Some Top Dogs Need Watchdogs: Boards increasingly pushed to establish CEO oversight procedures.

• Author: Milford, Maureen
• Position: CEO MAINTENANCE

Even wildly-gifted CEOs need supervision.

That appears to be the takeaway from recent regulatory cases where companies have been taken behind the woodshed for not monitoring their star chief executives.

The most recent example involved swift action by the U.S. Securities and Exchange Commission (SEC) against Tesla Inc., as well as its talented CEO, Elon Musk. The SEC sued both Musk and Tesla after Musk tweeted a series of "false and misleading" statements about a transaction to take Tesla private.

Part of the settlement included corporate government changes: Musk had to relinquish the chairman job, the addition of two new independent directors, the creation of a new committee of independent directors, and additional controls and procedures to oversee Musk's communications.

Radical measures for a radical CEO?

"Boards are always responsible for CEO oversight, but the Tesla situation seems to be a case study of an extreme example: You have a headstrong CEO who, for all we know, has perpetually rejected every board attempt to rationalize his conduct," says Joseph A. Grundfest, a professor of law and business at Stanford Law School.

The board might well have fired a less valuable CEO, Grundfest adds, "but Tesla's future seems so tied to Musk's leadership that the board could well have no rational alternative but to work with Musk, warts and all."

Unfortunately, the warts led to a $20 million fine against Musk and another $20 million against Tesla, not to mention a hit to the stock price. And in early November, a group of investors including California, Connecticut, Oregon, and New York pension funds holding about $775 billion in assets, called for a board overhaul because of a "lack of responsiveness to fundamental governance concerns."

Examples like this create an oversight conundrum for boards that have to balance company performance and a successful yet flawed CEO. A director's duty is to serve the interests of shareholders, not the CEO, however dazzling. Fulfilling that obligation includes having processes and controls to oversee and hold accountable senior managers.

"I think this is just a reminder that relationships shouldn't trump oversight," says Sarah Fortt, a senior associate at Vinson & Elkins who focuses on corporate governance and board representation. "It's a reminder to the board of directors to ask the tough questions."

There's definitely room for improvement among companies. Only 56% of boards formally evaluate the CEOs...