IN THE CEO/BOARD RELATIONSHIP.
Corporate Board Member May/June 2005
to Boards: Don't You Trust Us?
by Julie Connelly
Let's face it, a lot don't maybe with reason. But this is a dangerous
trend that both sides need to correct while they can. Some chief executives
and directors are doing just that.
After nearly three years of fallout from Sarbanes-Oxley, plus the
frightening realization that directors may be held financially liable for
their oversight failures, boards are no longer looking at their CEOs with
wonder. In fact, they're downright skeptical. "Trust in the CEO is not
at the levels it used to be," says Richard Koppes, a director of Apria
Healthcare and Valeant Pharmaceuticals International. Adds Philip
Burguieres, chairman emeritus of Weatherford International and a former CEO
of Panhandle Eastern Corp. and Cameron Iron Works: " The element of
trust seems to be gone. A few guys have done great harm."
Obviously the vast majority of CEOs
are trustworthy, but all have been slimed to some extent by the scandals of
recent years. In 2003 a joint BusinessWeek/Harris Poll survey found that
nearly 80% of Americans believed that CEOs of large companies put their own
interests before those of workers and shareholders.
To say that boards don't trust the
CEO is not to say that they suspect dishonesty. If they did, turnover at the
top of the corporate totem pole would be even higher than it is. Last year
663 CEOs decamped to other jobs, retired, or were fired, down from the
high-water mark of 1,106 in 2000, according to Challenger Gray &
Christmas, an retained search firm that keeps track of these peregrinations.
Rather, what boards fear is that their CEO isn't leveling with them, that
all information that directors receive about the company is filtered through
the CEO's ego.
When McKinsey & Co., a
management consulting firm, surveyed 150 directors in 2004, 81% said that
the CEO largely or completely controlled and shaped what board members
learned about the company. Only 30% said they felt they really knew what was
going on. Directors want to take more control of the information they are
getting, and that's a direct challenge to the CEO's power.
Of course, governance reforms have
already chipped away at that power base. "Before these changes, the
board saw only the tip of the iceberg in terms of information," says
Alice Kane, founder and former chairman of Blaylock-Abacus Asset Management,
who sits on a number of public-company boards. "Now we go down deeper
into the company."
Board members are demanding and
getting access to senior managers without the CEO present, to learn more
about the internal workings of the organization. Twice a year, for example,
General Electric directors spend time with the management and employees of
various business units, unaccompanied by anyone from headquarters. At
InCode, a wireless-technology company in San Diego, Edward Kingman, a former
assistant secretary of the Treasury, chairs the audit committee. "His
expectation is to have unlimited access to our CFO and treasurer, and he has
it. So I don't drive the agenda," says John Donovan, InCode's CEO.
"There's a lot more interface between the board and the functions at
More directors are also getting
together without the CEO to compare notes. Marshall Carter, the retired
chairman and CEO of State Street Bank in Boston and currently a director of
Honeywell International, notices that outside directors are meeting more
often in executive session, sometimes after every board meeting, or at least
once a quarter. "This gives us the chance to talk about whether we
liked what was being done or not," he says. "Then the lead
director gives our feedback to the CEO." And some CEOs love it, or say
they do. "I do encourage our directors to express their disagreement,
and it's a very outspoken group," says Steven Kriegsman, president and
CEO of CytRx, a NASDAQ-traded biotech company that is working on effective
treatments for Lou Gehrig's disease and type 2 diabetes. "Sometimes I
get a little hurt, but not where it bothers me. There's nothing personal, it's
all about the company and the business."
According to Harvard Business
School professor Jay Lorsch, who is a director of Computer Associates:
"We're headed in a different direction now, where the board is supreme,
and this is a permanent change. People won't take the risk of being
directors if they can't do the job."
A danger is that directors will
feel sufficiently empowered to usurp roles that properly belong to the
executives. Sarbanes-Oxley compliance procedures are the thin end of the
wedge here, because they are requiring board members to delve into
management's activities in the process of ensuring that companies abide by
the rules. Most directors have become mired in accounting oversight and
control and some CEOs are happy to have them there. Says InCode's John
Donovan: "My job is to spend my time with customers. I need to build a
business, and I can't spend my time on controls. I want someone who will
spend time with the auditors. I have to parachute in periodically to know
what's going on. But let the board deal with the control issues; let them be
the building inspectors."
At some point these oversight
functions of the board will become a manageable routine, and when that
happens, newly energized directors have indicated that they want to become
more engaged in other aspects of the company. That's what Robert Felton, a
director at McKinsey & Co., has concluded from a McKinsey-sponsored
January 2005 survey of board members at 1,000 public companies worldwide.
Three-quarters of the directors wanted to spend anywhere from 25% to 100%
more time on strategy formation, risk assessment, and people development,
management's traditional areas of responsibility, Felton notes. "Boards
want to get more involved," he says. "They want to move from
compliance to value-added activities."
Although the CEO has always served
at the board's pleasure, many directors are only now seeing themselves as
the CEO's boss, and like any conscientious employer they want to keep tabs
on what the workers are up to. CEOs are learning to go along with this.
