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CEOs and boards: reform or gridlock?

With the proxy season now concluded, following one of the most turbulent years in American corporate history, we owe it to ourselves to consider the changing relationships between directors and CEOs -- those individuals charged with delivering the strong business performance our economy requires.

Much has been written about the most visible examples of this changing relationship. But what about the hundreds of other, less visible public companies? How is this vital relationship evolving? What can be done to ensure that it is the productive, constructive relationship we need it to be?

Two recent Korn/Ferry surveys of CEOs and directors found that these two branches of the corporate power structure disagree on many key issues that may effect how a business is run. While this may be an outgrowth of increasingly "accountable" boards, it may also signal impending gridlock at a time when our nation's economic well-being requires agility, flexibility, creativity, and constructive strategizing. As a nation, we have a vested interest in seeing to it that directors and CEOs work together, not against each other.

Case in point: When we asked CEOs whether they believe that the SEC's new regulatory actions and reforms will benefit corporate performance, 72% said no. Yet, shareholder activists believe that the SEC's changes will have a positive impact on corporate performance. This can be interpreted to mean that CEOs either do not want to admit that external stimuli can have a positive effect on performance or, perhaps, that they do not believe that there's room for improvement.

Another example. When we asked CEOs, "Will pressure from external constituencies, i.e., institutional shareholders, cause corporate boards to become more critical of management performance, and quicker to act?" 82% answered yes. Nevertheless, when we asked, "In response to the SEC's new disclosure rules, do you or your board plan to make any substantive changes in executive compensation policy?" a whopping 97% said no. Although executives seem to accept that boards may be more critical of management performance, it appears that these CEOs, at least, do not expect their directors to change CEOs' personal compensation, despite the external pressure to link compensation and performance more closely.

Or consider this: More than two-thirds of CEOs also acknowledged that they "...believe that the SEC's rules signal a new era of heightened communications with shareholders," yet 83% said they did not intend to increase the amount of time they "personally spend meeting with institutional shareholders." The world may be changing around them, but many CEOs stop short of a personal investment of time to respond to those changes.

These results suggest that CEOs recognize the dramatic changes surrounding them but, in many instances, continue to resist the implicit personal threat to their own corporate authority.

It's possible, of course, that they simply do not want to change. Even after the dramatic upheaval at several highly visible companies, many CEOs, it seems, remain unwilling or unable to contemplate that they could suffer the same fate as GM's Robert Stempel, IBM's John Akers, or American Express's James Robinson.

Natural Resistance

This should not come as a surprise to most observers. After all, the current generation of CEOs did not grow up expecting the kinds of personal challenges they face today. Many CEOs believe that they have a right to be where they are. Having worked an average of X years at one company, they feel that they know their company inside out; they probably do not believe that anyone could do a better job. Hence, CEOs naturally resist anyone, even directors, who seek what CEOs perceive as undue involvement in managing "their" companies.

Nevertheless, in a study of director attitudes, our Organizational Consulting division found that directors, despite CEO resistance, are indeed seeking a more active role in key issues -- more active and more involved in areas that CEOs do not seem to expect directors to invade.

Seventy-eight percent of directors believed that boards should exercise more rigorous evaluation of executive performance against specific goals, and nearly 70% believed that there should be closer scrutiny of compensation generally. As mentioned above, CEOs do not appear to expect this kind of interference. At a time when compensation is being linked more closely to performance, this disagreement becomes a serious business issue.

In addition, directors and CEOs are distinctly divided when asked to identify "very important" priorities for future planning. Both directors and CEOs saw changing competitive dynamics, changing customer needs, and changing business economics as the top three priorities, in that order. Although both put these issues at the top of the list, a significantly smaller percentage of CEOs than directors did so.

These two factors alone say a great deal about the expectations each group has of the other, and about their relative priorities and objectives in guiding the companies they serve. Many CEOs still seem to believe, or hope, that the old rules prevail -- that their directors will not touch compensation even though they may take a closer look at performance. Further, change issues seem to be more important to directors than CEOs, raising questions about how America's boardrooms, and whom inside, will respond to the inevitability of change.

A Different View

Directors are also taking a different and more active view of their oversight function, seeking to get more deeply into meaningful measures of performance and to have more substantive, informal access to company information than CEOs are now giving them.

The apparent conflict between CEOs and directors indicates that both need to pay more attention to the dynamics of their working relationship.

How can they improve their relationship? In today's environment, it is crucial that CEOs recognize that board relations is a very real component of their job. This does not mean simply placating the board, entertaining them, and keeping them at bay. Rather, the CEO must recognize the pressures on directors and make sure that the board is sufficiently well informed about strategy, objectives, and performance and that directors feel well armed should an outsider question their judgment.

Immersion Program

CEOs cannot delegate this role. First, they must invest the time to develop an immersion program for new directors and a substantive education program for existing directors. Expose them to layers of management. Take them on field trips. Devote time at each meeting to review a particular, pre-determined component of the business. Provide substantive preparation materials for each meeting.

Second, CEOs can "defuse" their major institutional investors, giving them less incentive to manipulate the board directly. This, too, requires a personal investment of time and effort, reaching out to educate the investment community about strategic direction, objectives, and performance measures. The vast majority of CEOs in our survey said they had no intention of increasing the time they personally spend with their institutional shareholders. This could be a serious mistake. By delegating that function or, worse, ignoring it, the CEO gives his or her shareholders both opportunity and incentive to go directly to the board.

Third, directors share the responsibility for making this relationship work. CEOs expect that if the board is going to get involved, it should do so knowledgeably. Our CEO respondents urged directors to spend more time, join fewer boards, do more homework. Directors cannot expect CEOs to look to them for advice and counsel or to respect their suggestions if directors are not well-informed and up-to-date.

One other variable in the equation requires mention here: shareholder activists. The relationships among institutional investors, chief executives, and directors are, at their core, human relationships. As CEOs see activist institutions and their cohorts crowing about each successive "victory," human nature dictates that they might become even more recalcitrant, even more insistent upon doing things "my way."

If institutions are truly interested in constructive change, perhaps there is some way to demonstrate that intent. Although the quieter, gentler approach is said not to have worked, the current trend toward patient capital and relationship investing may help in this regard.

Act Responsibly

The headlines tell us that in recent corporate power struggles, CEOs almost always wear the black hats and activists, prodding newly accountable directors, wear the white. There is, however, considerable gray area in the relationship between these three. Given the fragility of our economy and the enormity of the stakes, all sides need to act responsibly. CEOs and directors are, after all, repositories of important experience and perspective that have a place in shaping our corporate future. It is not directors versus CEOs, but directors plus CEOs, that will build a successful future for American business and industry.

Copies of the surveys referred to in Mr. Ferry's article -- "Reinventing Corporate Governance: Directors Prepare for the 21st Century" and "Affirming Corporate Governance: Fortune CEOs Endorse Tradition" -- are available to interested DIRECTORS & BOARDS readers. Contact Deborah J. Cornwall, Managing Vice President of Korn/Ferry Organizational Consulting, at (617)423-9364.

Richard M. Ferry is President and Chief Executive Officer of Korn/Ferry International. He serves as a director on several corporate boards.
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Title Annotation:Building Brand Strength
Author:Ferry, Richard M.
Publication:Directors & Boards
Date:Jun 22, 1993
Previous Article:The corporation as a brand.
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