Steve Boatwright provides insight in, "Strong Leadership Entails Motivation of People and Improvement of Financial Results," for In Business Magazine's March 2024 feature story, "It’s Lonely at the Top: Empowering CEOs to Be Their Best."
Strong Leadership Entails Motivation of People and Improvement of Financial Results
The role of the CEO is all about leadership. The CEO answers to his or her board of directors, provides oversight of management and is ultimately responsible to the shareholders. Strong leadership entails motivation of people and improvement of financial results. A CEO’s impaired mental and physical health can create concerns about whether good decision making is even possible and, as a result, whether effective leadership is being provided to the company. Just as the public fixates on the health and mental lapses of U.S. presidents, shareholders demand strong physical traits and mental acumen in their CEOs. Apart from any hint of mental or physical shortcomings, the CEO might sometimes be viewed as someone who dislikes making decisions or is incapable of making good decisions. The bottom line is that the CEO position can be a lonely one; any transparency of weaknesses exhibited by the CEO often creates misperceptions among the board, management or shareholders about the CEO’s ability to make effective decisions.
Under the Securities and Exchange Commission regulations, the term used for the management style of a CEO is the “tone at the top.” It is used as part of the background in the regulations related to Items 404-407 of Regulation S-K under the Securities Exchange Act of 1934, as amended. Effective corporate governance requires corporate board members, and corporate officers who assist the CEO, to develop and implement strategies to lead the company to meet its goals and objectives within the confines of legal regulations. Professionals refer to this concept as having effective “internal controls” or accountability among the management team members resulting from a division of duties.
Two mistakes I most often see with my corporate clients are in their corporate governance structure and how to properly involve outside legal counsel in this structure. The CEO wants members of the board to encourage, affirm and ratify his or her decisions, and, in turn, might discourage in-person meetings. To further limit legitimate input and disagreement, written consents to ratify decisions replace in-person meetings.
There are strong policy reasons why in-person meetings with independent directors make sense. Independent directors should provide opinions independently from salary concerns or from a myopic focus on the industry in which the company operates. Board meetings run by a chairperson — and not the CEO — are also important, as they provide a healthier environment to elicit input from all members of the board. Ironically, the most difficult decisions need the most input from all members of the board and those are the decisions that an insecure CEO often wants to make without board input. Wise counselors make wise decisions, and input from many usually provides better decision making than from one — even if that one is the CEO.
The role of outside legal counsel for a corporate organization is to help the board of directors and CEO provide a setting where important, meaningful decisions can be made. Instead of facilitating autocratic CEO decision making, a good attorney will encourage the CEO to seek meaningful input from his or her board. When shareholders sue corporations, they sue members of the board and management. A CEO is best protected when board minutes reflect a careful, methodical decision-making process. Counsel should be trained to determine when board input is needed.
Unfortunately, counsel is often viewed in an adversarial manner by the CEO. The CEO brings an agenda of results he or she wants to achieve at the meeting and does not want counsel to require the discussion necessary for meaningful input from the board. Instead, the CEO should understand that the role of outside legal counsel is to protect him or her and the board from the failure to make decisions properly and is unconcerned about the outcome unless it violates the law. Effective leadership by the CEO means an inclusive decision-making process where the board and its legal counsel both contribute to the process.
One of the most effective CEOs I worked with took more than seven companies public and was a member of the board of directors of Berkshire Hathaway. He sarcastically referred to himself as the stupid little fat man and relied heavily on his legal counsel, whom he saw as an ally, and his board, which he had wisely populated with people smarter than himself. My advice is simple but hard to implement: CEOs should find smart independent board members and view counsel’s advice in the spirit of protecting themselves as the CEO and their board from needless litigation.
Stephen R. Boatwright, a shareholder with Gallagher & Kennedy, handles public and private business mergers and acquisitions for buyers and sellers of businesses of all kinds, and advises companies in raising private equity and public financing.
Click here to read Steve's article published by In Business Magazine. Read the full March 2024 issue here.