Michael W. Peregrine

One of the most important elements of corporate governance is the structure of the relationship between the CEO and the Board of Directors. In the following guest post, Michael W. Peregrine of the McDermott Will & Emery law firm analyses a recent report from the National Association of Corporate Directors (NACD) suggesting an approach for companies to take to ensure a collaborative relationship between CEOs and their companies’ boards. I would like to thank Michael for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Michael’s article.

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An efficient and respectful relationship between the board of directors and the CEO is a well-established element of both corporate governance and business operations. 

Yet maintaining such a relationship has increasingly proved elusive in recent years. This, especially, given concerns that boards are slipping more into management responsibilities, while management may be prone to skepticism of board effectiveness. The result can lead to damaging misalignment and dysfunction-and potential director liability exposure,

A new report from the estimable National Association of Corporate Directors offers a collaborative pathway for both sides to collaborate to avoid such dysfunction and exposure and assure a positive leadership culture.

The new report, “Building a High-Trust Board-CEO Relationship”, is intended as a “call to action” for boards and CEOs to treat their relationship as a “strategic differentiator”. In that regard, it concludes that the board/CEO relationship can no longer be left to evolve on its own pace or be considered as essentially procedural. Rather, the Report argues, the relationship is to be “cultivated with purpose, discipline, intentionality, and a shared commitment.”

The Report cites three specific trends as driving the need to cultivate the relationship with urgency: First, there is more pressure for CEOs to perform than before, with challenges from a broad group of activist stakeholders on matters extending beyond financial performance. Second is “unmistakeable” evidence of shrinking CEO and C-suite tenure, with average CEO tenure declining and turnover levels reaching record levels. Third is that corporate directors are confronting increased complexity and ambiguity, while simultaneously facing greater stakeholder (as well as regulatory and judicial) pressure to provide meaningful levels of oversight, decision-making and strategic direction.

To counteract these trends and strengthen the Board/CEO relationship, the NACD Report recommends three specific steps, all grounded in the goal of building a strong relationship of trust between leadership:

Step One: Building the Trust Foundation: This step involves an intentional effort to establish both the parameters for a collaborative board/CEO partnership, and the discipline to periodically revisit them in order to continually reinforce mutual trust. The step includes the following action items:

  • Delineating board and CEO roles and responsibilities to anchor a strong relationship; 
  • Explicitly define how the Board and CEO will work together; and
  • Strengthening the independent board leader’s role as the linchpin in the relationship.

The Report notes that while none of these steps are particularly new or unique, they serve to emphasize the importance of renewed commitment, greater consistency and more thoughtful understanding to the critical trust relationship between leadership.

Step Two: Operationalize Trust: This step is intended to sustain a strong Board/CEO relationship by assuring that traditional governance processes and board/CEO interactions intentionally operate to reinforce the established trust foundation. This step includes the following action items:

  • Commit to ongoing communications to sustain trust beyond formal meetings;
  • Enhance board and CEO evaluations to reinforce intended behaviors; 
  • Use executive sessions as levers for accountability and transparency; and
  • Prioritize the CEO’s overall well-being.

The Report observes that [C]onsistent, purposeful communication builds relational depth and keeps the CEO and directors informed throughout the year.

Step Three: Leverage Trust for Strategic Impact: This step focuses on establishing consistent behaviors and board practices intended to enhance the value of the governance role. The expectation is that these will help directors be more engaged and allow management to access valuable input directors may offer. These relate to how a strong foundation of trust is enhanced through consistent behaviors and board practices. This step includes two key practices:

  • Maximize the board’s value as a strategic advisor to the CEO; and
  • Continually assessing board composition to align with strategy and value creation.

This particular step places particular emphasis on the board’s three recognized roles: as decision-maker, oversight body and strategic advisor.

The NACD recommendations are supplemented by a detailed “toolbook” which is intended to be used by both directors and management to clarify the boundaries of board duties and ensuring alignment on when and how authority is delegated to the executive team. It can also be used to help boards as they evaluate existing delegation practices; e.g. whether they support the effectiveness of oversight and a culture of trust and responsibility. 

The essence of the Report is that a strong foundation of trust between the board and the CEO is a “critical enabler” for maximizing their relationship of the benefit of the company. In that and other respects, the totality of the Report can serve as a useful exercise to enhance the board/management dynamic and, in doing so, reduce the organizational and leadership liability profile.

NACD is a prominent member organization for corporate directors. Each year it commissions a diverse group of business leaders to examine a governance issue of critical importance and to deliver a report with practical and actionable recommendations. Given both the skill and expertise of the commission members, and the thoroughness of its workproduct, it is reasonable for boards to regard these annual “Blue Ribbon Commission” reports as the equivalent of “best practice”. 

And, as the Delaware and other courts law have long observed, underscored, the conscientious pursuit of governance best practices is the best prophylactic for director liability.