As heads of firms topple left and right, a primer on good governance
The recent departures of heads of major companies raise concerns for investors, especially when exoduses are attributed to differences with boards of directors regarding strategy or the approach to the future of the business.
The roles of the significant players in the governance and the operations of a company are set out in the relevant legislation and its founding documents. Shareholders are the providers of capital and the business owners. The shareholder tasks the board with oversight and control of the company, and the CEO and management are responsible for the day-to-day operations, assisted by executives and staff.
The CEO reports and is accountable to the board. The chair is often the conduit for the day-today interaction between them, but the chair is not the CEO’s manager.
It is important to note that often the board’s delegation is to the CEO and not executives and/or the executive committee. The board can therefore not substitute executives or the executive committee for the CEO. Executives and the executive committee should not bypass the CEO in engaging with the board. The board or members of the board should not bypass the CEO and/or prioritise executives and/or staff.
Under normal circumstances the board should look out for CEO and vice versa. Matters get hairy when the board or members of the board prioritise individual executives and/or employees over the CEO.
A CEO who does not have the backing of the board that ostensibly appointed him or her is not likely to succeed. A CEO who does not have the backing of executives will not succeed.
Section 66 of the Companies Act gives the board the power of control over the company. It provides that “the business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company”, except to the extent that the “act or the company’s memorandum of incorporation provides otherwise”.
The board often delegates some of its powers and control to management through the CEO, who, over and above “operationalising” the board’s control and management, prepares the strategy which the board deliberates on and approves. The shareholder defers to the board in this regard. The board appoints a CEO for this reason.
It is the prerogative of the board to approve the strategy, but it should, however, be in rare instances that the board rejects the strategy developed by the CEO, as this is one of the primary reasons for the CEO’s appointment and also a key deliverable.
It is therefore cause for great concern for investors when a CEO departs because of differences with the board regarding strategy. For investors, it signals that such differences must have been intractable.
There can undoubtedly be many reasons for this, but it raises a spectre of tangled and strained governance. Governance often gets entangled when the significant players stray from their defined roles. The shareholder is not the board and cannot sustainably act as the board, especially if a functional board is in place. The shareholder cannot be the board (unless they are a sole proprietor). The board cannot be the CEO. The chair of the board should not usurp the role of CEO regardless of their calibre and pedigree.
The reverse also holds: the CEO must allow the board to fulfil its role and the board cannot take the place of the shareholder. These roles are key to the success of a company or organisation when appropriately fulfilled, and detrimental when inappropriately applied.
The board cannot treat a CEO as a gofer and the CEO cannot treat the board as a rubber stamp. The relationship should be symbiotic, interdependent, co-operative and collaborative. There must be mutual support and respect.
A CEO must accept and respect the role of the board and its guidance. The board must accept and respect the CEO’s role and afford the CEO operational latitude. A board that eclipses a CEO is unlikely to find a CEO who is not a pushover. Given the nature and significance of this role, a CEO who is a pushover can never be good for any organisation. Conversely, neither is an all-powerful one.
This is not to say that there must be a Kumbaya relationship between the board and the CEO, characterised by mutual stroking of egos. Organisations need robust engagement between them for effective decision-making and implementation. When there are differences, and they are bound to be, these should not be to the detriment of that organisation and its stakeholders. Organisations need both a strong and capable board and CEO to succeed.
The board and the CEO should not be in competition but work together for the success and long-term sustainability of the company or organisation.