How the CEO and Board Work Together to Increase Shareholder Value

Plenary Session

Sunday, October 19, 2008, 5:00 PM

Presenters:
John (Jack) J. McMackin, Jr. Principal, Williams & Jensen
Albert P.L. Stroucken President & CEO, Owens-Illinois Inc., and Director, Baxter International, Inc.

A digested version of the panelists' comments follows:

Albert P.L. Stroucken:
Everyone on the board-the CEO and the directors-shares the responsibility of making good decisions. I remind my team frequently that we do not own our company-and we must do everything we can to ensure value for our owners. Considering our current financial circumstances, this is very difficult in the short term. The current financial crisis is a stark reminder of the importance of strong long-term strategic leadership.

Albert P.L. Stroucken

Albert P.L. Stroucken

We hear the most about board-CEO relationships when something has gone wrong, usually with the board on one side and the CEO on the other. A lot of people think this is what is required for a balanced view. But I-and most people in this room, I'm sure-don't believe that this is healthy.

An adversarial relationship between senior management and the board, if not resolved, can quickly be a death sentence-and have serious repercussions on shareholder value.

This evening I want to outline five criteria that I've found key in maintaining an appropriate board/CEO dynamic.

Relationships
The first criterion is to establish the right kind of relationship between the CEO and the board. The man who occupies the "first place" seldom plays the primary role. The CEO-even if he also chairs the board-must recognize that the board needs intellectual distance. This must not be affected by close personal relationships. The board should not offer affirmations-we have family for that. The board offers value through providing balance.

Every CEO and board member must consciously think about this. I avoid getting too close to board members because it could interfere with objectivity. If we socialize, it is as a group-usually at board dinners or board retreats.

Balance
On the one hand, we have a collective responsibility, as far as oversight of financials, building value, and ensuring a succession plan is in place. On the other hand, the board members are my bosses-they have the duty to review my performance. The imperial CEO has no place. I look at my relationship with my board in the same way I look at my relationship with my senior staff.

Tools and Access
The board has to be able to make informed opinions beyond what the CEO tells them. They need direct access to employees in different parts of the company-at least one or two levels below the CEO. Board members need to independently confirm what the CEO says.

Board members should be free to obtain information directly from the members of my team. Members of my team are encouraged to seek contact with the board. This can be done in a non-threatening manner. I just ask that they inform me of the contact and provide a brief overview of content.

We need to make sure boards get the right amount and type of information: Our board has informal telephonic "meetings-in-between-the-meetings." I send a letter to board members to inform them of relevant facts and developments. We provide board members a narrative in addition to PowerPoints for presentations. We try to send board books two weeks in advance.

This lets us use meetings for discussion rather than presentations. We choose board members for their expertise and wisdom: If we aren't encouraging debate and discussion-we aren't tapping into that wisdom. We need to make sure discussions include every board member if we're going to tap the expertise of the full board.

Listening
The CEO must listen to the board and set the agenda. If the agenda only reflects the CEO's issues-it may not reflect the issues of the board. It's my job as a CEO to know where my board members are, and what their thinking is. I want to communicate about the business-but it's more important to communicate the information they need to know to understand the business.

When we apply these general principles, we create a stronger foundation for success-we allow the board to monitor the company, participate in and oversee the strategic direction, oversee performance, and appropriate management succession.

John J. McMackin:
Al Stroucken is inviting us to think about the hardest scenario for board members to get their arms around: How do you add value? How do you earn your keep?

John J. McMackin, Jr.

John J. McMackin, Jr.

If you're not at war with your CEO-if the aspects of the questions you're dealing with go beyond those clear, formal, core (maybe mandated) responsibilities-that's the hardest case.

How does a board help a CEO do his or her job-within the prerogatives and responsibilities of the CEO?

I picture Al at a regular board meeting: "Here we've assembled all these smart people; we've spent a lot of time educating them. Thanks for all the overseeing-but now do something. Contribute in a constructive fashion."

This is the last frontier in the evolution of the role of the board. It represents a movement: this revolution from governance to activism-to more creative and relevant participation.

We've made a lot of progress in figuring out this role. But we're struggling to figure out this enhanced role-especially in figuring out how to make a better company. This optimal relationship is difficult to conceptualize without clarity.

