On May 17, 2016, members of the Lead Director Network (“LDN”) met in New York City to discuss challenges relating to board leadership, especially those involving CEO and director performance. King & Spalding and Tapestry Networks published a ViewPoints report that provides a summary of the discussions at the meeting.
The meeting centered on three topics: (1) managing CEO performance, (2) managing director performance, and (3) managing leadership transitions.
Managing CEO Performance
A primary role of a public company board is to ensure strong performance from the CEO. However, while it is easy to assess when a CEO is performing very well or very poorly, directors noted that it can be difficult to discern and respond in the zone between these two extremes.
LDN members identified several warning signs that could signal CEO underperformance, including turnover of critical employees, the CEO’s failure to delegate tasks, limited board access to other executives, and lower quality board materials.
Directors also agreed that it is important for the board and especially the lead director to build a relationship with the CEO, and this relationship has to be built on a shared understanding of their respective roles. LDN members identified several techniques that could foster regular and effective communication between the board and CEO, such as CEO and lead director meetings between board meetings, CEO and board dinners the night before a board meeting, and meetings with the CEO following the board’s executive session. In addition, several directors highlighted the importance of communication between the CEO and the chairs of key committees, including audit, compensation, and nomination and governance. These directors noted the value of having audit chairs debrief the CEO following audit committee meetings.
Managing Director Performance
Handling underperforming directors is another challenge faced by board leaders. Several LDN members noted the importance of peer evaluations in maintaining the performance of individual directors. LDN members noted that while peer evaluations can be used to identify underperforming directors, they can also be used to coach new directors and remedy selected performance issues.
Board refreshment and recruiting was another topic discussed at the meeting. Several LDN members noted that it has become increasingly difficult to recruit capable directors, with the audit committee chair being an especially challenging role to replace.
When strategizing as to selection criteria, LDN members acknowledged the need for certain types of specialized expertise, such as ex-CFOs, digital marketing executives, and cybersecurity. However, directors also underscored the importance of more general skills and qualities, such as judgment, collegiality, motivation, and performance focus. Directors also emphasized the importance of diversity and having current CEOs serve on a company’s board.
Managing Leadership Transitions
CEO and lead director transitions are also critical situations for boards to effectively manage. CEO transitions are particularly challenging, as permitting the outgoing CEO to remain for a transition period can be both valuable and detrimental to the new CEO’s relationship with the directors. LDN members had mixed views with respect to outgoing CEOs staying on as chair of the board. Some directors were generally wary of long transition periods with an outgoing CEO as chair, as such a transition period could result in the former CEO overshadowing the new CEO. However, some members noted that with careful planning, a short transition period with the outgoing CEO serving as executive chair could work well.
Boards should also implement a plan for lead director transitions. While some lead directors served for five, seven or indefinite terms, LDN members touched on different approaches to lead director rotation. Among other matters, one director noted that he was elected and assessed as lead director every year, while other directors viewed the lead director role as one that was only changed when there was a reason to change.
In selecting a lead director, members noted that the individual should have: (1) a historical understanding of the company; (2) the respect and trust of the board and management; (3) communicative ability around sensitive issues; (4) a broad perspective on the business; and (5) experience as a CEO or chair elsewhere.