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CEOs and Boards

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CEOs and Boards

It appears as if Tony Hayward will be stepping aside as the CEO of British Petroleum. The move is not entirely voluntary since the company’s Board of Directors has been meeting to discuss his future with the company.

One of the major roles for boards of public companies is to hire, monitor the performance, and when necessary, fire the CEOs of their companies. Another major role is to second guess the strategic directions set out by the CEOs. The boards should overrule their CEOs when they have serious reservations about the direction the CEOs want to take their companies. On December 1, 2009, Ed Whitacre and the rest of the board of General Motors forced Fritz Henderson out as CEO because the board lost confidence in his strategies and leadership.

The boards also should challenge the leadership capabilities of their CEOs. It appears as if Tony Hayward has lost the support of the board in his leadership abilities.

Since CEOs are employees of their companies, and serve at the discretion of the Board of Directors, who supposedly represent the interests of the owners of the companies, two important questions arise. Should CEOs also be appointed Chairs of their companies? Should CEOs even be appointed to the boards of their companies?

The answers to both questions are NO!

CEOs are hired hands, and as such, they should neither be on the boards of their companies, nor lead their boards. Directors should do their jobs without the presence of CEOs or any other senior executives of the companies. CEOs, and CFOs, should be invited by the boards to answer questions and periodically set out their plans for the companies. The directors then would discuss the plans and the future of the CEOs without their further presence.

Removing all senior executives from boards of public companies would be an excellent start towards reforming the current system of corporate governance, which failed miserably during the recent financial and economic meltdowns.

In the case of BP, there are five senior executives on the board. This might have been a contributing factor to the company’s dismal safety record and its lack of a contingency plan to deal with blowouts of deep-sea wells. If there were no senior executives on the board, perhaps the remaining directors would have shown a greater interest in risk management. With senior executives on the board, the non-executive directors might have taken the easy way out and deferred to the executive members of the board on strategy and risk management – obviously, a very poor decision in retrospect.

Out of curiosity, I looked up the composition of the boards of the 30 companies that make up the Dow Jones Industrial Average. In all cases, the CEOs of these companies also were members of the boards of their companies – a poor corporate governance practice. Unlike BP, there were no other senior executives of these companies on their boards.

Bad enough that the CEOs all were members of the boards. Worse yet, the CEOs of 22 of these companies also were the Chairmen of their boards. The only exceptions were Bank of America, Alcoa, Intel, McDonald’s, Microsoft, Pfizer, Wal-Mart and Walt Disney.

Why do these leading companies continue to engage in poor corporate governance? Largely because CEOs are unable to accept any oversight and they all believe that they actually run their companies. The massive egos of CEOs stand in the way of good corporate governance.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


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1 Comment

  1. Jaspreet Narula July 26, 2010

    Thats very true. This morning, I was actually thinking on similar lines about Tony Hayward being ousted from BP. I came across this interesting insight from a friend for this particular decision by the board of BP.
    Looks like this might be a very strategic move from BP. Since it is critical for it to be operational in N.A due to the large defense contracts from US. In the short term, this would help BP work more closely with the fed and force other operators to share the spill clean up cost.This way they could also continue operations in NA. Probably a reason why stocks rallied today.

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