The CEO and the Private Company Board
This most important governance relationship is more complex for a private company.
How the board and the CEO work together is the most important relationship in corporate governance. In public companies, the board’s principal role is to hire and fire the CEO, which clearly defines the role of each. In private and family-owned companies, the relationship is usually far more complex. What if the CEO is the owner of the company or a major shareholder?
In that case, the board serves at the pleasure of the CEO, not the other way around. And it becomes incumbent on directors to find ways to add value and demonstrate their worth. After all, effective private company governance is often a choice, not a mandate. In this issue of Private Company Director and at our Private Company Governance Summit in May, we focus on how to keep the relationship between the CEO and the private company board healthy and useful. There are a few key themes that we address.
Strike the right balance. However a private company’s ownership is structured, directors must be aligned with management. Both the CEO and the board should be completely transparent so one hand knows what the other hand is doing. An environment where the board and CEO work independently and don’t keep each other in the loop on major developments breeds miscommunication and distrust. Some approaches for making sure the board and CEO are up to speed with one another include holding discussions before board meetings to make sure there are no surprises on the actual day and defining and documenting key roles.
Work out disagreements. Disagreements between directors and management are bound to arise when it comes to strategic decisions. Directors must remember that it is the board’s role to help create a strategy, but it is management’s job to go about executing it. In family enterprises, board members may have to take a step back in disagreements with family owners. Such disputes are often best handled by another member of the family — someone who knows the family best and can more easily bring the conflict to a healthy conclusion.
Prioritize succession planning. Private company CEOs often play a larger role in determining their successor than you would traditionally see in a public company. But board members can help maintain a list of viable successors and review possible replacements with the CEO and senior management on a regular basis. The development of a formal succession plan can be the most important contribution a private company board can make.
Refresh the board. In private company boards , it is absolutely essential to have a suitable board evaluation process in place. This can help shareholders feel more comfortable that they have the right board members, but can also be used to identify and replace less-than-effective directors. The best private company boards need to be certain that everyone in the boardroom is adding value.
Mastering the relationship between the board and the CEO involves more than getting what you believe to be the best out of the chief executive. As a director, you also must understand what others expect of you and do your best to ensure you deliver on those expectations in a way that aids the CEO and results in the best financial performance for the business.
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