Comment

The Chief Executive Officer

Oct 01, 2018
The board of directors’ most important responsibility is the appointment – and, in certain cases, dismissal – of the CEO.

A non-executive director is not a passive function. The increasing wonder, apart from family businesses, is that anybody is willing to be a non-executive director at all. Directors can find themselves in the firing line of inquiries, allegations, parliamentary scrutiny and media attention, usually unexpectedly. Charities, banking, entertainment and hospital sectors are recent examples; and organisations controlled by the State.
Furthermore, a director is expected to be versed in corporate governance, which includes myriad obligations and regulations relating to Revenue, environmental, company law and employment; not to mention anticipating financial pitfalls and actually monitoring the business itself. I have regularly seen papers provided to directors in advance of a directors’ meeting running at more than 50 pages.

In summary, responsibilities for a director are high and not readily delegated, hence the importance of the CEO’s role. A moment’s thought will demonstrate that a large business is organised as a pyramid, with the CEO on top and power devolving downwards. In politics, the prime minister is on top but, in fact, power devolves upwards. As an aside, in my opinion, this is why businesspeople make poor politicians and vice versa.

It is the CEO who carries out the policies set down by the directors. In practice, policies are usually developed unconsciously over time by custom and practice. CEO complacency can readily occur; seven years is commonly spoken of as the appropriate tenure of a CEO. It can be difficult for a board of directors to be aware of critical matters. Certainly, there can be quality financial information provided, but often there are important issues or circumstances not apparent from financial appraisal alone.
As explained earlier vis-à-vis the pyramid structure, the CEO is the pinch point on policies and information as to upwards or downwards.

This is where the relationship between the chair and the CEO has great importance. It is up to the chair, separate to board meetings, to have regular face-to-face contact with the CEO, primarily to identify issues or circumstances that should be advised to the directors. A strong chair is
a necessity.

A dominant CEO can happen whereby the directors are given circumscribed information or, at worst, treated as rubber stamps. This particular trait became evident, not just in Ireland, but in the banking and related sectors in the fallout from the financial crash.

Large businesses are complex. Tragic events can happen. In recent times, directors have been heavily criticised for explosions on oil platforms, the sinking of a ferry, the bursting of a mining dam and other events. The famous saying of US president, Harry S. Truman, comes to mind: “the buck stops here”.

A ‘who’s who’ board of directors is not reassurance in itself. Around the world, many of the banks and insurance companies that carried out the worst excesses prior to the financial crash had prominent boards of directors. This is also true of quite a few large business failures.

The dismissal of a CEO, and the willingness to do so, is also a prime responsibility of the directors. It is not just a question of firing a CEO for a material misdemeanour; there is also the question of performance. The temptation is to look inwards for a CEO, but a competent line manager promoted to CEO may lack the broader skills and leadership qualities required of a CEO. It can often be difficult for directors to distinguish personality from ability. Careful identification of the skills necessary for particular circumstances is best addressed or assessed by outside advisers, though obviously the ultimate appointment is made by the directors.

The hiring, firing or resignation of a CEO in a quoted company can, and frequently does, move the share price. The money people recognised long ago that it is the CEO, for good or bad, that makes things happen.

Des Peelo is author of The Valuation of Businesses and Shares, published by Chartered Accountants Ireland.