March 18, 2020

Public Company Boards and the CEO – A key relationship

All agree that recruiting, selecting, evaluating and compensating the CEO is one of the most important roles independent Directors of public companies fulfill. Some would argue that it is the most important responsibility of the Board in that it is through the CEO that the Board exerts actual operational control of the business. With that background in mind, here are some comments and recommendations regarding those critical Board tasks.

• CEO Recruiting – At first glance, one might only think of CEO recruiting in the context of an immediate search for a CEO if there is a current vacancy or an impending departure. That would be an error. In reality, CEO tenures are statistically pretty short… on average about 8 years according to a recent Korn Ferry study. While that may seem like a fairly long period, it is surprising how quickly those 32 financial quarters will pass. Further, for a variety of reasons, a Board may well find itself unexpectedly in search of a new CEO literally overnight. Thus, the Board should always have a recruiting “game plan” in mind, and preferably, a well thought out succession plan that includes a thoughtful and ongoing “grooming” effort.

 

• CEO Selection – Selecting the right person to lead the business as CEO begins with stepping back and assessing the current state of the business and what the leadership needs are going forward. Given the ever-quickening rate of change in the business environment, what was optimal a year or two ago may be woefully inadequate in the future. A good place to start with this analysis is to consider the following three personal traits:
  • “Smarts” – What intellectual and analytical capabilities must the person have to cope with the current and anticipated future business situation?
  • “Skills” – What particular skills or body of knowledge must the candidate possess in order to meet the current leadership demands?
  • “Style” – What leadership style is needed at this point in time to bring the organization to its fullest potential?

 

• CEO Evaluation – Evaluating the CEO is a delicate process. The goal is to provide truly constructive criticism while being clear about the Board’s expectations and assessment of the CEO’s performance. The two big dangers are either a superficial “rubber stamp” evaluation or, at the other end of the spectrum, an acrimonious discussion that just creates strife in the Board Room and a dysfunctional relationship between the Board and the CEO. The best way to avoid these dangers is to have a comprehensive and well-defined process for conducting the CEO’s annual review. The key characteristics of such a process would include:
  • Clarity and openness – The process should be well defined and documented and all involved parties should fully understand how the process will be conducted and what the evaluation criteria are.
  • Multi-dimensional – While current financial performance is clearly a key evaluation metric, a modern business must also anticipate and address a wide range of issues including strategic planning, workforce development, the impact of new technology, globalization, cyber security, changing cultural norms, standards of conduct, “tone at the top” and a host of other areas and the CEO must be evaluated on all of those dimensions.
  • Confidentiality – The process must ensure that each evaluating Board member’s personal opinions and evaluations remain confidential and that the CEO is presented with a single, unified and coherent Board evaluation. This is usually accomplished by having the Chairman of the Compensation Committee or outside counsel collecting inputs from the evaluating Board members and then consolidating that information into a single, unified evaluation that represents the Board’s overall consensus vis-à-vis the CEO’s performance. Anything less inevitably leads to the emergence of dysfunctional factions and rancor within the Board.
  • Respect and honesty – Boards select CEO’s for their drive and competence to successfully lead the business. Given those characteristics, it can be difficult for a CEO, who typically has had a very successful career path, to receive a less than glowing or even a relatively negative evaluation. It is incumbent on the Board to ensure that the evaluation is presented in a respectful and honest manner and in the spirit of a mutual effort to improve both the CEO’s and the business’s performance.

• Setting CEO Compensation – CEO compensation packages continue to be a “lightning rod” issue in the world of public companies and Compensation Committees struggle with balancing the issues of regulatory requirements, “say on pay” votes, proxy advisor comments, top to bottom pay ratio disclosures and satisfying the needs and wants of the CEO. Here again there are some principles that can work to facilitate this process in a fair, expeditious and appropriate manner.
• • A defined compensation review process – Just as in the case of conducting the annual CEO evaluation, a clear, well-defined and open process for conducting the CEO’s yearly compensation review well serves the Board in this arena.
  • Clear expectations – Both the Board and the CEO should share clear expectations about the parameters of the compensation review such as expected compensation %-tile levels, bonus calculations, % of company equity to be granted, long term/short term compensation, perquisites and all the other elements of the CEO’s compensation package.
  • Use of compensation consultants – Compensation consultants can provide invaluable assistance in understanding what are the current compensation practices of other similar sized companies in a given industry. Being guided by the data provided by these consultants not only ensures that the Board has fulfilled its “Duty of Care” in compensation matters, but it also gives the Board a good sense of what truly is an appropriate CEO compensation package.
  • Proper balance of short term and long-term compensation – The CEO compensation package should provide the CEO with the motivation to not only achieve short term performance goals, but to also address the long-term health and viability of the business. The compensation consultants can provide important guidance in this matter.
  • Pay for performance – It goes without saying that the CEO’s compensation must definitely be tied to the actual performance and health of the business.

Hopefully, these comments provide Boards with some useful guidance for navigating the key Board – CEO relationship in the multi-dimensional milieu of contemporary public company governance. The team members at GigCapital possess a deep level of experience in all these matters, both from the perspective of acting as public company Board members and as formerly holding CEO and other C-suite positions in operating companies; they understand the issues “from both sides of the table”. In executing a business combination with GigCapital, the partner company has immediate access to this invaluable experience as members of the GigCapital team join the Board of the newly combined, now public, company. This experience and knowledge provide nuanced understanding of the issues involved, specific recommendations on establishing the formal processes needed and ready access to a network of consulting and legal resources.