The Fundamental Question

The Fundamental Question

Three decades ago our sister publication, Directors & Boards, which focuses on the governance of publicly traded companies, proposed the fundamental question that boards need to ponder at least once a year: “Is this the day we fire our CEO?” This remains as true today as it did then. The most important decision continually facing a board is whether the top leadership, in particular the CEO, has the strategic vision and personal capacity to drive the company forward. This is true for both public and private companies.

However, many board members of owner-operated and family businesses may feel hamstrung in their ability to even ask this question. According to a recent Korn Ferry survey, the average tenure of a Fortune 500 CEO is a little over four and a half years. Private companies that are not backed by a financial sponsor often have CEO tenures double or triple this average and infrequently see the turnover at the top public companies often experience. In many cases, this can be a good thing. But since the board has a fiduciary duty to the shareholders, if the CEO is a significant (or even the majority) shareholder is this still the fundamental question the board should ask? And if so, what happens when the answer is “Yes”?

Ultimately, the question of whether the company has the right leadership is an essential one, and it needs to be asked at every stage of a company’s lifecycle. But unlike public company CEOs — many of whom are evaluated on shareholder-centric measures, almost exclusively on total shareholder return — boards of private companies can utilize a broader variety of indicators. While public companies are now starting to examine their impact on broader stakeholder groups, private companies have long recognized a broader purpose and longer-term outlook.

Annual CEO assessments are generally backwards-looking, an exercise in evaluating past performance for the purpose of awarding bonuses. However, private company boards can more easily take a longer-term, forward-looking view as well as a wider lens on evaluations beyond financial returns, incorporating metrics tied to the longer-term benefit to a broader group of stakeholders such as employee health and welfare.

Panel sessions at our June Private Company Governance Summit in Washington, D.C., will address this topic, as well as possible courses of action when the answer to the big question is “Yes,” including ways to ease a transition, potentially to a chairman role. In fact, many CEOs who transitioned to chairman have been very successful in that role, perhaps more so than when they ran the business.

When looking in a mirror, a CEO too often sees “the fairest of them all.” This self-appraisal can be not only false, but also delusional. It is the board’s, and in particular the independent directors’, duty to ask the fundamental, albeit difficult, question and provide a fact-based evaluation. However, rather than being hamstrung, private company boards are in the best position to utilize a broader set of indicators in their evaluation and recommend a wider range of solutions not available to public companies.