The Agreement Every Board and CEO Should Make
Here's a document that eliminates a common stressor between CEOs and boards
When there is tension between a CEO and their board around decision making, the issue is almost never the content of the decisions. Usually, it’s ambiguity about who makes the decisions in the first place.
This ambiguity can drive CEOs into one of two failure modes. They might check with the board on every little thing, slowing the company down and signaling insecurity. Or they might act unilaterally on issues the board expects to weigh in on, eroding trust with the group that holds the CEO’s career in its hands.
I’ve sat on both sides of this table for a long time now, as a CEO reporting up, and as a board member watching someone else navigate it. And in so many companies, the real rules of engagement between CEO and board exist nowhere except in memory and supposition. Ask a CEO how much they can spend without checking with the board, and you will likely get a pause before you get a number. Ask one of their directors the same question and you may get a different number.
The governance paperwork is there, all the bylaws, the shareholder agreement, the technical board consent requirements, etc. Those matter, but they only cover the small number of decisions reserved to the board by law or by charter. They say nothing about the dozens of consequential judgment calls the CEO makes every month. That is the territory where trust is actually built or lost, and there is usually little specificity on where the boundary between CEO authority and board authority lies.
To close this gap, I recommend creating what I call a Board-CEO Operating Agreement.
This is not a replacement for any governance material, nor is it a legal document. Rather, it’s simply a written understanding between the CEO and the board about how the company will be run and how decisions will be made.
The agreement is usually only a page or two long. Every company already has assumptions about spending authority, hiring decisions, strategic initiatives, and the way the CEO operates the business. The problem is that those assumptions often live only in people’s heads. Writing them down forces everyone to discover where they already agree and where they don’t.
This way, you’re not left trying to get everything rubber stamped or put in a situation where the board is thrown off by you getting out over your skis—at least as they see it. There are few things boards hate more than surprises, and if you regularly walk into board meetings with news of decisions you made that the directors think they should’ve had a say in, you’re asking for trouble.
Here is a sample Board-CEO Operating Agreement showing what this looks like. Below the sample, I’ll give you some thoughts around how to build each section.
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I. Decision Authority
The first section of the agreement establishes four levels of decision authority. Every recurring decision in the business should fall into one of these categories.
Decide Alone. The CEO makes the decision without involving the board.
Decide and Inform. The CEO makes the decision, then reports it to the board.
Recommend and Approve. The CEO develops a recommendation and the board approves it before action is taken.
Board Reserved. The decision belongs to the board under the company’s governing documents.
Those four categories become the common language between the CEO and the board. Instead of debating every issue from first principles, you simply decide which category it belongs in. Over time, both sides develop a much clearer understanding of where the line actually is.
II. Decision Guidelines
Once you’ve agreed on the authority levels, work through the recurring decisions the CEO faces and assign each one to a category.
As you can see in the sample Operating Agreement, the Decision Guidelines are specific. They include dollar thresholds for spending, guidance around hiring executives, examples of strategic decisions that require board involvement, and the types of governance decisions that always remain with the board. The goal isn’t to anticipate every situation the company will ever face. It’s to eliminate ambiguity regarding the decisions that come up repeatedly.
Whenever possible, use objective criteria instead of subjective language. “Material expenditure” sounds precise until everyone around the table realizes they have a different definition of “material.” A dollar amount doesn’t leave much room for interpretation. The same principle applies to job levels, legal exposure, financing decisions, or anything else that tends to create uncertainty.
This discussion is often the most valuable part of the exercise. CEOs and directors frequently discover that they have been operating with different assumptions for years. It is far better to discover those differences while drafting the agreement than during an acquisition, executive termination, or capital raise.
III. Operating Commitments
The next section of the agreement outlines the basic operating system the CEO intends to follow.
As you can see in the sample, this isn’t a detailed operating manual. It’s a brief summary of the management cadence the board can expect to see. In the Chief Executive Operating System, this includes practices such as maintaining a current strategic plan, conducting quarterly planning sessions, holding regular executive team meetings, reviewing executive talent, maintaining succession plans for key leadership positions, and supporting an annual 360 review of the CEO.
The purpose is simply to establish the rhythm of the business. Directors should understand how the company is going to be managed, just as the CEO should understand how the board expects to govern. Putting those expectations in writing gives both parties a common point of reference as the company grows.
IV. Communication Expectations
A large part of the CEO’s job is communication. In fact, it’s basically the whole job. So it’s a good idea to let the board know what information they can expect to receive, when they will receive it, and how significant issues will be communicated.
As you can see in the sample agreement, this section doesn’t attempt to document every possible scenario. Instead, it establishes a few basic expectations. This section is also a good place to establish expectations in the other direction. If the CEO needs timely feedback on acquisitions, financing, or other board-level decisions, those expectations should be stated as well.
The completed Board-CEO Operating Agreement eliminates a surprising amount of uncertainty. Once these expectations and guidelines are written down, both sides spend less time guessing and more time focusing on what they are there to do: build and run a healthy business.