CEO-board relationship key to good governance
'You don't want boards to be a rubber stamp for management prerogatives'
The CEO-board relationship, like marriage, is so perplexing that it’s increasingly becoming a focus of academic research. Unlike a marriage, though, a lot of investors’ money rides on the CEO-board tango.
Chesapeake Energy didn’t get the dance right. The Oklahoma-based firm found itself embroiled in controversy this spring when it was revealed that Aubrey McClendon, Chesapeake’s CEO, personally borrowed $1.1 billion against company assets. Chesapeake never disclosed these activities to shareholders, likely because McClendon enjoyed an unusually intimate relationship with his board chairman: Himself.
That gave him an imperial impunity to scrutiny – until recently. In June, word came that Ohio’s attorney general is investigating McClendon to see if, with the board’s complicity or willful blindness, he manipulated core corporate activities to benefit himself while shareholders suffered.
Edward J. Zajac, the James F. Beré professor of management and organizations at Northwestern University’s Kellogg School of Management, is a leading expert on CEO-board relationships. He’s developed formulas describing their function that make Einstein’s theory of relativity look kindergarten-easy.
But despite all the research he’s done on the subject, Zajac says there are no easy answers to setting ground rules about the right “social psychological” temperature for CEO-board relations.
“I think everybody would agree that you don’t want boards to be a rubber stamp for management prerogatives,” he says. But, even in the name of good governance, a chilly boardroom atmosphere does no good either. “Then the CEO is less likely to engage in advice-seeking from the board because the board is executing on its monitoring evaluations role, but not its advising role,” Zagac says.
Jean-René Halde, president and CEO of the Business Development Bank of Canada (BDC), has also held CEO positions at companies such as Metro-Richelieu Inc., Culinar Inc. and Livingston Group Inc. And he’s directed companies including CCL Industries, Gaz Metropolitain and Provigo.
For Halde, the value systems of the CEO and chairperson are key to balancing the relationship between the two. But a CEO has to have a willingness to be transparent and see the board as an entity that provides balance to the business.
“I have been on boards where as board members we felt welcomed. We felt our input was useful. And in other boards you kind of felt you were the fifth wheel, were a bit of pain in the butt of the CEO. That’s never good.
“On the other side of that coin, as the CEO, you want a chairman also interested in building a strong board, who wants to follow best practices and create a skills matrix to make sure the board has a nice complement of skills. The chairman sets the tone at the top in terms of being demanding of management, yet at the same time is respectful of management.”
But how personal should things get? When are shared dinners, drinks or rounds of golf going beyond mere social courtesy into the dangerous realm of corporate complacency?
“I think,” Halde says, “if you have a strong board that’s experienced, it’s going to happen naturally. People will know how to be close enough to the business and be helpful, yet not so close that you lose perspective. This is all about good judgment and understanding you have a governance role. If you are honest with yourself, the day that you are starting to have a hard time making management accountable, that’s not good.”
Zajac thinks the United States could learn a few things from Canada about educating potential directors about their management role. He’s been brought to Canada by the Institute of Corporate Directors (ICD) to teach corporate governance in its directors education program.
There are, to Zajac’s knowledge, no such director programs in the U.S. “I’d like to see the U.S. move towards that because the qualifications for directors are actually very wide open. Ultimately you could argue you just need a pulse.”