How boards can prove their separate identity when CEOs surprise them

Over the past few months, board members of some high-profile enterprises have been heard exclaiming: "The CEO said what?!?!" This was followed by lots of confusion, face palming, and many awkward questions from investors, regulators, and the media. Then came quickly called, serious board meetings.

Papa John's pizza CEO and founder John Schnatter dropped a racially-offensive term in a corporate discussion - on diversity, no less - triggering a media outrage storm. And last month, Tesla chairman and CEO Elon Musk casually tweeted that he had a deal in place to take the company private. Musk followed his dramatic announcement up a few days later with a New York Times interview, outlining how the pressures of his empire were burning him out. As we write this we hear that Tesla board directors are now lawyering up. And the latest is that Musk will pay $40M to settle the tweet row and resign as chairman of Tesla.

And look at what Chanda Kochhar did at ICICI Bank. Not only did she end up suppressing a conflict of interest issue but also refused to step down for an independent enquiry. With the ouster of the board chairman and the pressure from regulators did she was asked to go on leave. While the enquiry was in progress, she again surprised the board by finally resigning.

Similar examples from India include Murthy and Infosys, Yadav of Housing.com who got sacked by the board eventually, and of course the husband-wife founder CEOs of Mu Sigma. We have seen the explosion that such outbursts of CEOs had created overnight in the markets, the media, and with the regulators.

These are some of the recent big-name instances of a CEO, board chairman or founder going off-script and leaving their board members to ask the question we started off with in the beginning. Of course, this sort of leadership "brick-dropping" happens all the time outside the spotlight at smaller firms worldwide. It seems most common in corporations founded by a strong, charismatic leader, someone who is certain that he (almost always a he) and the company are one.

After the CEO has said it (or wrote or done it) what does the board of directors do? First, summon the CEO or his staff and ask the question above. What exactly was said, and what was the context? What responses are we receiving? Which parties seem the most aggrieved, and which the most supportive? Is there potential legal fallout, either from regulators or investors?

Even if the comments don't prove fatal, a situation like this is a good opportunity for the board to prove its separate identity and force the CEO to take the following steps in place:

• Prepare a plan and get the entire organisation and board to be aligned to it. It should not be a complicated plan but the CEO should be guided in making this plan and communicate across. If there is any change to the plan or strategy, it should be communicated to the board so that the board is not blindsided.
• If the plan is changing drastically, the board should know of the reasons behind it. Is there a disruptive force in action like the Jio effect or government favouritism to a particular group? For example, HAL board would have blinked when the Rafale deal of the Indian government went to a newbie like Reliance Defence with no experience in aircraft making.
• Ensure that the execution is measured, monitored and managed well so that the plan deliverables are on course. CEO has the responsibility to keep the board aligned to the execution and seek its counsel.
• Call for strict adherence to transparency. There cannot be two different plans, one for the board and one for the rest of the enterprise. It is surprising how quite a few founders play this game with independent directors.
• Prepare a communication plan for upward reporting. The CEO should brief the board in emails if the information is clear and simple but plan for a presentation and seek suggestion if the information is complicated and require deliberations.
• Board meetings are well prepared and focused on an agenda. Board presentation deck should be shared at least two days prior and must provide all supporting data to each board member.
• CEO should consider board as an advisor and sounding board instead of what is commonly practiced in many companies. Encourage questioning the CEO or founder and not just nod for getting the sitting fee and reimbursements.
• Ask to get the senior executive team to be involved with the board wherever necessary. Concerned executive head should be called in to present his data and questioned. This is also a good step for the board to put in place a succession plan with least disturbances.
• Make feedback a two-way street. Board should be informed and measured on their inputs, guidance and overall value addition. Board scorecards are a good first step to drive this.

Executive sessions without the CEO (and possibly without the chairman) can discuss the situation and potential responses. The independent directors should consult with legal counsel, media and investor relations staff for their take on the situation. It is a good idea to involve these players in shaping a board strategy, which may or may not have the same priorities as those of the CEO.

A final piece of advice - discuss situations like this at your next session of the independent board members, even if there are no "CEO say what" blowups on the horizon. How would we as a board respond? Would we panic - or could we step up to speak for the company ourselves?

Muneer and Ralph drive mission-focused boards as part of the non-profit Medici Institute.