Helping Chief Executives Avoid Trouble With Their Boards

There are, of course, many ways for a CEO to get in trouble with their boards. My aim in this article is to shine a light on a particular aspect of a CEO’s life – when and how to consult with their board before making decisions. 

We recently worked through this issue with the CEO of a privately-held company in California. A long-time manager – she was the director of procurement – had been fired because of repeated policy violations. One of the board members who knew this manager was incensed that he’d learned about her firing from another employee and not been consulted in advance. “We should be consulted on significant decisions,” he said. 

The CEO responded curtly, saying that he had seen no reason to consult with the board in advance. 

As one might imagine, this did little to quash the controversy. Instead, the board member made a big stink about it at the next board meeting. “We need to be consulted on important personnel decisions,” he demanded.

A little background: The governing documents of the company, which we helped them develop, clearly state that the chief executive is delegated the authority to handle all personnel matters. In this case, the CEO had been informed about this employee’s repeated violations. And the CEO had agreed with the HR manager’s recommendation that she be terminated. The CEO had informed board members about this in his routine monthly update a few weeks later. 

So while the decision was within the delegations to the CEO, could it have been handled better? A key principle of effective communication between a CEO and his or her board comes to mind. The CEO should consult with the board whenever the CEO perceives a significant operational risk, reputational risk, financial risk, or risk to the achievement of the company’s goals. Did this incident rise to that level of risk? I don’t think so. The CEO didn’t need to consult with board members in advance.

However, there’s a distinction between consulting and informing. To consult is to seek counsel and perspective with an open mind – to use that input in shaping one’s decision. To inform is to share information. But timing is key. There’s a big difference between informing after the fact and informing before the fact. The director of procurement was well-known to board members. She’d made multiple presentations to the board and socialized with board members on multiple occasions. The failure, as the CEO later admitted, was that board members had not been informed prior to the decision.

CEOs are often reluctant to inform board members before the fact because of a fear of being undermined or second-guessed. But this can be rectified with some semantic clarification and a few operating principles. 

Here is an example of how one CEO’s operating principles helped clarify how she would work with the board: 

• I make hundreds of decisions each day – as do the managers who work for me. I will not inform you of those decisions unless they have a significant impact on the company or affect you in some manner. 

• For decisions within my delegated authority that do not pose a risk to the company, but where you may have an interest in learning about them from me in advance, I will endeavor to inform you as a courtesy. But I expect you not to second-guess me or undermine my authority. And due to the press of time or other factors, I may not always be able to do this.

• For decisions within my authority that have a significant impact on operations, on finances, on our reputation, or on our goals, then I will share my proposed decision with you in advance, I will consult with you to learn your perspectives, and I will factor those perspectives into my ultimate decision. But once I make a decision, I expect you to support it publicly if not privately.

• Lastly, I respect the board’s role in making the most important decisions affecting our company, namely about our strategic direction, about our budget, and of course about my performance as CEO. I will make sure you have all the information you need to make those decisions in an expert, prudent manner.

Needless to say, if the CEO in our example had put together operating principles such as these with his board, the kerfuffle over the firing of the procurement director might have been avoided. As the CEO later admitted, he erred by not letting board members know in advance, as a courtesy, that the director would be fired. 

Eric Douglas

For more than 20 years, LRI has successfully helped a wide array of government agencies, nonprofit organizations, and corporations achieve breakthroughs in performance. Eric's latest book “The Leadership Equation” shows how leaders can achieve strategic clarity, manage change effectively, and build a leadership culture.