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The Elephant in the Room

11 November 2019 by Ibi Eso

The Elephant in the Room

Has the chief executive officer role been given enough attention in governance codes?

Let’s talk about the elephant in the room, staring you in the eyes and ready to use its trunk to douse you with water. I’m not referring to the large, grey mammal that never forgets here but the all-powerful, all-knowing chief executive officer because, personally, I do not think enough attention has been devoted to this role in governance codes.

According to the UK Corporate Governance Code, “The chair leads the board and is responsible for its overall effectiveness in directing the company”. The CEO, as the leader of the executive directors, is usually the person closest to the business and responsible for formulating the strategy and direction for the organisation. This is then articulated to the board, for board members to challenge, critique or agree. However, a domineering CEO can have undue influence on the chair, the board, the other executives and, in some instances, may never be held to account. Below are some of the issues I feel should be talked about in relation to the CEO.

Terms and Culture

Similar to non-executive directors (NEDs), I think the CEO should have a maximum term of office. I’m not sure what the right number should be but if a figure is determined, boards can be tasked with proper succession planning for when the CEO’s term ends, rather than being forced into it abruptly by events such as sickness, accidents, or a scandal that forces the CEO out. I have seen too many CEOs carry on for years, and I do question the value they are adding to their organisation when there’s been no change at the top for over a decade.

The CEO can be very powerful in determining the culture of the organisation and if the board is not aware of, or not monitoring the culture, the CEO could be allowed to get away with creating a very toxic culture, one that stifles growth and prevents good people from joining an organisation. I know of one organisation where it was well-known that the CEO had ‘spies’ all around the office. Not only that, it was rumored that there was a relationship between the CEO and his PA, with the PA only booking in people she liked for meetings with the CEO. Admittedly, this abuse of power would now be harder to get away with in the current climate of heightened governance awareness, but it just goes to show the power of an out-of-control CEO.

Undue Influence

Whether by sheer force of personality or manipulating a situation, it is relatively easy for a dominant CEO to exert pressure on fellow board members to achieve their own ends. In their paper on the conflicts of interest faced by board directors, Professor Didier Cossin and Abraham Hongze Lu say the real danger lies in the extent to which boards and directors are unaware of the many subtle conflicts of interest that they are dealing with: “The boardroom is a dynamic place where struggles of ego, power, rules, and authority continuously surface, and it is not always clear, in the turmoil of group dynamics, what constitutes a conflict of interest or the manner in which one should participate in board deliberations”, they say.

Cossin and Hongze Lu go on to explain that: “Those occupying positions of power, such as the CEO and the chair, may manipulate directors into agreeing with their preferred decisions using psychological tactics such as tone of voice and eye contact to dominate the discussion, rebuff criticism, or intimidate others for their personal gain. In some cases, directors may feel as though they are being victimised or manipulated while those dominating the discussion may just think that they are leading a dynamic interaction. Such unbalanced dynamics, including superiority and inferiority complexes, reduce the effectiveness of board discussions and prevent independent directors from exercising their duty as directors”.

The CEO is sometimes involved with the recruitment of the chair, if the incumbent resigns or comes to the end of his/her term. Naturally, the CEO together with the senior independent director, will approach head-hunters, in search of a new chair, or could even look to other NEDs to fill the position. The CEO would naturally want someone with whom he/she enjoys good chemistry and could use this influence in a cunning way to ensure the person appointed fits the criteria the CEO needs in the chair.

While it is important in governance terms, for the relationship between the CEO and chair to be constructive, there is a danger the CEO could deliberately lean towards a chair who will not challenge or cause trouble and can be relied on to be amenable to anything the CEO says. In other words, appointing a ‘yes’ chairperson. Boards can manage this situation by ensuring the selection criteria for the chair are determined by the board as a whole and that NEDs are sufficiently involved in the chair’s appointment, preventing an over-reliance on the CEO’s observations and influence.

Setting the Agenda

How does information get to the board? In cases where the board chair or NEDs are not actively involved in setting the board agenda and there is no company secretary, the CEO would be free to set the board agenda. This means the board is told the story the CEO wants to tell. The CEO can determine the agenda and also approve the reports that get presented to the board. In the absence of active involvement by the board chair or NEDs, this could lead to the CEO having an undue influence and result in the board being blissfully unaware of what is actually going on in an organisation.

Who sets the CEO’s objectives and how are these used to monitor the CEO’s performance? There may be objectives linked to the share price in a listed company and other indices in the not-for-profit world, but are these objectives truly measured and assessed and is non-performance by the CEO taken seriously enough? There’s always a story to tell if an organisation is not performing as expected. It’s for the board to ensure stretch objectives are set for the CEO and for these to be regularly monitored and questioned if the CEO is not performing. We’ve all heard the horror stories of failed CEOs walking away with undeserved golden goodbyes or being paid excessive bonuses for under performance. I think remuneration is an area where the Code in the UK and governance profession is trying to make an impact. UK firms with more than 250 employees are now required to publish their CEO pay ratios.

A report by the CIPD and High Pay Centre reveals that the total income received by chief executives working for current FTSE 100 firms was £560.1 million in the financial year ending 2017. If we divide this amount equally among all the CEOs covered by the report, they would each receive a mean annual package worth £5.7 million. By contrast, data from the Office for National Statistics indicates that mean pay for full-time workers is £35,423. Such a yawning discrepancy between the remuneration of bosses and their workforce is seen as indefensible in many quarters. Alignment of other benefits such as pensions with those of the workforce is now also being considered and seen as best practice.

Added Value

As company secretaries, we all know the value we add to organisations with our knowledge of good governance. Having worked as a company secretary for many years, I have found that again the CEO is key to the success of this relationship and the perception of the company secretary within
an organisation.

If the CEO understands the value a good company secretary can bring, being a company secretary of such organisations can be very rewarding. Conversely, where the CEO does not understand the role, the company secretary is reduced to the equivalent of a senior executive assistant battling to get the CEO’s attention and focus, desperately trying to make an impact on the organisation’s governance.
Going back to the question I asked at the start of this article, I think for a number of boards, the elephant in the room could well be the CEO who, unmanaged and unhinged, is allowed to exert inappropriate influence and control on the board. In some cases, they could be stifling independent voices and preventing the organisation from evolving and achieving its agreed strategic objectives. 

Ibi Eso is founder and senior consultant at Bridgehouse Company Secretaries 

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