Chairman vs CEO: who’s right and who’s responsible?

Chairman vs CEO: who’s right and who’s responsible?
Image: Lord of the Flies, Criterion Collection
Opinion: Why setting boundaries and clarifying expectations is crucial to ensuring effective chairman/chief executive dynamics.

In New Zealand, many chief executives are appointed with a general high level understanding of the role of a board. It's quite rare for a new chief executive/chairman team to work through a structure process of clarifying their roles and to agree on how they tend to work together.

The chairman has often been described as “first among equals” and is appointed to the position by fellow board members, not shareholders, acting as an important link between the board and the chief executive/company. Thus many functions of the chairman are customary rather than formalised by law.

The board's most important role is to appoint and work with the chief executive. In practice, the two are mutually dependent. Boards rely on chief executives to provide input into strategic development, implement strategy, communicate management's perspective and alert the board to problems. The chief executive relies on the board for clear direction, mentoring and support.

This crucial relationship can be hampered by a lack of clearly defined responsibilities/delegations or by either party stepping outside of those agreed terms. This information should preferably be captured in writing, either in the employment agreement or a separate agreement.

A chairman can be effective only while he or she retains the confidence and respect of board members. An underperforming chairman may be asked to step down by other directors but, in respect of all public companies and most private companies, can only be removed from the board by a majority vote of shareholders. Most would choose to resign rather than face re-election without board endorsement.

Following best practice, the chairman should be an independent director and therefore free from potentially conflicting relationships with the organisation.

Recent court cases have created debate on the role of the chairman. There is an argument today that the role of the chairman is one that carries additional responsibilities.

These responsibilities involve leadership, governance and proper management of meetings. At time of writing, there is no legally binding precedent and the question awaits a definitive answer from the courts or parliament.

Boards rely on chief executives to provide input into strategic development, implement strategy, communicate management's perspective and alert the board to problems. The chief executive relies on the board for clear direction, mentoring and support. This crucial relationship can be hampered by either party stepping outside of those agreed terms.

The process of formalising the chief executive's powers and responsibilities in writing will help the board to clarify its expectations. At the same time the board’s responsibilities should be made clear in its own charter.

These documents are meant to give both sides freedom to act within boundaries, rather than to constrain.

In the absence of boundaries, the chief executive has to regularly approach the board for approval of activities and plans. This is an ineffective use of time, does not encourage high performance and misuses the board's skills, knowledge and experience by making them checkers rather than advisers.

By communicating expectations, the chief executive is free to work within these boundaries to achieve organisational goals and the board is not left to make decisions on the run. 

Perhaps the most important clarification concerns matters that must be referred to the board for decision or approval. Because directors have specific duties under the Companies Act 2003 they will retain control over some matters. This will vary from organisation to organisation.

Delegated authority should also be reviewed regularly as a matter of course.

A chairman can be effective only while he or she retains the confidence and respect of board members....Most would choose to resign rather than face re-election without board endorsement.

When the chief executive/chairman relationship is strong, the company benefits from having twice as much talent at the top—each playing a distinct leadership role and each supporting the other.

The board benefits by having a leader whose primary focus is on governance, maintaining ethical standards, and building the board into an effective team capable of managing everything from routine business to major crises. At meetings, the chairman can focus on managing the agenda rather than defending management actions.

While the chief executive focuses on getting decisions and guidance, the chairman can ensure that all views are heard and considered, that the debate is healthy, and that unproductive conversations are brought to a close quickly.

The chairman/chief executive relationship is unique—an interdependent relationship of equals at the top.

In my experience, a strong chairman/chief executive relationship is built through conscious attention to three tasks: Developing a shared context, agreeing on fundamental values and ethical standards, while understanding the accountability and boundaries of their roles.

All relationships require some investment, and some people are more prepared than others to make a conscious commitment to relationship building. But I believe the payoff in satisfaction for the individuals and effectiveness for the company can be substantial.

Henri Eliot is chief executive of Board Dynamics, a consultancy company which provides strategic advice to directors and boards throughout New Zealand and Australia.