In the “traditional” board model where the board serves as an extension of the management, there is a dance between the CEO and the board. The CEO provides information to the board which then deliberates over that information and approves a next step. But what if the CEO already has the authority to make the decision?
One CEO reported to the board about the progress of several projects under his direction. He showed the board time lines, budgets, copies of potential contracts, etc. He was being dutiful in that he was trying to keep the board well-informed. However, much of the information did not require any board action, it was just informational. For instance, the contract that he showed to the board was with a well-known and respected company and it seemed to be reasonably drawn.
However, one of the board members with a self-perception of expertise in the area of the contract had some questions about the agreement. There were some aspects of the contract that he would do differently. The board member raised his questions and several other board members expressed concerned that they may never have known about the problems with the contract had this first board member not raised the issue. Suddenly, the board member who had claimed expertise and questioned the contract had volunteered to review the contract with the company. The board quickly agreed, feeling that their newly realized concerns would be addressed. And just as quickly, the CEO’s ability to contract with other organizations disappeared under the board’s micromanagement.
What would have been a better way to handle the situation?
The board should think ahead about the types of activities in which the organization engages. This board knows that they will be engaging contractors, therefore, it should research what restrictions it should place on its CEO when engaging in a contract. For instance, if it is concerned that someone with expertise should review an agreement before entering in a contract, then the board should demand as much in a policy.
The policy might read:
The CEO shall not enter into any contract of over$1,000 without having the contract reviewed by someone without conflicts of interest and with expertise in the appropriate field of the contract.
In the above situation, the board member questioning the contract may have expertise in the particular field, but then again, he may not. It is difficult for the board to assess if his expertise is applicable, but it is extremely difficult for the CEO to reject using that particular board member’s input, even if the board member’s expertise is clearly insufficient. After a contract has been signed, the CEO should be required to submit a report to the board demonstrating that the contract was, in fact, reviewed by a person, of the CEO’s choice, who had appropriate expertise.
CEOs should not treat their board as an advisory committee since there is no reason to believe that the board contains the necessary knowledge. The board should proactively think about the types of situations in which the organization engages and think about the types of problems that might occur. By expressing these concerns as Executive Limitations policies and demanding that the CEO follow those limitations, the board is able to protect the organization and preserve the CEO’s authority to make decisions.