CEO Accountability; a key corporate board responsibility

“The board is responsible for the perpetual life of the corporation.”

Twice in my career as a turnaround executive, a nonexecutive chairman of a NYSE-traded company has called me to ask for help. Their companies were floundering, and each asked the same question: will you need to replace my CEO? While I was very impressed that these board members each took the initiative to address the issues their companies were facing, it intrigued me that they perceived handling the CEO to be a difficult issue. Why was this?

I came to know that the members of each board were highly competent people, distinguished in their careers. Each of the companies had been seen as an exemplar of the best of breed. Each CEO had been celebrated as an effective leader. And each board had interpreted themselves as the supporter of the CEO. The chairmen who called had gotten too close to the CEOs in question. In effect, they were calling for an outsider to help them do what they needed to do: hold the CEO accountable. Or else.

There are some important lessons in these two parallel situations. In my view, the seeds of the ultimate failure of the boards and their CEOs were sown in their success, which is a common pattern. The CEOs became larger than life not only in the eyes of the public, but in the eyes of their boards. Their inclination was to protect the CEO, given the success he had apparently created, until it was too late. Along the way, they had become too close to him personally to be able easily to hold him accountable.

How to protect against this? Consider first principles: who is responsible for what. The board is responsible for the perpetual life of the corporation, and its overall health, just as a parent is responsible for the welfare of a child. To ensure that life and health, the parent instills the habits of self-reliance and independence while keeping a weather eye, and a skeptical one, on the key indicators of progress.

Though cordial and trusting relationships between management and board are imperative and must be nurtured, directors cannot forget ever that their job is to hold the CEO accountable for the way he or she chooses to allocate the resources of the company. Active questioning and joint consideration and monitoring of relevant metrics of risk and reward and of progress toward realizing strategic goals must be considered at every board meeting. Meetings that are scripted by the CEO are a red flag.

Both of these boards had known the CEO for decades and had become too close to him, allowing an imperial tone to be established, in which the CEO could not be challenged. This is a dangerous and pernicious state of affairs, reminiscent of enabling spoiled children. Though it will ruffle feathers of both management and other directors, if this is happening in the boardrooms in which you sit, start interrupting.

Break the rehearsed cadence of the prepared presentation in favor of direct conversation. Be sure the directors are not receiving information about the company’s condition only from the CEO. Remember that it is only when directors can establish an independent framework for assessing the company’s health, and therefore the CEO’s effectiveness, that they can truly be in position to mentor the CEO. This is the way the board can be most helpful to the CEO — by knowing and caring enough, like a parent, to call the CEO to account for actions regularly, thus avoiding the need, we hope, to call for the possible replacement.

Deborah Hicks Midanek is president of Solon Group Inc., a firm she started in 2005 to work with boards, management, investors and lenders of companies facing serious difficulties (www.solongroup.com). She has served as a director of 15 companies that have been public, private, and family controlled.