The CEO’s Role In Corporate Governance

While preparing our article on Best Boards/Worst Boards (see p. 26), Bob Yavitz and I often discussed the factors that really make boards work effectively. We agree that it takes three elements: a confident and open-minded CEO; at least one or two strong, dedicated, and knowledgeable directors; and a considerable amount of organized planning and working together to capture the full benefits of a corporate-governance program.

What concerns me is that all CEOs are not “confident and open-minded” about corporate governance. There are still many chairmen/CEOs who have reservations about the corporate-governance moves under way in boardrooms these days.

“Why should I turn over the selection of new director candidates, the appointment of committee chairmen and members, and control of the board meeting agenda to my outside directors?” they ask. “Why should I be evaluated on my performance by the board unless the directors are similarly measured? Why should I put myself in such a precarious position that the very continuation of my job depends upon the whim of a few outside directors? Leave me alone to choose my own directors, run the board the way I want to, and then let the shareholders judge me on the company’s financial results. If they don’t like it, they can sell their stock.”

These words are seldom spoken aloud, but the actions of certain CEOs and companies indicate that this philosophy sometimes prevails. It seems to be particularly true of a few arrogant CEOs who are overwhelmed with their importance and power; of CEOs who founded their companies; of CEOs who own a great deal of stock; and of CEOs who are insecure in their jobs and fear director criticism.

A few of these CEOs will “get religion” and change their ways, rejuvenate their boards, and give it a good if belated try. A few more may go through the motions of embracing corporate governance. But the mere establishment of a Corporate Governance Committee and having a “once-over-lightly” performance evaluation of the CEO and the board is not, in itself, going to make good corporate governance happen. It won’t and can’t work until the CEO wants it to.

Most of these recalcitrant CEOs are not going to change their ways-or even pretend to do so. Nothing is going to happen until these CEOs retire or are replaced. I suspect we will have a number of candidates for our “Worst Board” selections for some years to come.

As a long-time corporate observer, I have always had disdain for those executives and especially CEOs-who surround themselves with sycophants and gophers. They seem to be afraid that brighter, stronger people will detract from their luster. I consider it to be a form of weakness and insecurity. And, in time, it usually has a deleterious impact upon the executive’s career and the company’s operation.

Much the same reasoning applies to boards. The chairmen/CEOs who pack their boards with their executives, their suppliers of goods and services, and their personal friends are giving short shrift to their companies and themselves. They do not have the depth of talent and experience on their boards to give them the kind of counsel they need, especially in times of crisis. When they and their boards become a target of institutional shareholders, should anyone be surprised? Will anybody shed a tear? I don’t think so.

The fact remains-and it will always be true that the chairman/CEO is still the key to the success of both the company and the board. No matter how good the board is, without a capable CEO in charge, the company will not reach its competitive potential.

The best combination is when a strong and competent CEO blends his or her leadership skills with a group of informed, participative directors, and, together, they develop a corporate-governance program. They start with a thorough review of the composition and structure of the board. Then they begin the dynamic processes that make the structure come alive. Finally, they learn to interact as they coalesce into an effective working board. When this fortuitous combination of a confident, open-minded CEO and some dedicated, knowledgeable directors is in place, all kinds of good things start to happen and keep on happening.

Formerly the CEO of F.&M. Schaefer (19721977), Robert W Lear is chairman of CE’s advisory board. He also teaches at Columbia Business School, where he is an executive-inresidence. He is an independent general partner of Equitable Capital Partners and holds directorships with Scudder Institutional Funds; Korea Fund; and Welsh, Carson, Anderson, Stowe Venture Capital Co.; and is a partner of Lear, Yavitz & Associates.