Drama-Free Corporate Governance: Best Practices for Smooth CEO/Board Relations

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Drama-Free Corporate Governance: Best Practices for Smooth CEO/Board Relations

Key Contact: Declan Goodwin

Last week, a corporate governance drama spilled out of the business pages and onto the front pages as the CEO of a leading AI company was dramatically sacked by the board of directors and then reinstated a few days later – along with a new board – following pressure from both employees and shareholders.

Not all fast-growing businesses are subject to the unique pressures facing a headline-grabbing company. However, with technological disruption remodelling business norms across all sectors and rising employee activism, there has never been a better time to ensure your corporate governance is fit for purpose, especially if you are an SME operating at the frontier of a fast-paced industry.

What does a typical governance structure look like?

Shareholders – the owners of the company.

Board of Directors – carries out the wishes of the shareholders, directs the affairs of the company and is responsible for overall company strategy.

Chief Executive Officer (CEO) – is responsible for implementing the strategy and running the company on a day-to-day basis.

Who should be on the board of directors?

Smaller boards often work well. Boards need to be able to make decisions quickly and challenge each other effectively. Larger boards (upwards of around 12) are often stymied in decision making because the more people around the table, the less bandwidth each board member is likely to get.

Diversity is another key feature of a successful board. A diverse board means that a range of viewpoints are expressed, challenged and debated.

What happens if the board and the CEO disagree?

Replacing the CEO

It is not particularly unusual for the board of directors to fire a CEO; CEOs and boards often have different ideas about growth plans or safety concerns, for example.

Generally, CEOs leave because they are failing to deliver on what they have been brought in to do. This could be anything from turning the financial performance of the company around to changing the culture of the company or delivering on certain targets.

A company should have an employment agreement with the CEO that sets out the terms of their employment and their deliverables, and allows the board to renew the term only if it’s satisfied with the CEO’s performance.

If the board decides to remove a CEO, it is a good idea to be careful about the messaging you allow into the public domain. It is common to create confidentiality restrictions around what all parties can say if a settlement agreement is in place and manage dissemination of information cautiously.

Replacing Board Members

Usually, if new board members are appointed, the process takes more than a few days and is much more protracted.

A well-governed company would have board sub-committees, including a nomination committee that leads on the process for appointing board members. Depending on the structure of the board, this committee may have the power to make nominations itself or have a process for finding board members to put before the board or shareholders for consideration.

Boards should use a “skills matrix” to map skills present within the board against skills that are missing, identify the gaps and recruit accordingly. Head-hunters, interviews, longlists and shortlists all come into play, just as they would for a normal executive appointment. 

In a publicly listed or high-profile company, this process would be expected to take at least a number of weeks.

But what if a governance crisis means the process must be expedited?

It’s important to have a prepared playbook for different possible scenarios. It’s also key to regularly take the pulse of the various stakeholders involved – such as shareholders and employees. You could even consider an employee representative board member, to ensure a strong connection with employees and understanding of their interests. In addition, having the support of a PR or communications service – with engagement letters set up ready – can be helpful in managing the message should the press become interested.

If a crisis flares up on a Friday and you have to spend the weekend getting engagement letters in place, that is time wasted.

Top tips for smooth interaction between the CEO and the Board

  1. Have the right arrangements in place to ensure there is clarity about when a CEO should be dismissed – have the right contractual terms in place.
  2. Make sure your governance structure is robust and follows best practice.
  3. Have the right advisers on hand to respond swiftly if a crisis blows up.

If you need advice about your corporate governance arrangements, get in touch with our Commercial & Technology team.

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