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The CEO's Boss: Tough Love in the Boardroom resources

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T H E S O C I A L C O N T R AC T 5 Prescription: The Social Contract A Social Contract, if developed correctly, can provide a prescription for strengthening and maintaining the partnership between the board and its CEO. I am defi ning a Social Contract as a clear set of behavioral statements willingly subscribed to by the board and CEO that details the mutual ex- pectations of their partnership. In layman’s terms, the Social Contract puts forth “the rules of the road.” Th e roots of the Social Contract are in the postconventional moral reasoning that is at the core of a demo cratic gov- ernment. (See Kohlberg’s Moral Development Th eory, Stage 5, which is Social Contract driven.6) As an alumnus of Saint Louis University, I con- sider my education Jesuit in nature, with a core emphasis on philosophy and all its applications. Th us, although my real academic focus was man- agement, I have maintained an interest in the philosophy behind it. Th e Social Contract is particularly interesting to me, as it is fundamentally a philosophical document that results from a philosophical discussion. It is a contract between a board and its CEO that is developed through a conver- sation about what’s important to ensure their commitment to the welfare of the business. Each of us places his person and authority under the supreme direction of the general will— in this case, the board/CEO partnership. From my experience as a board chairman, I have found that the best way to start a discussion of a board/CEO Social Contract is to come up with fi ve behavioral standards to present to the CEO. Five is a deliberate choice— I’m a believer in Miller’s law, the work of cognitive psychologist George A. Miller of Prince ton University’s Department of Psychology, who mea sured human short- term memory capacity and found a 7 ± 2 limit.7 I prefer keep- ing the number at the lower end of the range so that the standards can be readily remembered. Th ve I use are e fi • Commitment to values: a leadership credo that answers the question, “What do we stand for as an or ga ni za tion?” • Commitment to the stakeholders: customers, employees, sharehold- ers, and community. • Commitment to risk assessment: a willingness to manage the com- pany’s risk profi le. • Commitment to transparency: complete honesty in fi nancial and nonfi nancial matters. • Commitment to coaching: supporting the CEO and board’s con- tinuous improvement.

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