It's not a science, and there's none of those comforting attributes of formulas and equations. There are no bright lines, where you know what's on one side and what should be on the other. This problem is hard because it's soft-it's not a hard science. And this has implications for the form of the answers we might get, and the source of these answers. Aristotle said, "A disciple should have that degree of certainty which is appropriate to it"-and some might add, "and no more."

I'd like to give some practical guidance on three things that can facilitate the board/CEO relationship:

The Reverse Question
At our annual retreat, Al began each session by asking us (the board members) questions. Think of the message that tactic sends: "Passivity is not going to be tolerated here. I, as the chair/CEO really do want your input." On seeking greater value from the board-the key is to have a CEO who overtly welcomes it. It changes board input from being an interruption to being a contribution.

Information
You can't contribute as a board member at a meeting if you're learning new stuff. As Al said, we get board books weeks in advance. We get a narrative, not just the numbers. We're expected to have mastered it.

Intra-Board Communications
Boards are collegial institutions. We can take advantage of that fact before and after the meetings-where ideas are confirmed or disposed of. We have informal gatherings that allow discussions like: "Is it just me, or do we have a problem here?"

Audience Question: As a CEO and Chairman, what actual role do you play in shaping the board and committee composition, and communications?

Stroucken: In this case, coming from the board myself, I had a good understanding of where we were coming from. However, the lead is really taken by the lead director. I only get engaged in the discussion when they have narrowed it down to five or six candidates-then I can enter the discussion. Otherwise, the CEO might reach out only to people he knows. This way, I can voice an opinion, but ultimately I cannot steer and guide the composition of the board.

As far as the relationship with the investors-it's important for the company to speak with one voice. It's difficult for directors to have the depth of knowledge required of the mechanics and minutiae of the company. Therefore, if there is a desire for shareholder interaction, the senior management and directors must have alignment so they can speak as a unified body.

McMackin: Having Al as chair and CEO allows us to really show that "We're all on the same team," without an Us vs. Them mentality.

We have created a strong lead director role. This does allow there to be a sort of screening or formality in issues that arise. Before, if there was an issue, I'd probably call the CEO. Now, I'm more likely to call the lead director.

Audience Question: You've already answered this a bit, but I was going to ask what you saw as the role for the lead director and the value that brings to the organization.

Stroucken: In my first company, I entered as the CEO-and the chair was not friendly to me coming into the organization. It was important for me to have the lead director to interact with.

As the company was coming out of a difficult financial period, we had a lot of worried directors. There was a lot of discussion-and people had a lot of ideas. The lead director was someone who could listen to the discussion-which occurred without the CEO there-and take the two or three main threads and say "Here's what we think." This allows us to understand the overall direction without getting stuck in details.

McMackin: Our lead director interacts with Al on the agenda-so someone who is aware of the board-specific issues is making sure they get on the agenda. More than that-at the end of each meeting, we have an executive session and Al leaves. The lead director takes what comes out of these tight, productive sessions and reports to Al.

Audience Question: How do you educate directors on the global issues that affect the company?

Stroucken: At least one board meeting a year occurs internationally-the most recent was in Latin America . We have hundreds of thousands of employees there. If employees can work there, the board can too. Most importantly, it shows the board members the richness of the talent in all our locations. We tend to get headquarters-centric-but it's important for directors to be in the regions where we do business.

Board members need to insist the regional leaders come to at least one board meeting each year. When we talk about our business-and 75% of it is international-currency risk and global risk are an important part of the discussions. To have a meaningful and deep discussion, you need to make sure board members have experience in those regions. Our board has some Europeans. We recently added a gentleman from Beijing . There needs to be balance, though-some international directors may not be familiar with U.S. board protocols and regulations.

Question: What is the board's role in changing the culture of the board and organization?

McMackin: We've had some pretty lively discussions on that-that was a question Al directed at me at a board retreat. We decided on the themes of the new culture. We had PowerPoints. We talked about how the new culture was different from the old culture. We use these discussions in everything we do, especially in the board communications with the employees.

Stroucken: It's important for me to make it clear-the person who can make change in the organization is the CEO. A culture is almost like religion-it's difficult to argue for change using logic because it's very emotional. Coming in as an outsider, it was important for me to ask the directors-a lot of whom have been there for a long time: "What are some of the observations you have made in the organization?" I need to recognize barriers and make sure we move through them.

For More Information:

If you'd like additional guidance on defining the roles and relationship of the leader of the company, and the leader of the board, see NACD's: