Executive Sessions: A Best Practice
By Douglas V. Austin
One of the requirements for public corporations espoused by the Sarbanes-Oxley Act of 2002 (SOX) is that corporate boards of directors, including publicly traded financial institutions, must hold regular executive sessions of the board. These sessions must be held minus the chief executive officer, who is the chief administrative officer of the bank, even though he or she may be a director of the institution.
Most CEOs get nervous when the outside board of directors decides to talk about any subject without the president/CEO in attendance. Regardless of the circumstances, the CEO is certain that the reason for the meeting is to fire his or her fanny!
There’s an old joke about a psychiatrist telling a patient, “Don’t worry about having an inferiority complex, because you are inferior!” In the case of presidents/CEOs who are not allowed to attend executive sessions: “Don’t worry about having an insecurity complex; you are insecure!”
If the board of directors has held executive sessions only every five or 10 years, with the consistent outcome of either retiring or firing the president, it is understandable why the CEO would take a dim view of such sessions. I have a treasure chest of anecdotes about panicked phone calls from presidents. One bank president drove by a director’s home and found six other directors’ vehicles parked there. He was certain they were meeting to plan his demise and asked me to find out what was going on.
It turned out that the board members were merely playing poker; the CEO wasn’t invited because he frowned on gambling. There was no ulterior motive involved, and in fact the board members liked the president and respected his abilities. On the other hand, the president suffered from paranoia – which was not good for the bank in the long run. Several years later, the president was retired by the board of directors when the liability of his paranoia outweighed his performance assets.
As SOX tells us, it is a best practice to hold executive sessions on a regular basis and to exclude the president/CEO. Utilize such executive sessions to discuss matters among the directors (sans the president/CEO) that are important to the overall financial condition and performance of the institution as well as its interworkings, interpersonal relationships and the future of the financial institution.
Over the years, a tradition has developed to appoint CEOs to the board of directors not because they should be equals to outside directors, but because they believe they can control the institution from inside the board. This situation is especially true if they weasel their way into becoming chairman of the board, plus president/CEO of the bank and holding company alike.
If the president is also the chairman and chief executive of the financial institution, the board of directors has no separate checks and balances. The result is a weak, powerless board of directors and a strong, controlling president/CEO. This scenario would not be considered a “best practice” under any normal corporate governance mechanism.
Thus executive sessions should be held on a regular basis. “Regular basis” does not mean every month; it doesn’t even mean every quarter. SOX was designed primarily for publicly traded industrial-type corporations whose boards of directors tend to meet only quarterly rather than monthly. Executive sessions should be held on a regular basis, with the board of directors determining what is regular.
For the first year, the executive sessions should be held quarterly (i.e. the board meetings of March, June, September and December). After a year, appraise the situation and decide whether to hold executive sessions every two months or even every six weeks. This schedule would allow the board the opportunity to call an executive session at any time.
The quid pro quo for regular executive sessions of the board without the attendance of the president/CEO is the recognition that such sessions are not being held to poke pins into a presidential voodoo doll. An executive session is held for the free exchange of conversation, ideas, criticisms and overall planning for the financial institution that deals with (or without) the president and senior management.
The executive sessions should concentrate on constructive criticisms of what the president does or does not do, what the management and staff do, and what is not being done appropriately. The sessions should also concentrate on what the financial institution is doing in comparison to the competitive marketplace.
Any topic is open for conversation during an executive session. This is the time when rumors, allegations or innuendoes should be explored in a constructive yet confidential manner to determine whether a formal investigation should take place, or what should be done to protect the financial institution.
A director who has received confidential information has a duty to disclose it to the other directors. “Information” could be a rumor, an allegation by one staff member against another, an allegation of fraud by the chief financial officer or the president, sexual harassment concerns or unethical behavior by a senior officer or board member. The types of problems are limitless and should be treated prudently by the board of directors. Having the freedom, in confidence, to decide what may be a problem or to utilize the resources of the financial institution to investigate a potential problem and nip it in the bud may make the difference between a solution and severe litigative pressure.
Should board members consider executive sessions as best practices, or simply as a nonsensical requirement of SOX? If your CEO tells you it is not necessary to hold executive sessions, then you definitely need to hold them!
A secure, competent president/ CEO should not be concerned whether the board holds executive sessions. In fact, presidents/CEOs should be pressuring boards to evaluate their performance on an annual basis, compensate them fairly and provide them with appropriate stock options and the comforts they deserve.
On the other hand, if the president/CEO is insecure about the board holding executive sessions, then there is probably a good reason to hold executive sessions to determine what is behind the situation. This would be especially true if the president/CEO is 60 to 65 years of age and there is no one in the upper ranks of management who could take over if the president became ill, disabled or died. The more the president/CEO complains about executive sessions, the more your board needs them.
Executive sessions can be a nonsensical requirement if you treat them that way. But if you give them a chance, you will discover that they can permit better supervision and monitoring of the activities of your financial institution. Executive sessions may not be a best practice, but they are a much better practice than no executive sessions at all.
The board needs the freedom to communicate among its members without putting the fox in with the chickens! The fox (president/CEO) needs to leave the chicken coop (board) so that you can operate in an appropriate supervisory and oversight manner. Then the board can work in concert with the president/CEO to run the administration of the financial institution appropriately.
Douglas V. Austin is chairman and CEO of Austin Financial Services Inc., based in Toledo, Ohio.