How Boards and New CEOs Can Establish a Strong Relationship

Reprinted with permission from the National Association of Corporate Directors after originally appearing as a Directorship online article on October 16, 2024.

Of all the responsibilities boards have, none is more crucial than the selection and appointment of a new CEO, and over the past decade, the stakes have been raised to make the right decision. Russell Reynolds’s Global CEO Turnover Index analyzed the CEO turnover data of listed companies globally, including those in the S&P 500, FTSE 100, Nikkei 225, and S&P/ASX 200. It showed that since 2018 an average of 10.9 percent of new CEOs at the world’s largest listed companies failed to make it to the two-year mark; this has increased to 15.1 percent through the first quarter of 2024.

In light of this, boards should remember that they play a critical role in ensuring the successful transition of CEOs and, in turn, help lay the foundation for their long-term success. There is a mutual responsibility to ensure the board-CEO relationship gets off to a good start.

For many new CEOs, taking on the top job puts them in new territory with the board. Not only do the board and board-related activities consume 25 percent of a CEO’s time in their first year on average, according to Russell Reynolds Associates’ CEO Transition: Defining Success in the First 12 Months, but it is also a significant shift: having had a singular boss for much of their careers, CEOs must now deal with multiple bosses who are not involved in the day-to-day business. This is something that many new CEOs find to be a challenge.

Below are some of the common mistakes new CEOs make with their boards, how to spot them, and what directors can do to mitigate them.

Failing to Prioritize Building the Right Relationships With the Board

New CEOs have an abundance of responsibilities and they can struggle to prioritize their actions. The demands and noise from below will often be far louder than from above. However, one of the worst things a new CEO can do is ignore or avoid the board while they try to handle other important things.

This is a lesson that some CEOs realize too late. One transition regret shared regularly by new CEOs in the CEO Transition: Defining Success in the First 12 Month report is that they wished they had better used the board in their first couple of years. Over time, they get a greater sense of what the board can deliver and realize that, for a variety of reasons, they did not engage the board in the most effective way early on.

New CEOs and directors should start early to form a positive relationship, often before a CEO officially enters the role. For example, PepsiCo’s Ramon Laguarta spent significant time with his board early on, even though he had already been exposed to many of them during the 20-plus years he’d been with the company. “I tried to create a personal relationship and the space for them to tell me what they really thought about the business,” said Ramon in The New CEO, Lessons from CEOs on How to Start Well and Perform Quickly (Minus the Common Mistakes).

In early conversations with the new CEO, boards should make sure that relationship-building is encouraged as a priority and made easy. If it is not an early action on the new CEO’s to-do list, then directors should push for it.

Assuming Silence Is Approval

Often, experienced directors give new CEOs space and time. They step back to allow the CEO to find their feet, explore the organization, and form their own impressions. However, this should be made clear to the new CEO. Otherwise, the CEO may assume that a silent board means a job well done—and take the lack of comment, direction, or intervention as a glowing endorsement of their brilliance.

Ultimately, there is a fine line between being too involved and too absent when it comes to the relationship with new CEOs. CEOs need the board’s engagement, interest, and challenge to make the best decisions for the organization. Without that, they lose a valuable set of inputs that are built into the organizational design to benefit them.

Not Understanding the Board’s Role Versus Theirs

For some new CEOs, the distinction between their role and the board’s role is far from crystal clear. In some cases, it’s downright opaque. We have seen situations where the CEO had full support from the board and others where the CEO title should have been “general manager.”

Ultimately, new CEOs need to understand the scope and role of the board and what makes a board effective. Two of a board’s primary functions are to hire (and fire) the CEO and to approve the strategy. CEOs and boards who are not aligned on their roles and responsibilities will invite conflict, as will CEOs who think it is their job to manage the board.

One common gray area is designing versus approving the strategy. In our experience, the right answer is that the board approves the strategy, though it does not design it. Yet, we have seen many boards overstep the mark in terms of strategy, especially when there is a new or first-time CEO. This is an area where directors need to be extremely clear from the start, preferably from the interviewing stage: boards don’t design the strategy; CEOs do.

A commonly cited phrase is that good boards should have their “noses in, but hands out.” Conceptually this is true: directors should understand what is happening, what decisions are forming, and what challenges lie ahead of the organization while leaving the running of the business to the CEO and the senior leadership team.

It can often take the first year or so to find a workable rhythm between the board and a new CEO. This can be accelerated by the CEO dedicating the time to get to know each director individually. This involves forming the right relationships and establishing the “right to lead,” or the shared understanding of where the CEO’s role starts and stops and where the board’s role starts and stops. Tolerating ambiguous boundaries early on may set the relationship up for trouble for the future—something that every board has a vested interest in trying to avoid.

Russell Reynolds Associates is a NACD strategic content partner, providing directors with critical and timely information, and perspectives. Russell Reynolds Associates is a financial supporter of the NACD.

Authors

Margot McShane coleads Russell Reynolds Associates’ Board & CEO Advisory Partners in the Americas.
Rusty O’Kelley is a senior advisor and consultant to corporate boards and CEOs globally and coleads Russell Reynolds Associates’ Board & CEO Advisory Partners in the Americas.
Ty Wiggins is a trusted advisor to world-leading CEOs, helping them successfully transition into their roles to unlock business and personal success faster.