Exercising Executive Power
The CEO is a singular role. There is only the one instance of it and his has no peers (within the same Company). It is a powerful role, able to make decisions on all matters of concern at all levels of the Company. The constraints placed on the use of CEO power has evolved over the years, in a favorable way -- no longer able to abuse the power as a matter of course. Nonetheless, it is a supreme leadership role and one that the Board is counting on to make sure the business operation runs smoothly.
First time CEO's often find themselves in a quandary unsure of where their power really lies. This can lead to hesitation in their leadership which leads to fear, uncertainty and doubt in their own Company's ability to succeed. You can see this on the team and they way they operation. They simply collectively start to make mistakes.
Experienced leaders understand how to use their executive power and over time learn that there are few moments in the history of a Company where their leadership had to be used as a form of power. This is a crucial issue for first time CEO's to understand quickly if they want to build the most successful company they can. Follow along as we'll explore how this learning transition occurs.
The CEO Has No Boss
Some people are destined to be a CEO of a successful organization. They have the right leadership qualities, confidence, skills and often luck, to rise to the top of an organization. Some people make their own destiny by forming a company and voila, they are a CEO. The motivation is often the same in both cases, they don't want to be managed by anyone.
It's actually pretty lonely having no boss. No one to get any guidance from, no one to make sure you don't make mistakes, no one to take the responsibility when something goes wrong, no one to replace you when you want to go on vacation, get sick or just need a break. No one to learn from, no one to follow around.
In most organizations, the Board of Directors is the 'boss'. Whether there is an appointed Chairperson or the Board members collectively govern the business, they become the Boss of the CEO. They are supposed to provide guidance, set goals, help make sure the CEO does not make mistakes, admit to being part of the problem when mistakes happen, step in if needed when the CEO is away, sick or unavailable and much more. Really great Boards can be learned from.
So the CEO does have a Boss and how the CEO responds is an important part of the CEO role overall. It's important to understand who is the Boss, or more correctly, who is playing the role of the Boss, because that provides a context on which the CEO uses executive power.
The Business Plan Runs the Business
Executive power is best supported by an exceptional business plan. The simplest example is the role a detailed budget plays in decision making. If the budget supports making a purchase or hiring a resource, the purchase is made or the resource is hired, if it's not in the budget, it is not. If it's not in the budget, but the item or resource is needed, an exceptional meeting occurs to decide on whether the budget should be over-ridden. The CEO often makes a budget-overriding decision, or at least should be held accountable for making the decision. The Board should make sure there are some criteria that guides the CEO towards making the correct decision. A common approach is to require Board involvement for approval of defined budget overages (especially human resources). This makes sure the right level of discussion occurs and alternatives are reviewed in a more neutral setting - an accountability is shared, no reason for the CEO to always hold it alone.
Young businesses often don't have a detailed business plan -- the early stage of product, service or sales tends to make everyone feel that writing down a detailed business plan serves no purpose. A small team can manage things out of their heads, a written plan is not needed. In these circumstances, the CEO has to exercise executive power daily, a very heavy burden, an unfair burden. In fact, when decisions are made with the full emotion prevailing during the heat of a moment, it's hard to make sure all the analytical basis are covered. Decisions are made with very little analysis of long term impact. Create a business plan no matter what stage of business you may be running.
An effective business plan helps govern how executive power is exercised if at least the following is provided within it:
- a monthly budget which identifies all resource hiring and other major expenses
- key deliverables (measurable) for the product team
- monthly or quarterly metrics for any marketing activities (e.g. # leads, etc)
- monthly sales goals (always monthly)
The management team, with support of data from finance, would review how the business is doing with an eye to comparing to the details in the business plan. If the key items are tracking well, the business continues to make decisions guided by the plan. If key items are off track, it is important to analyze and come up with corrective measures before waiting for the year to end.
One very sensitive area comes to play when a business is off track -- do you change the plan? The prevailing tendency is to leave the original plan as the plan of record but define a new plan that guides the business through to the end of the planning period (e.g. fiscal year end). Performance bonuses are often stuck on the plan of record but the operating plan, the plan that everyone uses to make key decisions, should always be as accurate and meaningful as possible. If you have the flex ability to refine the operating plan on a monthly basis -- taking into account the reality of the fiscal year as it unfolds, you will always have the most meaningful plan and ideally the least number of contentious issues when it comes to exercising executive power. Keep in mind though that the Board will still measure CEO performance against the plan of record given the CEO is charged with the strategic vision and ideally the most in-depth view of how the business should perform.
The Board and the CEO
It is important to establish a trust factor between the CEO and the Board. The CEO has to feel the Board can handle good and bad news without reacting irrationally and the Board has to trust that the CEO will make decisions using the approved business plan as a guide. This two-way trust is hard to establish in young companies and is often a reflection of both an inexperienced set of Board members and/or a first-time CEO.
Even in cases where the CEO is experienced, the trust factors with the Board are often low. The experienced CEO feels they have earned the right to act independently and exercise executive power as they see fit (for the good of the business) while the Board, fueling this perspective, often does not put in place the right governance policies assuming the CEO knows what he or she is doing. If a thoughtful and approved business plan is in place, both a first-time and an experienced CEO should be able to succeed in earning the trust of the Board.
When things go bad -- a target is missed, a bad hire is made, a competitor wins a key deal -- everyone hides. The CEO is hesitant to promptly raise the issue with the Board fearing that executive power will be lost. The Board, especially one made up mostly of investors (common in young companies), immediately look to scale things back to reduce risk. The CEO wants to wait to correct the situation before reporting to the Board. The Board is concerned the CEO is operating in a rogue fashion, without respect for Board governance. If the CEO and the Board are not communicating well, it is often impossible to discuss rational alternatives to help address whatever the issue is. The following guidelines are useful to consider:
The CEO should:
- regularly, consistently and concisely provide updates to the Board
- use a consistent template
- compare to the approved plan so the Board always knows the direction of the business
- avoid 'selling', just the facts and what alternatives are being considered
- never hesitate to share bad news with the Board
- sometimes brief one Board member to gauge possible reactions from the other Board members
- always follow up email with a phone call to make sure the right message was received
- always propose what actions are being taken in reaction to negative AND positive news
- build relationships with Board members
- call each Board member 1-1 to make sure they know what they need to know about the business. It does not make sense to have uninformed Board member
The Board should:
- always have a thoughtful operating plan in place
- don't assume the CEO or management team have the right plan
- never approve a bad plan just so that you can provide a failing grade at the end of the year
- make sure you are paying attention to company communication
- you are of little value if you are not staying current with the company's activities
- provide guidance and analysis all the time, encourage the CEO to be analytical, always exploring possibilities
Board members become board members through their own business or industry success. Don't forget what it takes to become a CEO. Don't allow a gulf to develop between the Board and the CEO/management team as it does not benefit anyone and can severely hamper the business at those critical times when key decisions need to be made. Business plans are there to help when things go bad or things go really well -- both are important to the success of any company.