512 Making Key Strategic Decisions
BOARD MEMBER RESPONSIBILITIES
In the following sections, we describe the specific activities for which the
board is responsible. In this section, we describe the responsibilities of indi-
vidual board members.
Board members must not personally buy stock or sell their own stock im-
mediately after they learn of important developments at board meetings or
other activities. Examples of relevant developments include current estimates
of earnings, change in dividend policy, a decision to acquire another company
or to buy back stock, and changes in senior management. The Securities and
Exchange Commission and rules of the stock exchanges impose an “earnings
blackout” period of one or two days in which such trading is prohibited.
Board members and management must not disclose any of these events to
a selected group of interested parties. For example, they must not make a tele-
phone conference call to a selected group, send an Internet message to them, or
disclose information at a meeting of such a group. When this information is dis-
closed, it must be made available at the same time to the general public. These
rules were significantly tightened in 1999 and 2000 by SEC Regulation FD.
RELATION TO THE CHIEF EXECUTIVE OFFICER
Their titles indicate that the board of directors “directs” and the chief execu-
tive officer “executes” the board’s directions, but these terms are not an accu-
rate description of the roles of these two parties. In the majority of companies,
the chief executive officer is also the board’s chairman and is the principal ar-
chitect of policies. Executing these policies is indeed a primary responsibility.
The CEO is truly the “chief.”
The board selects the CEO and, therefore, wants to give the CEO its full
support. The CEO is accountable to the board and may be terminated if the
board decides that the individual’s performance was unsatisfactory.
The appropriate relationship is one of trust. The board must believe that
the CEO is completely trustworthy, provides the board with all the informa-
tion it wants and needs, withholds nothing, and doesn’t slant arguments to sup-
port a preconceived position. The CEO, in turn, must believe that he or she has
the full support of the board.
Appraising the CEO
A board’s major responsibility is to appraise the CEO. If performance is below
expectations, there are two possible explanations: (1) The CEO is to blame, or
(2) extraneous inf luences are responsible. In most cases, both factors are in-
volved, and the directors have the extraordinarily difficult job of judging their
relative importance. If they conclude that the CEO has made an incorrect de-
cision, they may suggest a different course of action. More likely, however, they