When Stress Strikes the Boardroom
Eight characteristics of the courageous board.
Airline pilots and anesthesiologists have been known to quip that their professions involve “90% boredom and 10% sheer terror.” I have come to view service on a public company board in a similar fashion.
Like pilots reviewing preflight checklists, public company directors go through a routine. Oversight of corporate and compliance functions, attention to audit committee and disclosure matters, compensation gatekeeping and infrequent strategic discussions are the norm. All are important roles to be sure — just not the sort of activity that spikes the adrenaline.
Sometimes, however, public company directors are faced with matters such as major business combinations, shareholder activism, existential litigation, governmental investigations, financing shortfalls or other crises that cause the heart to race.
In my experience, directors find no decision more gut-wrenching than terminating the CEO. When this unpleasant and time-consuming task arises, boards are called upon to perform one of their most important tasks: choosing the next leader of the company. Many boards shoulder this challenge with grace and decisiveness. Others, however, falter and elect to retain the status quo when many on the board realize that is the wrong choice.
Experience suggests there are eight hallmarks common to boards that act with courage and conviction when removal of the CEO is under consideration. These character traits should be prerequisites for any prospective directors. They will aid a board not only when dealing with a CEO transition, but also in the undertaking of any difficult decision.
Independence in fact. The major stock exchanges and the SEC have all published standards of independence for directors serving on boards and their committees. While necessary, compliance with these standards is not sufficient to ensure that a board will act with true independence when staring down the prospect of replacing the CEO. Even a director who is close friends with the CEO will often qualify as independent under stock exchange or SEC rules. I have encountered nominally independent directors who had been the college roommate of the CEO or a part of the CEO’s wedding party. I have also crossed paths with directors who unabashedly declared their loyalty to their CEO — sometimes in writing. Not surprisingly, these directors struggle when called upon to act against the interests of a friend.
A worse situation develops when a director with this type of personal relationship chooses to become the archdefender of the CEO. Dogged advocacy for the CEO from a known close associate can have devastating consequences for board dynamics and cohesiveness. Similarly, directors who have business interests that would be adversely affected by removal of the CEO find it hard to act with the undivided loyalty that the law expects.
An effective board nominating committee. The second structural component of a courageous board is a nominating committee that does its job conscientiously rather than rubber-stamping the renomination of directors who cannot be counted upon to be independent from management.
Removal of independence-challenged directors is only the first step toward addressing this problem. Identification of new directors with the right mettle is equally as important. A board that relies exclusively on a “friends and family” approach to recruitment, one in which no director operates in a sphere that is truly separate from that of the CEO, will not enhance board independence.
A purposeful director self-assessment process. Major stock exchanges and institutional investors expect boards to conduct annual self-evaluations. Often, these annual rituals are conducted as “check-the-box” questionnaire-based exercises, during which no real effort is made to surface information about the underperformance of the board or individual directors, or identifying problems with director independence. A purposeful board self-assessment is an important tool for a nominating committee intent on properly performing its function.
Tenure management. Many boards have dropped strict term limits in favor of more surgical approaches to managing board tenure and refreshment. However, not all boards have done a proper job of retiring directors whose tenures stretch over a decade or more. Institutional investors and proxy advisory firms have zeroed in on this issue as a key indicator of problematic board performance, and their reasons are often sound.
Directors with extended tenures come to see themselves as “part of the team.” In other situations, they develop relationships with the CEO that are beyond collegial. Long-serving directors often have a difficult time taking action against a CEO they regard as a good friend.
Willingness to make unpopular decisions. Most boards value collegiality. Fear of being called “difficult” or “unsupportive of management” can make directors worry that they will be hampered in their efforts to obtain future board assignments. This concern is particularly acute for those directors who earn a significant portion of their livelihood from board work. It’s important for directors to set aside these personal concerns and take action when circumstances dictate that a CEO be terminated.
Sufficient advance CEO succession planning. It goes without saying that a company that has not engaged in CEO succession planning will have a difficult time removing the CEO. There are many strong reasons for establishing a robust succession plan. Assuring that the board sees a pathway to CEO removal without long-term damage to the company is key among them.
Absence of personal agendas. When a CEO departure is sudden and no obvious internal management candidate exists, it is common to select a director to take the helm on an interim basis. If an individual director has obvious designs on serving in that role and is seen to be overly enthusiastic in supporting the CEO’s departure, skepticism and resentments can develop. Avoidance of this situation underscores the need for advance succession planning. Start the process on a “clear day,” before a sudden CEO transition crisis becomes unavoidable.
Effective board leadership. Board leadership plays a crucial role when directors seek a consensus about an unpleasant decision. Frequently — but not always — this leadership will come from an independent chair or lead director.
Board leaders must proceed with care and solicit input from all directors. It will be important to present the board with ample, reliable facts, and to allow sufficient time for directors to make an informed decision. If directors feel they are being needlessly rushed into making a hasty decision based on incomplete facts, it will be hard to recover the confidence necessary to take decisive action.
Finding the Courage to Act
A board is more likely to act courageously when the right structural elements are in place for it to do so. Courage is derived from conviction, and conviction is easier to come by when directors are surrounded by colleagues they know are prepared to join them in making even the toughest calls.
Frank M. Placenti is a senior partner in the corporate practice of Squire Patton Boggs, where he leads the U.S. governance practice. He is chair of the American Bar Association governance committee. The viewpoints expressed herein are those of the author and not of his law firm, its clients or any other organization with which he is affiliated.