Boards of directors expect a lot from their executives these days, as they should. In the post-Sarbanes-Oxley world, the need to be informed on all areas of compliance, operations, and financial reporting is more vital than ever before.
To that end, such demands require a stepped-up level of communication and transparency between the C-suite and the boardroom. CEOs, chief financial officers, and even chief information officers need practical, effective ways to exchange information, foster collaboration with the board, implement any corporate reforms and, of course, maintain confidence and trust.
That pressure is something Joseph Simrell, CEO of $2 million telecom services firm Primal Solutions, knows intimately. “In our company, it all starts with the annual strategic planning process. This is a formal management and board activity that reviews past performance and sets near-term and long-term direction and goals,” says Simrell, who is also chairman of the Irvine, Calif.-based company. “We even use an outside consultant versed in strategic planning to facilitate the process.”
In addition to those strategic planning sessions, Primal does what it calls its annual “CEO 360” evaluation. This is a formal review led by a director to gather honest feedback on the CEO’s performance during the year. Simrell says the strategic plan, annual corporate objectives, and governance are all key evaluation points.
“We also perform board self-evaluations and benchmark against prior-year results and experiences at other local public companies,” he adds. “Working together over time through the good and bad contributes to a strong unified team that can really benefit the company.”
Since 2002, the National Association of Corporate Directors, major U.S. stock exchanges, and the Securities and Exchange Commission have all converted to the creed of more independent directors. The SEC in particular adopted new rules in 2003 requiring all listed companies to have at least three independent directors and specified charters for powerful committees such as the audit and compensation committees.
As a result, senior managers who historically may have been used to a collegial atmosphere, where board members were seen as peers, must now adapt to a climate where the board, itself, is under the watchful eye of regulators and must play gatekeeper for shareholders, rather than merely advance the agenda of the C-Suite.
“It’s increasingly clear that boards are wielding more power than ever, especially in the current market volatility,” says Donald Straszheim, vice chairman at boutique investment bank Roth Capital Partners and a former chief economist of Merrill Lynch. Boards “are putting considerable pressure on management to deliver, as well as ensure that the board is composed of people with a business background and not just friends of top executives but people that can bring value to the company. There’s much more scrutiny.”
Indeed, communication at any effective business is now a two-way conversation, according to Michael Cangemi, chief executive of Financial Executives International. Cangemi has at some point in his career been a CEO, a CFO, and a CIO for companies both public and private. He cannot stress enough the need for frequent formal and informal conversations with board members, on an individual and group basis.
“This is so that on a tactical or short-term basis, for example, when bad news emerges, informing the board promptly and keeping them in the loop, with evaluations of causes and possible actions you are considering, is key,” Cangemi says.
“You don’t have to be an expert in compliance and governance to know that when the board loses trust it’s already too late; the company is already in trouble, perhaps fatally.”
— Ed Lawler,
Professor of Business,
University of Southern California
Cangemi and others contend that keeping pertinent information flowing and striking a delicate balance between information overload and insufficient disclosure is one of the most important aspects of maintaining a healthy relationship with the board.
“You know the old saying, ‘Change is the only constant?’ Well, experienced executives and board members should be well aware that business changes, all the time. Over the longer term [C-level managers] should schedule and have discussions of the strategic plan and options, competitive issues, new initiatives.”
Becoming a ‘Trusty’ Manager
Disagreements about strategic plans, internal controls testing, and costs (not to mention operational issues) are to be expected between top brass and the board. Throughout those disputes, confidence and honesty are absolute essentials.
“You don’t have to be an expert in compliance and governance to know that when the board loses trust it’s already too late; the company is already in trouble, perhaps fatally,” says Ed Lawler, professor of business and director for the Center for Effective Organizations at the University of Southern California. “As an executive, the rule is not to have three sets of books: one for the public filings, one for the board, and the real one. In other words, don’t lie. For the board, they need to get on top of what’s going on with human capital and fiscal capital. They should know who senior managers are and what they do and who reports to them.”
Lawler’s advice for CFOs: “You have to listen, just listen, to what the board is telling you. You don’t have any other choice.” Lawler says many directors—especially the independent ones—are already leery of top managers and their temptation to manipulate earnings in the quest for more compensation. Lawler released a study in mid-February that found one-third of directors at public companies believe CEO pay is “too high in most cases.”
Richard Roedel, director of the Association of Audit Committee Members and a board member for several companies, says an “all cards on the table” approach is critical. “Over time, no matter how great the performance of a given senior executive, there’s no way you can operate without knowing for sure what everybody is doing, why they’re doing it, when they’re doing it, and how they’re doing it. Honesty is not only the best policy, but the only policy where I'm concerned,” he says.
Many of today’s boards also have a say in the rearing and monitoring of top IT staff, who need a reasonable modicum of trust from the board—particularly as it relates to compliance. Robert Stroud, an executive vice president in charge of IT audit for computer consultant firm CA, suggests that what is said in memos and other communication with the board doesn’t matter if staff deviate from predefined goals.
“Confidence and trust cannot be built overnight; it grows over time,” he says. “It evolves based on several measures, and the first is open and transparent communications including reporting on the metrics jointly defined and evolving these measurements over time.”