For simplicity the term ‘CEO’ will be used in this Director Q&A to refer to both positions.
The legislative basis for this position is sec 201J of the Corporations Act 2001, which provides that the directors of a company may appoint one or more of themselves to the office of managing director of the company for the period and on the terms (including remuneration) as the directors see fit.
What are the CEO’s role and responsibilities?
The CEO is the head of the executive team and manages the day to day operations of the organisation, its people and resources. The CEO implements the strategy approved by the board and ensures that the organisation’s structure and processes meet the strategic and cultural needs of the organisation.
The board’s most important role is to appoint and work with the CEO. In practice the two are mutually dependent. Boards rely on CEOs to provide input into strategic development, implement strategy, communicate management’s perspective and alert the board to growing issues. The CEO relies on the board for clear direction, mentoring and support.
This relationship is crucial to the organisation’s success. It can be hampered by a lack of clearly defined responsibilities/delegations or by either party stepping outside of those agreed terms. This information should preferably be captured in writing, either in the employment contract or a separate agreement.
Specific CEO responsibilities may include:
- Developing and recommending business plans for the board’s consideration;
- Submitting reports, budgets and financial statements to the board;
- Implementing all approved plans, policies and programmes and achieve agreed targets;
- Overseeing the financial management of the organisation;
- Maintaining awareness of the business, economic and political environment as it affects the organisation;
- Overseeing the effective operation, administration and development of the company;
- Protect and enhance the image and reputation of the company;
- Ensuring compliance with legal and regulatory obligations.
What is covered in terms of appointment and executive service agreements?
The terms and conditions of the CEO’s appointment plus the extent of the CEO’s authority will be reflected in either a letter of appointment signed by both parties or in a more formal executive service agreement.
Typically this will cover the CEO’s:
- Duties and responsibilities;
- Length of contract and conditions for reappointment;
- Structure of remuneration package, including incentives and other financial benefits;
- Entitlements to leave and any special benefits;
- Entitlements to employment in the case of a takeover or merger with another company;
- Special requirements such as prohibition from having interests in competing companies;
- Frequency of performance evaluations;
- Commitment to abide by company and regulators’ rules;
- Commitment to always promote the interests of the organisation and not to engage in any conflicting interests;
- Obligation to return all organisational information to the organisation when leaving;
- Confidentiality clauses;
- Circumstances in which termination may occur, and associated procedures and entitlements.
What are the advantages of clear board expectations and delegations of authority?
The process of formalising the CEO’s powers and responsibilities in writing will help the board to clarify its expectations. At the same time the board’s responsibilities should be made clear in its own charter. These documents are meant to give both sides freedom to act within boundaries, rather than to constrain.
Conversely, not defining the boundaries of the CEO role means that a CEO has to regularly approach the board for approval of activities and plans. This is an ineffective use of time, does not encourage high performance and misuses the board’s skills, knowledge and experience by making them a checker rather than an adviser. By proactively communicating expectations, the CEO is free to work within these boundaries to achieve organisational goals and the board is not left to make decisions on the run.
Perhaps the most important clarification concerns matters which must be referred to the board for decision or approval. Because directors have specific duties under the Corporations Act 2001 they will retain control over some matters. This will vary from organisation to organisation.
Examples of delegations that boards typically make to CEOs include:
- Management of major operational activities;
- Financial management limitations, e.g. on capital expenditure and operational expenditure;
- Senior staff appointments;
- Writing contracts;
- Role in strategic planning.
Delegations should be reviewed regularly as a matter of course but may need extra revision if unanticipated situations arise. For listed companies, the obligations of the board regarding continuous disclosure to the ASX about market sensitive matters requires clear delineation and understanding.
Ultimately, it should be noted that directors are responsible for the exercise by the delegate of any powers delegated by directors to that person, subject only to the operation of the "reasonable reliance" defences under s 190 of the Corporations Act 2001.
What should a CEO report to the board?
Expectations regarding CEO communication with the board e.g. frequency and format, are also important. Generally the CEO writes a report for inclusion with the board papers for each board meeting and will probably speak at the meeting. To use this opportunity effectively the CEO should focus on the role of the board – governance and oversight – and use the board’s considerable expertise to assist with high level issues. Hence the CEO should concentrate on governance-level concerns, not operational matters, and ensure that the board receives the report in time to consider it fully.
The board should think of the CEO’s Report as “for information”, with matters requiring decisions or substantial discussion being better placed in separate agenda items. The CEO may need to refer matters to the board at other times. In these cases, the chairman is the main contact point.
Do CEOs generally sit on boards?
CEOs as executive directors are relatively rare in the non-profit sector but they are common in the corporate sector, where they act as head of the executive team plus sit on the board of directors. Being an executive director may appear to be a conflict, as the responsibilities of governance and management are different. The CEO as executive director is both an employer, serving shareholders, and an employee, serving the board.
There will be times when it is important for the board to meet without any management present. Executive directors in practice may also absent themselves from parts of board meetings to deal with real or perceived conflicts of interests. Executive directors are not usually present for board proceedings when the CEO’s performance or remuneration are being discussed or for board meetings with the external auditor. Alternatively the board can be given an opportunity to decide whether an executive director should vote on matters where they have conflicts.
Is the CEO a director or officer for the purposes of the Corporations Act?
Whether an executive director or simply the chief executive, CEOs are considered to be either directors or officers for the purposes of the Corporations Act.
The term ‘director’ is defined in section 9 of the Corporations Act 2001 to be mean anyone:
- Appointed as a director or an alternate director who is acting in that capacity, regardless of the name given to their position;
- Not validly appointed as a director but acting in that position anyway or a person with whose wishes or instruction the directors are accustomed to act.
An officer of a corporation is defined in the same section as:
- A director or secretary of the corporation;
- A person who makes or helps to make decisions that affect the whole or a substantial part of the business or who may significantly affect the company’s financial standing;
- A person in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation);
- Receivers, administrators, liquidators, trustees.
Whether the CEO is a board member or not, the CEO would be classed as an officer at the very least. This means that he/she is liable under the Corporations Act 2001 for his/her decisions and actions.
Should a CEO sit on the board of another organisation?
This will be determined by individual boards as they see fit. Specific requirements may be outlined in the executive service agreement. According to the Corporations Act 2001, the CEO has legal responsibilities to act in good faith in the best interests of the organisation and for a proper purpose, to act with care and diligence, to avoid conflicts and not to misuse his/her position or information obtained in that position. To fulfil these duties, a CEO will need to devote sufficient time and have regular performance appraisals.
With this in mind and remembering that a CEO position is a full time executive, the board will place the needs of the organisation first in making its decision. For example, the board of a start up company or an organisation experiencing significant change may decide that the organisation needs the CEO’s full attention and disallow any outside directorships.
R P Austin, H A J Ford, & I M Ramsay, Company Directors: Principles of Law and Corporate Governance, LexisNexis Butterworths, Sydney , 2005.
R Baxt, Duties and Responsibilities of Directors and Officers, (20th ed), Australian Institute of Company Directors, Sydney , 2012.
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Updated January 2013
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