A fine balancing act
15 November 2017
By Parmi Natesan and Dr Prieur du Plessis
Arguably, one of the most important functions a governing body performs is appointing and overseeing the CEO. Getting this right is critical to the organisation’s success.
CEOs are the superstars of the corporate world, and the CEO’s performance has a direct and significant effect on the success of the organisation he or she leads, both in the long and short term. However, CEOs serve at the pleasure of the governing body, which appoints them. It is thus up to the governing body to put in place the right processes and structures for creating and maintaining a constructive and productive relationship with the CEO, and more generally with management.
One of the first things to get right is a proper framework through which the governing body delegates authority to the CEO. It is recommended that this framework be formal because, as Principle 10 of King IV states clearly, “The governing body should ensure that the appointment of, and delegation to, management contribute to role clarity and the effective exercise of authority and responsibilities.”
Getting this relationship wrong comes at a high cost.
This is illustrated by the view that this lack of role clarity is one of the most important reasons for the challenges in so many of South Africa’s state-owned enterprises. Put simply, because their CEOs are appointed directly by the Minister, representing the single shareholder, they tend to report back to, and feel accountable to, the Minister rather than to the governing body.
Once each party understands precisely what its role is, it becomes much easier to build a relationship based on mutual respect, equality and a sense of real teamwork, always with the focus on the long-term interests of the organisation.
Bridging the information gap
The relationship between the governing body on the one hand and the CEO and executive team on the other hand is an interesting one. While the executive team’s authority is derived from the governing body, to which it must report, the executive team clearly has the advantage in terms of institutional knowledge. Executives spend all their working hours, and then some, doing the organisation’s work whereas the non-executive members spend in the region of, say, 200 hours a year on it.
Worst case, unscrupulous executives can control their governing bodies by curating the information they receive; more usually, the information in meeting packs is likely to reflect the unconscious bias of those who compile it.
In order to balance this inevitable bias, whether conscious or unconscious, governing body members need both the will and opportunity to interrogate information, ask for additional information if required, and even visit the organisation and engage informally with senior and junior managers. They should also arrange to have sessions with executive management outside of governing body meetings. Overall, they must satisfy themselves that the organisation’s affairs are indeed aligned with the strategy.
Managing for the future
As noted above, the performance of the CEO and that of the organisation are intimately linked. It thus follows that once the governing body has chosen a CEO, it has to ensure he or she remains an asset.
Understanding this, it’s not surprising that one of the most important functions of the chair is to build a good working relationship with the CEO and, particularly, to lead the CEO’s regular, formal evaluation process. This process must be both frank and constructive, and is particularly valuable for CEOs because it provides recognition for accomplishments and an opportunity to understand the governing body’s evolving thinking and expectations.
It is also a vital tool in the discharge of the governing body’s responsibility to ensure the organisation is being well led.
Governing bodies also have an obligation to think long term. In this context, and given the importance of the role, succession planning for the CEO is vital. Thus, even though governing bodies sometimes delegate this responsibility to the nominations committee, it should be a standing agenda item for the governing body itself.
A well-crafted succession plan has a number of dimensions. At the very least, it should include interim provision for something unexpected as well as a more carefully staged handover in the normal course of events.
Preferably, the CEO succession plan should be aligned with the governing body’s long-term strategic plan and, in a perfect world, should be envisioned as a pipeline stretching into the future rather than a plan for a single event. As quoted in the Harvard Business Review “7 Tenets of a good CEO succession process”, experts say organisations should be looking two to three CEOs into the future, and have seven potential CEOs of various generations within the organisation at any one time. These individuals should be given a mix of on-the-job training, intensive coaching, mentoring and formal education. This will not only give these individuals an opportunity to develop their potential and gain experience at the governing body level, but will also give the governing body the chance to assess them at close quarters.
Nobody likes surprises, least of all when they relate to the most important single position within the organisation. Governing bodies must make sure they are prepared for every eventuality relating to the top leadership, and that the succession is top of mind.
Parmi Natesan and Dr Prieur du Plessis are Executive Director: Centre for Corporate Governance and Chairman of the Institute of Directors (IoDSA) respectively.
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