Redefining the relationship between CEOs and boards

Think:Act Magazine Trust
Redefining the relationship between CEOs and boards

Wharton professor Michael Useem promotes the idea of steering by commitee

Interview

by Bennett Voyles
illustrations by Frank Flöthmann

It’s time to bring the relationship between the CEO and the board out of the stoneage: Wharton professor Michael Useem on the new leadership model that’s steering companies to make smarter decisions.

Traditionally, corporate boards hired and fired the company’s leaders, but otherwise stood back and let the CEO pilot the ship. In their book "Boards That Lead: When to Take Charge, When to Partner, and When to Stay Out of the Way", Dennis Carey, Ram Charan and Michael Useem observed that, these days, more and more boards are choosing to stay on the bridge for the whole voyage.

But is steering by committee a good idea? Useem, the William and Jacalyn Egan professor of management at the Wharton School of Business in Philadelphia, explained to Think:Act why, despite the downside risks that board leadership creates, he believes it’s a chance worth taking.

The new board: Michael Useem believes that boards can play a much more constructive role than they currently do.

Think:Act:In "Boards That Lead", you argued that the role of the board has undergone a quiet revolution over the last 10 years. What’s different about today’s boards?

Michael Useem: Over the past decade, many boards have added a second function to the traditional function of keeping an eye on management. For a host of reasons, many boards are moving towards adding a leadership function as well.

If you ask directors what question is uppermost on their minds, historically their answer was: Is top management doing the right thing for its owners? In addition, directors now really want to work as a partner with top management, to think about how to create value.

Board members are also getting more involved in leadership development. Many firms now ask non-executive directors to serve as mentors to top managers, and even as instructors in company leadership development programs, adding substance and not just oversight to their role.

In the past, board membership was often an almost honorific position. Does being a board member demand a bigger commitment today than a few lost rounds of golf?

Yes, it definitely takes more time. In the US, if you’re the lead director or the non-executive chair, you can be putting in well more than 200 hours a year.

In the US, both of those roles have become much more important, much more time-consuming, and much more a matter of actually knowing the substance of what the business is doing and what the market looks like than used to be the case.

Are there any downside risks to this new model? For instance, could board members’ personal investment in the strategy make them less objective about management’s performance?

That’s a potential Achilles’ heel of this new model. As non-executive directors devote more time in helping to shape the company’s strategy, they may be less able to monitor performance objectively.

The key questions to ask your board
1

Is the person who is the lead director or non-executive chair a person who can lead, organize and direct the work of the board in collaboration with top management? Are they persuasive, are they decisive and are they strategic?

2

Is the board large enough to have a critical mass of diverse expertise and experiences, but not so large that it can’t function as a decision-making team?

3

Is everybody in the boardroom contributing value not only to the monitoring function, but also to the strategy and leadership of the board and the firm?

4

If you were an activist investor looking at your company, what changes would you want to make in the board and its leadership of the firm?

Will we see term limits?

It’s coming, as a way of keeping the board fresh, to give it new ideas and to ensure director independence. I think that governance is going to move in this direction as appreciation grows of the downside of having very long-term directors who may lose some of their edge as independent voices.

Could you give us an example of the kind of value this new style of board can add?

I’ll reference one that’s in our book: The CEO of Gillette, the biggest player in the men’s shaving market, called the CEO of Procter & Gamble and said Gillette would like to consider being acquired by Procter & Gamble.

"I think the logic is inescapable that companies that are well led by executives who partner with their directors are going to make smarter decisions."
Professor of Management
Wharton School of Business in Philadelphia

This was going to be one of the biggest decisions that the CEO of P&G at the time, A.G. Lafley, and his top team would be making during their tenure. They had a bunch of critical questions to answer: What was the right price? Would it make sense to bring this consumer product into the P&G family given the history of it not being there?

Is the current chief executive of Gillette and what he knows vital to making the acquisition succeed, and if so, what will it take to retain him for at least several years? And, what will it do to the culture of Procter & Gamble to bring in a huge new division that has its own traditions?

Fortunately, Procter & Gamble had six current or former executives on the board who had been through very large acquisitions of their own before they joined the P&G board. Whom better for the P&G chief executive to obtain informed guidance from than executives who’ve been through major acquisitions themselves?

Choosing board members must also be a more serious business now. The nominations and governance committee, which is responsible for identifying future members of the board and making certain that the board procedures are strong, has become a much more important player at many companies.

Nominations and governance committees are asking themselves much tougher questions these days: What kind of a board member do we need that we don’t have? Do we have somebody, for instance, who is knowledgeable about cybersecurity? Do we have somebody on the board who really understands global supply chains?

Illustrations by Frank Flöthmann
Illustrations by Frank Flöthmann

What should a healthy working relationship between a board and a CEO look like?

In British firms, the relationship between the chairman and the CEO is crucial. In American firms, the relationship between the lead director and the CEO has become critical as well. In both cases, the question comes down to whether the two of them are capable of collaborating closely. Are they able to divide up what they work on effectively? Do they understand each other’s thinking exquisitely well? Can they call each other with no notice to receive guidance and advice? In the monitoring-only era, these relationships were less significant.

But isn’t it unstable to have two leaders?

Historically, very few firms have had two co-CEOs for any length of time. The fact that they’re so few and far between means it’s an unstable configuration. It’s akin to certain atomic configurations that decay soon because they’re in an unstable state. It’s good to view the strong collaboration between the chief executive and board chair or lead director not as a co-relationship, but as a complementary relationship.

You’ve mentioned the differences between the US and the UK, but other board configurations are even more different. Do you think this model will go global?

Country traditions in governance are probably more varied for large publicly traded companies than almost any aspect of corporate management. The way boards operate in Norway, for example, is different from that in Germany, and their operation in Germany is still different than what we have in the US or UK. Over time, I think the logic is inescapable that companies that are well led by executives who partner with their directors are going to make smarter decisions and perform better in all countries.

Many countries now require boards to include a certain percentage of women. What impact does diversity have on board performance?

I believe that bringing women onto governing boards is one of those quiet revolutions that is happening in front of us. Overall, there is good evidence now that more diversity in terms of expertise, geographic location and demographic variety makes for a more consequential board.

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  • Photos Priyanka Parashar/Getty Images; Frank Flöthmann; Martin Burgdorff; Stephen Voss, the forbes collection / Getty Images; Illustration: twotype design, Christina Maria Klein; Plumb Images/Leicester City FC via Getty Images; Marco_Piunti / iStockphoto; Drew Angerer, Staff / GettyImages; Illustrations by Martin Burgdorff