The success of a start-up hinges not only on innovative ideas and cutting-edge technology but also on the strength of its leadership. At the forefront of this leadership dynamic is the crucial relationship between the Chair of the Board and the CEO.
In my work as a Chair, CEO and Board Advisor I have seen the good, the bad and the ugly of a Chair – CEO relationship.
This partnership, when well-nurtured, can be the driving force behind a start-up’s growth and resilience. If the Chair-CEO relationship becomes toxic, then the company is at risk.
Before looking at practical steps in establishing a fruitful Chair-CEO relationship it is worthwhile understanding the two major theories of corporate governance:
The Agency Theory and the Stewardship Theory.
The dynamics between the Chair and the CEO is influenced by which governance model is the predominant one.
The Agency Theory explores the relationship between principals (shareholders/investors) and agents (founders/executives) in an organisation. Investors (principals) invest in start-ups and rely on the founders and executives (agents) to manage the company. The challenge is to design governance structures that align the interests of investors and entrepreneurs, ensuring effective monitoring and performance incentives.
The Stewardship Theory assumes that managers (stewards) are naturally inclined to act in the best interests of the organisation and its stakeholders. Stewardship implies a relationship built on trust and collaboration between owners and managers. Stewards see themselves as custodians of the organisation’s resources and work collaboratively with owners to achieve common goals.
At its extreme: the Agency Theory is concerned with minimising potential agency costs (alignment, information asymmetry), relying on the control by an independent board. Stewardship theory, in contrast, relies more on trust than control, and is concerned with maximising joint performance between the executives and the Board, even suggesting CEO duality (CEO could usefully take the role of the Chair).
The university of Cambridge and Oslo published a very interesting study related to this topic.
There can be regional differences (US/UK tend to be leaning more towards the agency vs. the Scandinavian countries more towards the Stewardship model) as well differences based on the stages of the business (early start-ups vs. post funding rounds).
Despite these tendencies I have not experienced business adopting these opposing theories at their extremes. They both provide helpful frameworks for companies to design corporate governance structures best suited for their circumstances, including for framing the Chair – CEO relationship.
Here are some best practices to foster a positive and collaborative dynamic between the Chair and the CEO:
- Clear Roles and Responsibilities: Define and communicate clear roles and responsibilities for both the Chair and the CEO. A well-defined division of duties helps minimise ambiguity and fosters accountability. Agreeing on Terms of Reference for the Chair is a good starting point.
- Shared Vision and Strategy: Develop a shared vision and strategy for the organisation. This might seem obvious. I’ve however witnessed too many times the detrimental consequences the misalignment between the Chair and the CEO related to long-term goals, key performance indicators, and the overall direction of the company can cause. Only a shared understanding builds unity and commitment.
- Open and Transparent Communication: Establish a culture of open and transparent communication. Agreeing on regular communication channels, such as one-on-one meetings, board meetings, and strategy sessions, are essential for aligning visions and addressing concerns promptly. This is the basis of cultivating a relationship built on mutual trust and respect.
- Clearly Defined Expectations: Articulate expectations from both parties. Understanding what the board expects from the CEO and vice versa is crucial for avoiding misunderstandings and ensuring that both parties are working towards common goals. Implementing regular performance evaluations for both the Chair and the CEO is very a helpful process to measure alignment as well facilitating professional growth.
Fostering a strong relationship between the Chair and the CEO is an ongoing process that requires commitment, communication, and a shared dedication to the success of the organisation. These best practices help building a collaborative and effective partnership laying the foundations for a strong company culture built on trust and respect.