Governance vs. Management

by Wayne Willis on May 16, 2011

Probably the issue which gives CEOs and directors the most heartburn is the nature and extent of the authority delegated to the CEO.  Sometimes boards grant broad mandates and discretion to the CEO, relying on post-facto reports to alert them to any problems.  Sometimes boards reserve the right to pre-approve corporate action, keeping the CEO on a short leash.

Taken to an extreme, broad delegation becomes abdication of ultimate board responsibility.  At the other extreme, micro-management of the CEO hamstrings and frustrates the management team.  A happy medium will focus the board on GOVERNANCE of the Company and focus the CEO on the MANAGEMENT of the company.

Governance involves setting corporate strategy; approving major investments and operating budgets; hiring “management” (primarily the CEO but often including the CFO); and providing accountability and feedback for results.

Management involves planning, organizing and controlling of the operations of the company, including hiring critical staff, setting goals, making assignments, determining compensation and executing the business plan that the board approved and assigned.

All of the interesting questions occur at the interface between “day to day operations” and the “strategic plan”.  Practically speaking, here are the common issues that need to be discussed and decided:

  1. CEO Contract and Compensation – The CEO shouldn’t set her own compensation.  The Board, often via a Compensation Committee, will negotiate any employment contract and conduct annual evaluations and salary reviews.  Depending on the setup of the Comp Committee, final contracts or raises may or may not need full board approval.  The Comp Committee may also review and approve the CEO’s reimbursed expenses.
     
  2. Hiring Of Other Officers – I believe it is wise, unless the CEO has little experience, to let the CEO select and hire her own team, including the vice-presidents and other senior executives of the company.  One effective practice is to have a few members of the board meet with the final candidates for any critical position.  Sometimes, the “extra pair of eyes and ears” can deliver useful input to the CEO’s decision making.  Less often, it will reveal a candidate who would not be acceptable to the Board.  At the end of the day, a wise board will defer to the CEO’s judgment and the wise CEO will carefully consider any misgivings the board interviewers may have.  After the VPs are hired for their functional skills – finance, operations, marketing, etc. – then the formal corporate offices of Secretary and Treasurer are assigned to someone able to discharge those responsibilities.  Normally, the CEO recommends the appointments and the Board reviews and approves unless there is a reason not to approve. 
     
  3. Contractual and Expenditure Authority – the board should delegate authority to enter into contracts such that the CEO can operate “in the ordinary course of business” without further approval from the board.  Some boards explicitly do this, or do this so long as the company is reasonably close to the approved budget for the year.  CEOs and their delagees can then hire and fire employees and contractors, buy inventories or supplies, negotiate purchase/sale contracts with customers and execute all other necessary contracts to buy and sell in the ordinary course of business.  I am a fan of making this a formal, explicit resolution, not so much because you want a legal record of the “signature authority” granted to the CEO, but so that the board and the CEO have a clear discussion of what is “material” and needs board approval prior to commitment (e.g., an expensive piece of capital equipment), what events should trigger special notice to the board but no pre-approval (e.g., a very large customer commitment) and what will be reported to the board only as part of the ongoing financial reports delivered to the board (e.g., a deep discount to a large customer, which might depress gross margins).
     
  4. Compensation Of Officers– Normally, boards allow CEOs to unilaterally manage the compensation of all employees and junior managers.  Boards frequently want “input” – and sometimes even “approval” – in compensation for VPs and other senior officers.  Conversations about compensation, especially those involving raises or promotions, necessarily involve an evaluation of performance or of corporate structure.  If conflicting positions begin to arise, it is wise to recognize the conflict for what it is: an argument about results and capacities, not about compensation.   In such a case, it’s better to get to the real issues and resolve those, not couch the discussion in compensation terms.

     
    That said, sometimes there is a genuine philosophical difference about compensation strategy.  The CEO may be biased toward underpayment and not getting the talent or experience that the company needs.   Or he may be overly loyal or generous, paying too much.  Rather than resolve the dispute with argument and compromise (or capitulation), the Compensation Committee of the Board can, with the CEO, hire a consultant to benchmark the Company’s senior positions against the median salary / benefit / stock packages for similarly situated companies.  Often that market survey data also calibrates the experience and talent of the incumbent officers in the peer companies in the industry.  This input, coming from “the market,” will frequently narrow the differences between the Board and the CEO to a reasonable range.  A decision following such an exercise enjoys full, not grudging, support.

  5. New Initiatives / Projects - Whether the triggering discussion is a major capital expenditure, the opening of a new line of business or significant geographic expansion, there will come a time when the CEO develops and proposes a new corporate initiative that the Board resists.  There may be no question that the new initiative is beyond “the ordinary course of business” and thus requires board sanction.  But that’s not the final answer, because if the board rejects a well-thought-out plan, even for good reasons, it can seriously undermine morale and even set up an excuse for under-performance.  If the board’s misgivings are substantial and the CEO’s commitment to the new project serious, then a type of “irresistible force vs. immovable object” conflict can arise.  Special committees of the board to evaluate the idea, pilot projects to demonstrate ROI, or finding lower risk alternatives might reassure the Board and lead them to approval.  Or it might persuade the CEO that the initiative is not as important as first thought.  At the extreme, however, it might sever the relationship between the Board and the CEO.

Of course, the real answer to any conflict like these is to negotiate a solution where all parties can be heard and their views incorporated in the final decision.  The wise board will support the CEO who is trying to drive superior results.  The wise CEO will nurture good Board relationships, even when – especially when – the Board doesn’t see the wisdom of her recommendations.

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