Bobby Chacko Discusses the 3 Steps in Due Diligence Before Taking a CEO Job

Bobby Chacko

March 22, 2021

3 Steps in Due Diligence Before Taking a CEO Job

Getting Offered a CEO Job Is Exciting but Bobby Chacko Knows that Everyone Must Do Their Due Diligence Before Taking a CEO Job.  Prepare for the unexpected

It is always exciting to get offered a CEO job; however, at the same time, the CEO is not the same position at every company. Most people think about the CEO as the boss of the company but the CEO has different powers at different companies. Therefore, it is important for everyone to do their due diligence before they decide to accept a CEO job and Bobby Chacko is here to discuss three of the most important steps that people have to take before signing on the dotted line. After all the buck will stop with you!

Step 1: Hire a lawyer to review and negotiate your contract and interview board on role expectations

Bobby Chacko wants all New CEOs to have a fair and level playing field for their value and effort to achieve objectives.  Often when you are recruited into a CEO role you have a lot of options to implement more structured diligence.  When promoted into the role of CEO quite the opposite.  Both scenarios require the same diligence.  There is a belief the chairman, board, secretary of the board or general counsel are capable and know what to do with the new appointment of a CEO.  Rest assured a lot of documents or procedures are either outdated or are relationship-driven based on culture.  Have a lawyer interview the board to be clear that what’s on paper matches what’s on the mind of the board for the expectations of an incoming CEO.  Test for blockers, issues, and governance.  The other aspect that a lawyer needs to vet is a CEO contract, a lot is cut and paste, and worse not a lot of thought has gone into it except how much less can I pay the incoming CEO and how do I justify it with comp analysis.  Not many Boards are populated with independent directors.  So assume an objective approach on compensation to the level of effort of the job.  Other things to consider are terms, non compete, and termination clauses, make sure you are protected.  Politics can weigh heavily to get rid of a CEO without having to pay them.  While the CEO has the power to hire and fire; demand to know who the untouchables are and why in the company, as boards have cronies in management ranks. This can be the singular reason for people to undermine the CEO.  Bobby Chacko wants CEOs to stand tall and state that if they are being brought in with a mandate, the company has to do things their way. If there are too many cooks in the kitchen, then the company is going to have a hard time staying together, acting as one, and moving in the same direction. This can hurt the future of the company and make it hard to run especially for turnaround mandates..

Step 2: Formalize an understanding of Bylaws of company and powers of CEO vs. Chairman vs. Board

Bobby Chacko also wants everyone to explore the exact powers the board has. For example, the board usually has the power to hire or fire the CEO; however, there is more as well. What other powers does the board have? Does the board have the power to make deals without the approval of the CEO? Does the board have the power to hire or fire people at the highest levels of the company without the CEO’s approval? Everyone who is thinking about taking a CEO job has to know what powers the board has when it comes to the company. Importantly what is the role of the Chairman with and without executive powers?  How does the flow of information work in executive sessions without a CEO?  What are the real powers of a CEO who is also a Board member and are the rights of the combined role adhered to?  From procedures of Board meetings to shareholder meetings to committee rights, especially Audit – where do rights fall and how do you call foul in a legal way.  CEO’s can find themselves as pawns or unwittingly the messenger of biased conclusions to pass a vote.  This step should not be underestimated for a new CEO and your shareholders demand it!

Step 3: Establish past vs. present: Interview Past CEOs, Audit firms, and Management – Look for skeletons and trap doors

Finally, according to Bobby Chacko, despite the reasons for the departures of previous management from companies in having discussions there are always clues that shed light on the company and board culture.  Often, you come to find out the way some previous management was characterized by the board was actually inaccurate. The reality is when boards make bad decisions or intervene with biased intentions, the CEO is often the one who inherits the blame.  Just because you see big names of firms as Compensation advisors, or accounting firms, or advisory law firms – it is critical to talk to the individuals doing the work to understand where the influences were and how they impacted decisions. According to Bobby Chacko, Board materials are often codified with jargon and votes and resolutions undecipherable.  A lot is often done intentionally.  Remember the buck stops with you! Push for transparency and know what you are walking into so as to know how the game is going to be played.  Nothing worse than a CEO fooled!