3.6 Relationship Between Chairman and CEO

The relationship between the Chairman and CEO of an early stage technology company is complex.

Mentor: The Board’s role is to advise and support the CEO. In an early state tech company, the CEO is often also the founder, and is typically young and energetic, but inexperienced in many of the functions he needs to perform. In particular, the relationship with his Board and Chairman likely need development. For this reason, the Chairman should ideally be an experienced technology executive and a former or current CEO.

As a mentor, the Chairman should be a confidante for the CEO; someone that the CEO can come to for advice on the many challenges he faces. There must be explicit trust between the CEO and Chairman, or else the CEO will not be able to confide in the Chairman.

To facilitate the mentorship, the CEO and Chairman should meet or converse at least weekly. This will allow the Chairman to keep current. The CEO must alert the Chairman to any material issues that could affect the company’s performance. This is the best time to seek and be guided by advice. This is also the opportunity to identify issues that should come to the Board at the next meeting.

If a problem is identified at a Board meeting of which the Chairman did not have prior knowledge, then that is a clear indication that the communications between the CEO and Chairman are not as frequent or as strong as they should be. A worse situation would exist if the Board became aware of a material problem that had not been disclosed to the Board or Chairman.

That said, the CEO must use discretion in identifying which issues to bring to the Chairman’s attention. It is not the Chairman’s job to review every operational issue; that is management’s responsibility. The Chairman should be consulted on the material issues which affect the performance of the Company, where the decision or action is not obvious, or where the CEO does not have the requisite experience or skills to manage the issue.

Overseer: The Chairman also reviews the performance of the CEO. Formally, this is done at least annually under the control of the Compensation Committee. Please see related documents Terms of Reference for Compensation Committee and CEO Review Process. On a regular basis, and as required, the Chairman should review with the CEO his actions and decisions. The objective is to improve the effectiveness of the CEO and the quality of his decisions.

The Chairman should take the opportunity to provide constructive criticism of the CEO’s performance, commending the good work, and suggesting how improvements might be made. The Chairman’s approach in this role is important. If the Chairman criticizes a decision or action that, with 20/20 hindsight proved to be a poor one, without providing any insight as to how the situation might have been analyzed differently at the outset, then he is not adding value or helping the CEO to improve. He might lose credibility quickly which compromise his ability to continue as Chairman. Rather, the Chairman should review the facts and the thought processes leading up to the decision or action, the timeframes, the risks involved, and whether the risks might be mitigated. An analysis of the action or decision can only be useful in the context of the information and risks known at the time. There are always unknowns and risks. It may be that a thorough analysis leads to a decision that turns out poorly because of the risk involved: “right decision, wrong outcome”. This is not a management mistake.

The CEO would be in error if he fails to consider the available information or risks and consequences prior to taking the action or decision. The Chairman’s role is to help the CEO to improve his processes so that there is a better chance that the actions and decisions will lead to positive outcomes.

Potential conflict in roles: Ultimately, the CEO is judged on the quality of his actions and decisions, among other things. It requires maturity and discipline to seek mentorship from the same person who judges his performance; the Chairman’s roles do conflict. Since it is the short supply of maturity which creates the need for stronger mentorship of early stage tech CEO’s, the Chairman should be vigilant for signs that a CEO may be struggling yet unwilling to ask for help. He should use a gently proactive approach to help the CEO identify and articulate the major issues with which he made help, and of which the Board should be made aware.

Trust is everything: One thing is certain. If there is not a high level of trust between the Chairman and CEO, then virtually none of the benefits of the Chairman’s experience will accrue. The CEO will be reluctant to confide, and issues which could benefit from the Chairman’s experience may not surface until they become crises which could have been avoided. The premise of all of these documents is that early stage companies need a high level of proactive involvement of an experienced Board. Without the trust to allow this to happen, the effectiveness of the Board may be fatally compromised.

To avoid this inherent conflict, the CEO can look for a mentor who is not on the Board.  An experienced former CEO who has lived through the struggles that most CEOs face, with a constructive, sympathetic, but forthright approach, can help a CEO work through difficult issues.  The CEO can trust the mentor, because there is no secondary motive, and because it is based on similar real experience 1.

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1. “CEOS Need Mentors Too”, Janusz, Peiperl, Harvard Business Review, April 2015.