CEO Duties — Some Assembly Required?

Big Red Car here.  Early start today.  Big doings.

So The Boss is meeting with a VC friend.  Yes, The Boss is friendly with some VCs.  He does almost always side with CEOs but VCs are not all bad.

“Some of my best friends are VCs….”  [Haha, Big Red Car, STFU already.  Get on with the story.]

So they get into a conversation about the duties of CEOs and Boardmembers.  This blog post will focus on CEOs.

The big question is — what are the duties of a CEO and how are they defined?  Seems like an easy enough conversation, no?  The discussion is not about the nature of the “duties” but more something like — to whom does the CEO have a duty and at what level?

What are the standards

The standards are pretty clear as a matter of both definition and law.  Young CEOs may be confused and VCs may not take much time to think about the issue but the law is pretty damn clear on the nature of CEO duties.

One you take on that title as CEO — remember you are the CHIEF Executive Officer — your duties are defined by fairly rigorous concepts.

Duties

The CEO’s duties are typically thought of as being:

1.  Defined by agreement — such as in an Employment Agreement;

2.  Customary for the position; or,

3.  As directed by the Board of Directors from time to time.

In reality, CEO duties are a combination of “all of the above”.

Another important point is that CEO duties may be specifically limited in some manner — the CEO may be forbidden from doing certain things or certain things may require specific prior authority.

It is also a good idea to take a look at the company’s Articles of Incorporation and By Laws before launching into any final thoughts on the subject.

The CEO and the Board should have a clear definition of CEO duties at all times.  The best way to do this is in writing in an Employment Agreement.

Dedication or level of effort

It should be clear to the CEO and the Board as to the level of effort that is required by the CEO in the discharge of his duties.

1.  A CEO could be a “part time” CEO.  This is probably the most difficult type of level of effort to adequately define and is fraught with peril when we get to discussing the CEO’s fiduciary duty to the shareholders of the company.

2.  A CEO’s level of effort might be defined by some prescribed “specific amount of time” to be dedicated to his duties.

3.  The kissing cousin of the prescribed specific amount of time might be an allusion to something like “substantially full time”.  The Boss and the Big Red Car and the VC hate this notion.  It is a silly idea and it is confusing.  Nonetheless, it is a recognized level of effort.

4.  The gold standard is “full time dedication” as the primary and perhaps only business effort of the CEO.  As a startup CEO, this is you, Old Sport.  When this standard of dedication is used other implications echo this level of effort.

When the echo chamber is silent on the issue of dedication or level of effort — particularly when you are using OPM — the default position is full time dedication as the primary and only business effort of the CEO.  [CEOs and Boardmembers and VCs — do not let this be decided by default.  Act and act with precision to define the level of effort.  Please.]

Performance standard

In much the same way that there must be clarity on the issue of the dedication or level of effort of the CEO, there must be an understanding as to the performance standard — how hard do you expect the CEO to work?

1.  The CEO may be tasked to discharge his duties by employing his “best efforts”.  This is a very high standard.

2.  The CEO may be tasked to discharge his duties by employing her “reasonable best efforts”.  This is a high standard but not as intense as best efforts.

3.  The CEO may be tasked to discharge his duties as is “customary for the position”.  This is also a very high standard because arguably being a CEO of a startup or a public company has a very high standard that is customary.

4.  The CEO may be tasked to discharge her duties in a manner that is “faithful and diligent”.  [WTF does that mean, Big Red Car?  Indeed sayeth the Big Red Car.  WTF does that really mean?]

5.  The CEO may also be required to acknowledge that the discharge of his duties creates a “fiduciary obligation” — an extraordinarily high standard and one that can be enunciated in conjunction with other levels of performance.  [The Big Red Car believes that a CEO always has a fiduciary obligation to shareholders as both a matter of law and practice which is particularly keen in public companies in which the custom is well established.]

A huge word of caution — moreso than any other aspect of this discussion, these are legal standards and you should chat them out with your favorite lawyer.  Know what you have gotten yourself into, Old Sport.  Board members, do not allow a CEO to be confused as to your expected level of performance.

What else can you do?

The above discussion leads to a logical question — as the CEO what can I do or what else is forbidden to be done.

In defining the duties of a CEO, it is also important to identify what other duties are permitted such as board service within and outside the industry, charitable board activities, time consuming outside interests, dangerous personal pursuits, speaking engagements and industry activity.

CEOs need to be extremely proactive on this issue.  If you are on a board or engaged in a time consuming endeavor when you accept the position as CEO, make damn sure that it is disclosed and approved before you decide to take the job.

Disclosure is the medicine that cures all such problems.  Be clear and forthright as to what competes for your time given your level of performance and performance standard.  If you are a “part time” CEO, this is a different consideration than a full time CEO.  In both instances, disclosure is your best friend.

