Tuesday, January 15, 2008

The need for CEOs to be honest

There is a terrific article in yesterday's Wall St Journal "Why CEOs Need To Be Honest With Their Boards". The need to be open and straight resonates strongly with my experience - but it is a balance that has to be managed carefully.

The tough challenge is that boards don't spend as much time in the company as CEOs do, and they tend to assume the CEO is overly optimistic, so you have to find ways to keep the board up to speed and help them absorb bad news without over reacting. I have found the best way to do this is to tell them early when you have bad news, don't let it fester or risk them figuring it out on their own.

As quoted in the article “In many cases, the CEOs have the best of intentions. As leaders, they want to take charge and inspire confidence, even when things are turning sour. But that instinct can lead them to be less than forthcoming about problems -- which can snowball into severe tensions with directors. That's especially true these days, as calls for good governance grow louder and directors seek to shed their image as fiduciary figureheads, insulated from a real understanding of the companies they serve.”

A classic example of this is how to lead when you are going to miss a quarter - which happens to the best of companies at times for a whole host of reasons. I am on a non-profit board where the CEO predicted that she was not going to make her fundraising targets and I advised her to get the news out to the board immediately so no one would be surprised. In the end she made her targets but the board appreciated the heads up and the time to do contingency planning. So, for a for-profit company giving an early warning if you are going to miss is an important part of building and maintaining credibility - plus allowing the board to participate in the management of the miss.

Likewise strategy options - M&A, distribution etc. - make sure the board is well educated on the market landscape and options well in advance so when you bring in a deal you don't have to start from ground zero.

Or even things like overall market strategy. I have to wonder if Hector Ruiz will still be running AMD by the end of the year given the failure of his strategy so far - and the way that failure is now entering such open debate - for example Cowen predicting a change away from the current market share strategy vs. Intel sometime this year. That has to be a contentious discussion at the AMD board level.

As the WSJ article says “CEOs who fail to make that leap [working effectively with the board and keeping them up to date] increasingly risk being fired. In 2006, 31.9% of CEOs who stepped down world-wide did so due to conflicts with the board, up from 12.4% in 1995, according to a recent Booz Allen study. The forced departures were "nearly always because of transparency issues," says Mr. Wheeler, who co-wrote the study.”

It's always been tough to be a CEO but now it is tough to be a board member too. The responsibilities are real and significant. So sugar coating in the current environment would be dumb. Better to put the time in to make sure everyone knows what's working, what isn't and what you're doing about it.

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