Corporate governance is under increasing scrutiny. Intense competition, a shifting marketplace, increased regulatory review and activist stakeholders – these are the hallmarks of the myriad complex challenges facing today’s corporate boards. Directors are the stewards of their corporations. They are elected by shareholders to oversee the management of their organizations with the goal of increasing long-term shareholder value.
The board has the fiduciary responsibility to assess management’s performance and effectiveness. Its key functions include setting the organization’s strategic goals; the hiring, compensation and performance review of the CEO; succession planning; development strategies for key senior executives; and leadership’s readiness to deliver on the corporation’s goals.
In this heightened environment of governance accountability, boards are compelled to govern at levels once considered the exclusive purview of management. The immutable line between the roles of governance and management is blurring. Boards and management are defining their roles and responsibilities according to the particular situation unique to their organization. Nowhere is this more pronounced than in crisis situations (e.g. severe tensions between the board and the CEO, the abrupt departure of the CEO…).
The successful hiring and development of effective CEOs is especially challenging. The Economist (October 10th, 2015), notes that “confidence in business leadership is at a record low”, and fewer than 50% of respondents in an opinion poll trust CEOs. Furthermore, according to recent academic studies, one in two leaders is deemed a disappointment, incompetent, miss-hire or complete failure. In my experience, ingrained mental patterns which have been successful yesterday, may no longer be so. A strong track record of accomplishments does not guarantee an executive’s success today, let alone tomorrow.
Another serious issue facing corporate boards is CEO compensation. Some say that a CEO’s salary should be left solely to market forces. However, CEOs often command high compensation regardless of the financial performance of their companies and of the state of the economy. According to a study cited in Forbes (Susan Adams, “The Highest-Paid CEOs are the Worst Performers, New Study Says”, June 16, 2014), the higher a CEO’s compensation, the worse the company’s success over three years in terms of stock valuation and accounting performance. Chiefly, this is due to hubris: some highly paid CEO’s ignore differing opinions, their own limitations, and act according to what they have convinced themselves is right.
In 2013, 23.8% of CEO turnover in the US was due to dismissals (The Conference Board). The situation is no better for new externally hired or promoted executives. From 40% to 64% of these executives leave their jobs (voluntarily or otherwise) within the first 18 months of being hired. Many more underachieve. (See my blog, Great Leaders: The Competencies Imperative, November 2015).
The conequences for a board of not addressing purposefully the issue of CEO oversight, including leadership development, can be dire. Boards can find themselves with CEOs who lack required competencies such as:
- A strategist who can’t deliver actionable plans.
- A business or operations leader who can’t lead change.
- A visionary who doesn’t pay careful attention to the bottom line.
- A leader who can’t see beyond the ordinary, to identify new possibilities and the potential for the extraordinary.
- An executive who lacks the emotional intelligence to manage effectively, losing key personnel.
The most successful organizations are those with strong corporate governance, and effective oversight of their human capital. To foster excellence in their senior executive leaders, boards understand that leadership development is one of the most important investments their companies can make.