Making it Work: The CEO and Board Relationship Roundtable

Observers have likened the two-year, three-way race among successors to replace GlaxoSmithKline CEO Jean-Pierre Garnier to an episode of the hit television show Survivor. For two years, three candidates openly vied for the job that Garnier, the French-born leader of the world’s number-two drug maker, was vacating in May. Such a horse race can create tension among the company’s leaders as board members back different candidates.

The day after Andrew Witty was named to succeed Garnier, Directorship hosted a Roundtable in San Francisco to discuss the delicate, sometimes stormy relations between boards and CEOs, especially when it comes to sensitive topics such as CEO pay and succession. Leading the discussion were Curtis Crawford, the president and CEO of XCEO and a director at DuPont and ITT, and Keith Meyer, co-managing partner of the North American CEO practice of Heidrick & Struggles.

Asked to explain the characteristics of a good CEO-board relationship, Crawford described what he calls the “enlightened director.” “The enlightened director today does not wait for the CEO to contact him or her, and does not feel any obligation to have the approval of the chairman or anyone else to engage with the CEO or any other member of the company,” he said.

What typically emerges with boards, our Roundtable participants agreed, is a pecking order of who talks to whom and when, including the CEO. “There’s always the official structure of the board and there’s the informal network,” said Meyer. “And you really have to understand the informal network, which crosses all titles and other boundaries.”

“I don’t have to be concerned about getting the approval of [chairman and CEO Charles] ‘Chad’ Holliday at DuPont to talk to the executive vice president and chief innovations officer,” says Crawford. “But at the same time, you earn that trust by your performance as a board member.”

Ashwin Rangan, architect of Wal-Mart.com who now serves on the board of a number of technology companies, agrees that informal interactions with board members are often more fruitful: “What I find invigorating is being asked to provide an opinion, whether it relates to business, engineering, or spinouts…I think the key is to foster an environment where you raise the game for everybody and not just for the CEO.”

On one board that Alice Starr, president and CEO of Starr Strategies, sits on, the chairman and CEO hosted a get-together after a board meeting for directors and corporate officers. “We got to know each other in a friendly, more relaxed way and were encouraged to contact them any time we had ideas that might help with their growth or with contacts.”

A Language Specific to Boards

Fostering rapport was deemed to be a requirement for good board interaction, but it also raised questions about protocol. As a board member, the Roundtable participants debated when it is appropriate to contact the CEO or the chairman of the board. Should this be treated as a back channel to discuss a sensitive issue or even another board member? While this may be an efficient means of dealing with a problem, does it undercut the collegial nature of the board itself?

Edward Merino, who runs a consulting company called Office of the Chairman, says protocol and etiquette are important to a company’s reputation, resulting in an ability to attract good directors. He notes there’s almost a “language” specific to boards, echoing Meyer’s assertion that there are both formal and informal networks on boards.

What it comes down to is trust, said Peter Hursh, cofounder and managing director of ECG Advisors. “The trust issue comes up every single time when you’re talking about CEO pay.” Mention CEO pay and Robert Nardelli, the high-profile executive ousted after a showdown with the Home Depot board amid criticism that he was overpaid, is likely to come up. “To what extent was the Nardelli era merely the result of a new and outsider CEO going to a company with a legacy board that had a long history together?” asked Directorship chairman and CEO Jeff Cunningham, who sits on the boards of Sapient and TheStreet.com.

Said Heidrick & Struggles’ Meyer: “It was the perfect storm. You had a founder-based company with a founder-based board. You had a successful business model that was under attack by a competitor and you had an individual who, having lost the race at General Electric (Nardelli was a runner-up to Jeffrey Immelt to replace GE CEO Jack Welch), was at the top of the compensation market. Going in, Nardelli had a leadership style that was completely different than the way the company was built. I’m shocked he lasted as long as he did. My view of the situation is that the due diligence around the selection was flawed or at least they chose to ignore some of these potential warning signs. And the result was not executive failure, as it has been called, but primarily a misplaced CEO appointment.” According to Meyer, boards underestimate the risk of going outside for the CEO. “I’d say that 80 percent of the successions are internal and there’s a solid reason for that.”