How to Optimize the Relationship

WE'VE SPENT THE last few years studying why CEOs get fired. We had long suspected that the conventional wisdom (it's the numbers, stupid!) just wasn't true. After interviewing 1,200 directors who had fired their CEO, we discovered that the reason behind most CEO dismissals had less to do with the price of shares than with the CEO-board relationship. When the board loses confidence in, or gets frustrated with, the CEO, bad things tend to happen.

So how can boards and CEOs maintain a healthy relationship? The following are three important lessons.

Dig for bad news. No news is not good news. There isn't a company today that doesn't have tough questions to address. But we see case after case where boards and CEOs spend their time together sharing the good news and avoiding the bad. And when bad news does get shared, it often gets watered down. For example, many observers believe that Kraft faces much deeper challenges than Roger Deromedi, its recently departed CEO, was willing to admit.

We coach CEOs to be proactive in communicating bad news to the board. If the chief executive has deep-seated fears about the company, the board probably has them too. A CEO who waits for the board to raise the issues first will look passive and is more likely to lose directors' confidence. Asking the tough questions doesn't cause problems; it simply identifies problems that were already there. We avoid the test because we're afraid of the answer. If the board gets bad news about the company before the CEO does, the company has real problems. Either people aren't telling the chief executive the unvarnished truth, or he's not asking the right questions.

Give the audience what it wants. Some directors are concerned about hard data, like financials; others are concerned about people issues. Some want to know about nittygritty process details, while still others want long-range visions and strategies. There isn't one style or approach that's better than another. In fact, many boards benefit from having stylistic diversity. But when a director asks a question from a particular vantage point, he or she is entitled to a straight answer. Because when directors feel their perspective is being invalidated or ignored, they react with anger and suspicion— as most people do.

We often advise CEOs to jot down every question the board asks and try to understand each individual director's unique perspective. Then they can deliver the requested information in a way that demonstrates respect. Before a CEO can change the board's focus or educate it about specific issues, he has to give directors what they want. Any CEO who ignores that lesson does so at his peril.

Make your conversations meaningful. When William Perez was hired as CEO of Nike, Chairman Phil Knight instituted a regular Monday morning meeting between them. Designed as a forum for the outsider Perez to bounce ideas off the legendary founder, by most accounts they were pretty mundane. We'll probably never know who's to blame for that. But the meetings were obviously a wasted opportunity. When Perez was fired, it became clear that he really hadn't absorbed Nike's culture. And it also became clear that Knight hadn't been much of a guide.

Vacuous conversations have a huge opportunity cost. Besides their role as shareholder advocates, directors also represent a sounding board for the CEO. The best boards serve as debating partners that help their CEOs clarify and develop their thinking. William Wrigley once said, "In business, when two people always agree, one of them is irrelevant." If boards and CEOs are just going to smile at each other and discuss the weather, one of the parties probably isn't necessary.