The heart of the matter: good governance depends on good relationships between the management and the board. Sounds simple and straightforward? It's not.

• Author: Smith, Diana McLain
• Position: ENDNOTE

IN ITS 2004 Principles of Corporate Governance, the international Organization for Economic Cooperation and Development (OECD) describes corporate governance as "a set of relationships between a company's management, its board, its shareholders and other stakeholders." At first glance this statement isn't particularly earth shattering. If anything, it's painfully obvious.

But if you focus on the word "relationships"--a word that lies not only at the heart of the sentence but of corporate governance as well--things get more complicated. Why? Because relationships among these groups are anything but simple. They're what negotiation experts call "mixed-motive" relationships, and they're exceedingly prone to breakdown and failure.

Consider a recent Booz Allen Hamilton study of the world's 2,500 largest publicly traded corporations. Calling record-high turnover among executives "the new normal," this study reports that forced turnover among CEOs rose 318% since 1995. In 2006, one out of every three CEOs left involuntarily. Nearly a quarter of the forced departures followed from conflicts with the board--up from 2% in 1995. In each case, shareholders ended up footing the bill.

These statistics reflect at a macro level pervasive turmoil at a human level--turmoil that can only be understood by looking at the shifting relationship between boards and CEOs.

Two cases I studied illustrate the point. In the first, a young entrepreneurial CEO of a fast-growing firm was under siege from her board after an especially tumultuous year. While the firm's results were still strong, the board's activist chairman quite rightfully worried about the organization's longer-term health. Why was there so much turnover in the higher ranks? Why wasn't she sticking to the firm's strategy? Was she too volatile and opportunistic to take the organization to the next level? These are exactly the kinds of questions boards are charged with asking and CEOs are charged with answering.

Chairman's tirade

Yet that isn't what happened. Instead, having privately reached his own conclusions, the chairman more or less subtly launched one criticism after another at the CEO. Feeling undermined and outraged, the CEO retaliated in kind, countering each "attack" with one defensive maneuver after another. Unable to see eye-to-eye, each brought the worst out in the other, making it impossible for them to fulfill their governance responsibilities. Indeed, far from creating value for the...