerns well in advance of a meeting. That, combined with transparency and honesty, builds trust, the oil that keeps the board-CEO machine running. “CEOs are afraid to say, ‘I don’t have the answer right now’ because they think the board will get rid of them if they aren’t being effective leaders,” Earley says.

A board and CEO that work through thorny issues together develop a bond that ultimately produces more effective decisions, a higher-performing culture and, yes, an improved bottom line. The McKinsey survey reported that among boards that have established strong dynamics and processes, 59% of directors reported their companies financially outperformed industry peers. That’s compared with just 43% who said the same at firms with lower-performing boards.

When it comes to boards and CEOs, successfully brokering a healthy, long-term relationship often comes down to a little thing called faith: faith that the company has the right leadership, both in its C-suite and on its board, and that both are prepared for a period when tumult inevitably hits. That includes CEO succession, which Romano says means getting leaders comfortable with the idea of one day passing the baton. “I think that’s where there is an opportunity for an issue to arise: where a decision has to be made very quickly and the board and the CEO are not completely aligned.” In the end, she says, “nobody likes surprises.”  

Kevin B. Kelly is based in Atlanta and a managing director in the board of directors practice at Diversified Search, one of Forbes magazine’s top five executive search firms in the nation. He conducts board searches for such companies as State Farm, Helmerich & Payne and UGI Corporation, among others.

 


Issue: 
2018 Fourth Quarter

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