Boards, are you going to allow your CEO to fly a private airplane while discharging his duties as CEO?  This is both a cost and a danger consideration.  You have just created a potential catastrophe for the continuity of the enterprise.  Eyes wide open, Board.

CEO as Director

The CEO as Director creates a bit different issue.  A Director is always a fiduciary and has a duty not just to the shares he owns but to all shareholders.  In fact, there is an obvious and serious conflict among what is good for the CEO’s shares, what is good for the Directors’ shares, what is good for the remaining shareholders and what is good for all shareholders collectively.

This is not a trifling consideration.  You could be performing perfectly as the CEO — crushing it as you can do when you are at your best  [Yes, the Big Red Car knows that you are a business assassin capable of killing your competition, dear beloved CEO.  STFU, Big Red Car, and get on with it.] — and then you run afoul of your fiduciary obligation to all shareholders.

CEOs, if you are a Director you have a duty to all shareholders and this is your primary duty as a fiduciary.  Do not overlook this consideration.

What is customary?

Many CEOs are brought into an organization as a result of a change in management or as a result of the resignation of a former CEO.  When this happens, it may take some time to execute an Employment Agreement which defines many of the subjects discussed above.  It may take a bit of time to negotiate the Employment Agreement and the new CEO may want a chance to see how the Board operates before launching into negotiations.  All logical and likely to actually happen.

That puts both the CEO and the Board into the position of relying on what is “reasonable and customary” as evidenced by the company’s prior practices.  If the prior CEO had an Employment Agreement that is likely to define what is reasonable and customary.  It certainly demonstrates the will of the Board.

A new CEO should read the prior guy’s Employment Agreement and be informed that absent changes in levels of compensation that is likely the deal you will end up with.

In the absence of a prior CEO Employment Agreement, then the CEO and the Board are left in a bit of a No Mans Land.  Not a good place to wander for long as it is filled with mine fields.

Fatal problems

There are some fatal problems which should at least be identified and acknowledged.

There are some things that a CEO can simply get fired for — a “for cause” firing.  Criminal activity of any sort.  Inappropriate relationships in the workplace or elsewhere.  Reflecting discredit on the company.  Financial irregularities.  Falling short of the truth.

The list can be endless.  These things should be spelled out in the Employment Agreement under the heading “Termination for cause”.

There are also some other issues that may creep up from time to time — like who owns a business opportunity that is presented to the CEO?

As a general standard, when a CEO is engaged in an industry, particularly when employed by a Board discharging its fiduciary duty to the shareholders, any business opportunity presented to a CEO belongs to the company.  You are the CEO of that company 24/7 and when you are answering a phone call or an email, well, dear CEO, you are the CEO.  Even in your pajamas you are still the CEO.

This happens often in the real estate industry where a company may be essentially focused on office buildings and a great multi-family opportunity comes over the transom.  Who owns it and why?

This is very well settled law in partnerships and public companies.  Partners have a strict fiduciary duty to their partners and could only pursue such an opportunity independent of their partners with their partners’ permission.  Likewise public companies wherein your fiduciary to shareholders trumps everything.

When the level of effort and the standard of performance are overlaid on the opportunity, these considerations may already trump the new opportunity and provide clear guidance as to how such matters are to be dealt with.

Again, disclosure is the antiseptic that ensures clarity and fairness to CEOs, Boards and shareholders.  CEOs be forewarned this is also where your fiduciary duties as a Director immediately come into play.  You cannot pick and choose when to wear your management and Board hats.  They are on all the time.

You may be tempted to be a bit ambivalent with your CEO hat on — the Big Red Car thinks not, mind you — but that Director hat is a bit more snug and you have both a duty of disclosure to other Directors and an ironclad fiduciary obligation to ALL shareholders.  This is not a close call.

In public companies, some of these fatal problems can constitute very serious securities fraud transgressions and if you think you can sweet talk your Board into submission, good luck with the US Securities and Exchange Commission, FINRA, your State Securities Board and the US Attorney’s office.

The best practice is to avoid these kind of conflicts of interest.  Life is too short to play with fire.  Don’t do it.

The ultimate solution

The ultimate solution to all of this discussion is a well crafted and negotiated Employment Agreement in which each and every issue is dealt with with precision and clarity.

Boards are cautioned that failing to spell these things out and allowing them to just drift may justify an accusation of mismanagement and perhaps even misconduct.  You have a similar fiduciary duty to the shareholders to ensure that the CEO is fairly chosen and well employed.

But, hey, what the Hell do really know anyway?  I’m just a Big Red Car.  Now The Boss has been a CEO of public and private companies for over 33 years, so he knows some of this stuff, but, me?  Nahhh!  Be good to yourself, you’ve earned it.