Ever since the Sarbanes-Oxley Act of 2002 and the accompanying new rules from the major stock exchanges, boards of directors of publicly held companies have had to have a majority of independent directors. And many more today also have lead directors, even at companies where the CEO is also chairman of the board.
All well and good. But directors tell me that some hazards are cropping up in how boards manage executive sessions -- closed sessions held without the CEO and other members of senior management present. Among the problems I hear about frequently:
- One danger is that independent directors, realizing that they will be having an executive session after a regularly scheduled board meeting, may pull their punches and not engage in the full and robust discussion that is the hallmark of healthy board-CEO relationships. Obviously, it's easier to avoid delicate subjects in front of the CEO, who may have played a role in recruiting the director in the first place.
- When in executive session, independent directors may seize upon a relatively minor issue and magnify it so that it becomes a larger problem than it really is. The meetings become old-fashioned gripe sessions. A good lead director will help maintain a healthy balance to the meeting.
- Perhaps the single most sensitive issue is, what does the CEO learn about what was said in executive session and when? It's a mistake for directors to have an executive session and then just go home. That creates the potential for misunderstandings between them and their CEO.
Maintaining the right relationship between a CEO and board is one of the most important issues in corporate governance today. Executive sessions should be part of the solution, not part of the problem.