Company success starts at the top

When the Companies Act addresses the issue of a company’s management, it requires a company is managed by, or under the direction and supervision of, a board of directors. No mention is made of a chief executive officer. Under the Act, a board of directors is required, a CEO is not.

A board has the legal capacity to directly manage a company without employing a full-time manager or set of executives. Where this does occur it tends to be characterised by smaller, closely held companies (such as family businesses) where there is little distinction between shareholders and managers. Typically, there is a managing director who works in the business fulltime and is the de facto CEO. The more common reality is a board which meets monthly, or less often, simply cannot manage a company requiring day-to-day attention. The company is thus managed by a CEO and executive team under the direction and supervision of a board of directors. The CEO becomes the main portal through which a board exercises its direction and supervision.

The selection of the CEO by the board is therefore one of the most important decisions a board makes. The key question then for directors, is not only what makes a good CEO but also what makes a good CEO for their company. The consequences of a poor selection can be grave, and we have seen many instances both nationally and internationally of such decisions, particularly in the finance industry.
Equally, an excellent CEO can play a significant role in propelling a company to market leadership and sustained profitability, such as Jack Welch at General Electric, Ralph Waters at Fletcher Building and Michael Chaney at Wesfarmers.

So what are the desirable competencies that directors should seek in their CEOs? The relationship between the CEO and board must be characterised by trust and candour, so integrity and personal qualities of professionalism, diligence and sound relationship management are prerequisites. A keen understanding of corporate governance by the CEO, of his or her role vis-à-vis the board and the chairman, will ensure that a board becomes more of an ally, mentor, sounding board and supervisor as opposed to a disciplinarian or obstacle.

The CEO must provide leadership throughout the company and one key indicator of this is strategic thinking. A good CEO will understand his or her industry and markets, and be able to chart a profitable course for the company. The complementary and necessary skill to strategic thinking is the ability to deliver results. While a sound long-term view is essential, the capability to effect and sustain agreed short-term progress will keep all boards receptive and on side. This means not only can a CEO recognise hard decisions but also that he or she can make them and implement them.

The era of the individual superstar CEO is long gone. Individuals cannot force results through sheer force of will or intellect. Teams of people, well led, motivated and trained to pursue a common purpose will always out-perform individuals. A key trait then of good CEOs is the ability to energise and motivate others, and to nurture a collaborative culture and to ensure sound alignment between company goals and company structures, processes and values. Good CEOs are hard to find and harder to keep. If a board chooses wisely, it has fulfilled a basic governance need and the company’s chances of success are greatly enhanced.