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Authority

The challenge that most CEO's face with their Board is understanding where authority effectively lies. The Board is a governing body and has a variety of formalized authorities typically defined in a Company charter and related by-laws. It also has fiduciary responsibilities that relate to tax, stock option grants and other business laws that can result in Directors going to jail if governed improperly. The CEO role reports to the Board making the Board the authority for setting and measuring CEO job objectives. The CEO has the authority to run the business within parameters set out by the Board which need to be pre-established. When these two are properly aligned, a business can run smoothly with full empowerment where it belongs. When the CEO-Board relationship is misaligned, it tends to distract to the detriment of the business. This section outlines some guidelines you might want to follow to fully define levels of authority to establish a proper working relationship between the Board and the CEO (and the leadership team).

Trust

Before any form of authority can be established, trust has to exist between the two parties. The Board has to trust the CEO that the approved plan will be followed and that operating guidelines will be adhered to. The CEO has to trust that the Board will deal with business issues without overreacting and act in an added-value way to any issues that come up. Trust is earned over time, so in a young company, it may take one or two full operating periods before the right level of trust is established.

An absence of trust will often lead to an ab sense of delegated authority. The Board will not want to grant to the CEO the latitude needed to run the business. Governance rules will be put in place that make it hard for the CEO to make decisions without Board concurrence. The Board will start focusing on governance management and oversight as the key to business success rather than any particular aspect of the corporate strategy -- a situation that will likely result in underachievement overall.

The CEO has to trust that the Board can be an 'insider' to the business operation. This does not mean the CEO involves the Board or individual Board members in day to day decision making, but rather that the CEO can be open, honest and direct in sharing information with the Board about the state of the business.

A typical example - the status of a key customer opportunity -- the CEO reports pursuit of a key customer, the Board gets all excited by the prospect of securing a marketable named account and starts to document the CEO commitments made (e.g. close date). The CEO becomes hesitant to report back that delays have occurred and tries to deflect the Board to keep its attention on other issues. The Board keeps demanding the opportunity be closed despite the realities of a young product, market or sales leadership. The opportunity delays or goes away for reasons often out of control of a startup company, the CEO does not report to the Board the facts of the situation. After a few of these, the Board no longer believes the CEO can forecast opportunities and the CEO no longer believes the Board understands the realities of the sales process in their market. The CEO stops reporting anything uncertain (which is usually most things), preferring to wait for key opportunities to fully close before saying anything. The Board no longer believes the company is going to achieve its objectives and starts to look at ways costs can be reduced to preserve valuable cash runway. A mess on both sides. The CEO no longer treats the Board as an insider to the business, the Board no longer views the CEO as someone they can trust to run with the key objectives laid out.

The above example occurs in almost every young company. The CEO is often new to the sales process and the Board is often made up of only financial investors (versus experienced business operators). The product is new to the market and/or the market is new to the industry. A lot of uncertainties can exist, a lot of influences exist often out of the control of the company itself. The Board and the CEO have to trust each other, work as partners in navigating the bumpy road.

Communication

Many sections of InsideSpin are centered on communication as a key to success. So many aspects of a business are effected positively or negatively based on how communication is approached. The challenge with delegating authority is the level of trust that goes with it. If you don't communicate, authority can be used to create serious damage before something bad can be stopped. If you are not mature enough to hear what needs to be told, you won't. It's important to establish the right level of maturity and hence establish early on, effective methods of communication. Here are some key areas to focus on:

Write it down, define it -- when delegating authority, write down the parameters that both parties wish to have in place. For example, you may want to see monthly reporting as part of the delegated responsibility. The CEO should always take the initiative to define what will be reported and when so that the Board has a clear picture of what will be communicated. The Board has to provide more than a superficial analysis of what is reported or the CEO will quickly find the interaction of little value. The Board should also not change the requirements of what is reported each time they see a report. The CEO will resent that the rules of the game change every time the two parties interact (this is a common occurrence that drives most CEO's to distrust interaction with the Board).

Stick to it -- the CEO should report consistently and comprehensively to the Board. It's a fallacy to think that there is no need to communicate if there is no progress to report. Reporting that no progress has been made is itself progress as it helps both parties realize that perhaps certain assumptions of progress were incorrect and need to be adjusted. A lack of reporting immediately starts to look like information is being hidden, organizational incompetence is occurring or simply a lack of respect for the other party is occurring. Stick to an agreed upon reporting rhythm and report what needs to be reported on the agreed upon schedule even if there is nothing to report.

Comment on it -- the Board should ALWAYS reply to the CEO when communication is received. This is the only way the CEO knows the Board is receiving and hopefully absorbing what is prepared. The Board has to keep in mind the CEO is spending valuable time on communication with the Board so making that time seem wasted by not acknowledging what is received is a form of professional rudeness. Ideally one Board member is appointed to reply to the CEO. It is challenging for the CEO to receive many in dependant replies from Board members as it takes time to reconcile what is the official Board reaction versus that of a specific Board member. This role often falls to the Chairperson or perhaps the Board member with the appropriate operational background. The Board should communicate amongst itself to form opinions to feed back to the CEO.

Guidelines and Rules

One of the areas I am always frustrated with when involved with a Board of Directors is the lack of detail often provided to define the guidelines and rules that define authority. There are of course many common sense things that do not need to be formally defined, but there are also many aspects of business performance and expectations that should NOT be left to common sense assumptions. My best moments of success revolve around having thought through what to do in some future situation -- well before it might happen. This brings a sense of calmness to a situation that is otherwise treated as a crisis if no advance thinking or planning was done to foresee its possibility. I always want to be able to operate to the parameters of an agreed upon plan, this is the essentially the only way to operate without the need for continued operational discussions with the Board. Time with the Board gets spent on strategic items versus short term tactical operational items. Life is good.

A Board and the CEO should work together to define the parameters of authority. Ideally, the CEO would take the lead before the Board does so as to control the approach taken and make sure it lines up with how the CEO would like to operate the business towards a point of success. The Board may pick apart elements of the CEO's proposal but at least the Board is discussing the CEO's proposal and not the other way around. In either case, the end goal is to have a set of guidelines and rules that define authority that both parties can agree to. Here are two simple examples:

Defining guidelines and rules should occur in the very first year of the business. It's not something you want to start 'when you are bigger', it's harder to change the habits of everyone involved once the business is a going concern. Use the small size of a new business to practice these procedures so that they grow with the business instead of becoming a key element of a change management process.

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