In the context of a degree of churn amongst ASX100 CEOs over the past two years, it is important to remember the most important role of a Board of Directors of a publicly listed company is to appoint and remove the Chief Executive Officer.
And the most destructive decision a Board can do to shareholder value is to get either of these two things wrong.
Considerable damage is caused to a company by an otherwise highly successful CEO coasting to the line of retirement. Even if not overtly, it is difficult (although not impossible) for a CEO to maintain energy indefinitely to confront change, transformation and disruption or to undertake major projects or mergers and acquisitions activity. And this can cause companies to miss opportunities or fail to see the future bearing down on them and their business.
So what can a Board of directors do?
Not be afraid to have tenure and succession discussions with the Chief Executive Officer. A frank discussion about the CEO’s intentions regarding his/her possible retirement date, and how this fits in with the current strategy or timing of major projects or acquisitions, should happen regularly. Without, of course, triggering any pre-emptive continuous disclosure obligations. This is especially important as a CEO completes a reasonable term in office and/or approaches a respectable age for retirement.
Equally, the Board must keep an eye on the pipeline of talent coming through an organisation and overseeing the development of key talent with a view to grooming the leader or leaders of tomorrow.
While internal succession is often preferable to an external appointment where the Board is comfortable with strategic direction, the Board should also monitor the available pool of external candidates.
Consider succession in the context of the company’s forward-looking strategy. The demands of today are inevitably not the demands of tomorrow. The challenges and opportunities in the future may require a different skill set, background and experience in the CEO and his or her leadership team. Thinking about the company’s future business strategy will inform the Board’s assessment of what it is looking for in its next CEO – and when it needs to make this change in order to execute their strategy.
Look for the telltale signs of CEO fatigue. A Board, and most particularly a Chair, should be monitoring the energy, enthusiasm and elan of the CEO. If those characteristics, which were the cornerstone of the appointment of the CEO, begin to wane, or be less pronounced, the need for ‘the talk’ becomes more necessary.
Consider the issue of succession in the context of setting remuneration, as Boards do not want to structure their rewards in such a way as to provide a disincentive to a CEO to leave at the right time.
This is not to say we shouldn’t all mature after time in role. Nor that we need to enter our seventh decade with the same spring in our step as our fifth. But when the CEO seems to have lost his or her appetite for the fight, for the next big challenge or to confront the inevitability of needing to reinvent the business to remain ahead of the competitors (both known and not yet identified), the Board needs to start to consider having the discussion with the CEO. And if there are no other good reasons to explain the Board’s perception, the Board needs to start thinking about forcing change.
I am not talking about sacking the CEO. But an open dialogue over expectations and the time frame that the Board requires the CEO to commit to execute on the current strategy. This should allow the CEO and Chair to assess whether the Board and CEO are both on the same page or whether there is a misalignment in expectations and ambitions that mean it is time to make a change at the top.
Many Chairs only oversee a change in CEO a few times in their career. And so this may not be an area where they have much experience; even if they are ex-executives that may have terminated many employees over the years. It is a delicate operation, as damaging the Board’s relationship with the CEO can also cause corporate damage.
A great benefit of building a Board with a diverse range of experiences and skills is that collectively they are equipped to chart this territory. They just need to be mindful to act in a timely manner and not allow a CEO to drift and, almost by default, the company to lose momentum.