Listen to Kriegsman describe his relationship with the CytRx board: "There
are no stars here; I answer to the board. They call the shots. I implement
their decisions. My obligation is to keep them apprised of everything that
is going on."
All of which takes time. Loren
Carlson, chairman of an organization for chief executives called CEO
Roundtable, estimates that more than 30% of a CEO's time is now spent
managing the board. "That's a lot," he says, "because the CEO
needs to have one-on-one conversations with each of the board members on a
consistent basis, and especially prior to the board meeting so that there
are no surprises at the meeting."
Donovan, who says he spends four
hours a week recapping issues for his InCode directors, explains that they
are "helping me prioritize things; they are telling me what they think
are our biggest problems. There are times when the board suggests something
to which I can say 'Thanks' and go my way. But I have to be aware of where
the board is an adviser and where it's a contender. On financial matters, it's
pretty clear where it's their call. It all boils down to engaged board
members, a respectful CEO, and open dialogue."
One director told Donovan that
during the recruiting process board members had said they thought highly of
their CEO. Replied Donovan: "Tell them to tell that to me!"
Kriegsman communicates with his
directors as often as matters develop that are material to CytRx; sometimes
that's every day, sometimes every couple of weeks. "I don't count the
time that I spend talking to board members, because I work all the
time," he says. "But you build a relationship by communication
that is face-to-face or over the phone or in writing, and by conversations
that are both business and personal."
Nothing gets directors' backs up
faster than a CEO who kites off on his or her own without discussion in the
boardroom. "A CEO can't come to the board and say, 'I've been talking
to so-and-so and we've decided to merge our two companies. Whaddaya
think?'" says Jay Lorsch. At least not without paying a career penalty.
"It's to the CEO's advantage to share things with the board when they
are still in the formative stages," says Honeywell director Marshall
Carter. "If you've said nothing, it doesn't help when six months later
something goes wrong." He recalls an instance of a CEO who involved his
company in a big acquisition. The board felt it was not in the loop about
the deal, a point clearly made to the CEO by the lead director. When the
deal collapsed, the CEO took early retirement.
Yet some chief executives complain
that Sarbanes-Oxley is making boardrooms so formal and process-oriented that
boards will only listen to formal presentations. Laurence Stybel of Stybel
Peabody Lincolnshire, a consulting firm, recalls that in the course of a
board self-evaluation at a Fortune 500 company, the CEO complained that the
directors paid so much attention to audit and oversight that he felt he
couldn't run trial balloons past them, and he didn't know whom else he could
talk to about certain issues. "So the board created the 'half-baked
ideas' concept," says Stybel. "They told the CEO that if he made a
formal proposal, they'd evaluate it as a formal oversight matter. But if he
said the magic words half-baked idea, they'd give him advice and
Of course, many CEOs have
intuitively sought advice and counsel outside the boardroom, because the job
is lonely and they know they need reality checks from people without an
agenda. Brad Thompson, the chairman and CEO of Oncolytics Biotech, a NASDAQ
company in Calgary, Alberta, has what he calls his "quack club," a
couple of other CEOs whom he's known for years and who join him in letting
off steam. "I quack and they grumble," he says. "Finding
these people is the hardest thing for a CEO, because what you tell them
cannot go further."
With directors wanting to become so
much more involved, it won't be difficult for them to trip over the line
between governance and management, to move from oversight to
decision-making. Stybel believes that boards are not eager to usurp
management's role, because they know that however open the CEO, the best
information they can get is historical. "They are looking at last
quarter's data or last year's data, and it would be as if they were trying
to drive the car by looking in the rearview mirror," he says. "They're
hoping the CEO is looking ahead, so they're not going to say, "Let me
have the wheel."
And yet the line of demarcation is
so tenuous that this can happen. Edward Zajac, a professor of management and
organizations at Northwestern University's Kellogg School of Management,
notes that at one company where he has done some consulting, the managers
were receiving e-mails from both the CEO and an outside director about a
strategic matter. Says Zajac: "The e-mails were not in sync."
But sometimes a CEO is on less
solid ground when he or she objects to the board's incursions. Consultant
Thomas Doorley, the CEO of Sage Partners, says he is working with a public
company whose directors believe that the business model is running out of
gas and needs to change. The CEO disagrees, and he and the board are at
loggerheads. "Is this something the board is supposed to look into?"
Doorley asks. "If it is and the CEO is right, the board's confidence in
him will be restored. If the directors are right, the CEO can do something
about it before it's too late." And then there is the case of
Hewlett-Packard. Were the directors intruding on management's prerogatives
when they insisted that Carly Fiorina delegate some of her responsibilities
to three subordinates? Or were they finally waking up to the presence of a
dangerous control freak in the corner office?
For CEOs, life has become more
difficult and uncertain because distrust has undermined their relationship
with their boards. Restoring that trust is going to take time and ceaseless
effort. Says Brad Thompson of Oncolytics Biotech: "You build trust with
your board by year-in, year-out doing what you say you'll do. The board sees
the consequences of this and sees that your intentions were the right ones.
But every time a new board member comes on, you have to build a new
relationship of trust." That's also a two-way street.
Corporate Board Member