A Critical Friend: Relationship of the Chairman and CEO
I remember my first CEO role. God I was scared. Would my staff do as I asked? Who could go to for help? Was I expected to be omnipotent? Fortunately I had a great Chairman who had been there, got the T-shirt, and the scars.
We made a team. I thought this was the norm. After 20 years as a VC I now know how lucky I was. Most CEOs and Chairmans do not really understand the roles and how important that relationship it.
Notionally the role the CEO is to run the company the role of the Chairman is to manage the CEO and the board. However, in practice the relationship between the Chairman and CEO is so much more than that. The ideal Chairman is a mentor, coach, and critical friend. The ideal CEO is open, coachable, and responsive. The quality of their relationship can be an important determinant of how successful the company is.
In an early-stage company, the CEO is often the founder, and is typically young and energetic, but inexperienced in many of the functions he needs to perform. In particular, he may not have the experience to manage his relationship with the Board. Once a company accepts investment it is likely that the board will have a number of different stakeholders all of whom have their own agendas. A good chairman will understand this and manage them accordingly.
For this reason, the Chairman should ideally be an experienced executive and a former or current CEO.
As a mentor, the Chairman should be a confidante for the CEO; someone that the CEO can come to for advice on the many challenges he faces. There must be explicit trust between the CEO and Chairman, or else the CEO will not be able to confide in the Chairman.
To facilitate the mentorship, the CEO and Chairman should meet or converse at least weekly. This will allow the Chairman to keep current. The CEO must alert the Chairman to any material issues that could affect the company’s performance. This is the best time to seek and be guided by advice. This is also the opportunity to identify issues that should come to the Board at the next meeting.
If a problem is identified at a Board meeting of which the Chairman did not have prior knowledge, then that is a clear indication that the communications between the CEO and Chairman are not as frequent or as strong as they should be. A worse situation would exist if the Board became aware of a material problem that had not been disclosed to the Board or Chairman.
That said, the CEO must use discretion in identifying which issues to bring to the Chairman’s attention. It is not the Chairman’s job to review every operational issue; that is management’s responsibility. The Chairman should be consulted on the material issues which affect the performance of the Company, where the decision or action is not obvious, or where the CEO does not have the requisite experience or skills to manage the issue.
The Chairman also reviews the performance of the CEO. Formally, this is done at least annually under the control of the Compensation Committee. On a regular basis, and as required, the Chairman should review with the CEO his actions and decisions. The objective is to improve the effectiveness of the CEO and the quality of his decisions.
The Chairman should be a critical friend: providing constructive criticism of the CEO’s performance, commending the good work, and suggesting how improvements might be made. If the Chairman criticises a decision or action that, with 20/20 hindsight proved to be a poor one, without providing any insight as to how the situation might have been analysed differently at the outset, then he is not adding value or helping the CEO to improve. He might lose credibility quickly which compromise his ability to continue as Chairman. Rather, the Chairman should review the facts and the thought processes leading up to the decision or action, the time-frames, the risks involved, and whether the risks might be mitigated. An analysis of the action or decision can only be useful in the context of the information and risks known at the time. There are always unknowns and risks. It may be that a thorough analysis leads to a decision that turns out poorly because of the risk involved: “right decision, wrong outcome”. This is not a management mistake.
Ultimately, the CEO is judged on the quality of his actions and decisions, among other things. It requires maturity and discipline to seek mentorship from the same person who judges his performance; the Chairman’s roles do conflict. Since it is the short supply of maturity which creates the need for stronger mentorship of early stage CEO’s, the Chairman should be vigilant for signs that a CEO may be struggling yet unwilling to ask for help. He should use a gently proactive approach to help the CEO identify and articulate the major issues with which he made help, and of which the Board should be made aware.
Trust is everything: One thing is certain. If there is not a high level of trust between the Chairman and CEO, then virtually none of the benefits of the Chairman’s experience will accrue. The CEO will be reluctant to confide, and issues which could benefit from the Chairman’s experience may not surface until they become crises which could have been avoided.