When Vance Coffman was elevated to the CEO post of Lockheed Martin in 1997, he had to focus on finishing the integrations stemming from the 1995 merger of Lockheed with Martin Marietta and the 1996 acquisition of Loral. It was a difficult time for defense and aerospace, and Lockheed’s stock price languished for several years as Mr. Coffman stuck to his integration timetable. His execution was not readily apparent to outsiders, but it was clear to the board. The board resisted outside calls to replace Mr. Coffman because it was confident in his plan. This confidence was rewarded when the business turned around in 2000. Mr. Coffman did for Lockheed Martin what Ken Lewis is now doing for Bank of America.
Boards also need to directly support incoming CEOs, both informally and formally. Directors should make themselves available to the CEO for informal dialogue, especially when they have specific expertise to offer. An outside director who is also a sitting CEO could be a sounding board on strategy and organization issues. A politically astute director could offer insights on legal and political issues. (I know one firm that hired a key executive for environmental affairs on the advice of a director who was a former regulator.) Some boards go so far as to appoint a director, usually a former CEO at a different firm, to be a coach for the new CEO.
The board should have formal mechanisms in place for presenting constructive feedback to the CEO. One opportunity to develop such feedback is through executive sessions, the closed-door meetings of nonexecutive directors that are now mandated by the Sarbanes-Oxley regulation. These boards pose hypotheses about people, strategy, acquisitions, and risks. And they debate them vigorously. Some turn out to be naive and are quickly discarded, but others carry more weight. Hypotheses I commonly hear include: The CEO’s acquisitions and vision are good, but his team has not delivered on promises of execution. The CEO’s focus is diluted. Our heavily loaded balance sheet and fast pace of acquisitions will come back to haunt us in a slow economy. Turnover among senior executives has been too high. When hypotheses such as these stand up to scrutiny among outside directors, it usually means they’re important and need further examination. Why are these things happening? What are their effects? How can the board help? The discussion should then be communicated to the CEO in a constructive manner that enables action.
Of course, the best board advice is of no use if the CEO does not listen. Those who do will realize that directors are smart and experienced executives, and their talents and wisdom are invaluable resources that will strengthen the company’s management and support its long-term success. The few who don’t listen are the likely candidates to join the ranks of failed CEOs.
Reprint No. 03404
Ram Charan ([email protected]) is a Dallas-based advisor to boards and CEOs of Fortune 500 companies. He is the author of the best-selling book Execution: The Discipline of Getting Things Done (Crown Business, 2002), with Larry Bossidy, and of Boards at Work: How Corporate Boards Create Competitive Advantage (Jossey-Bass, 1998).