How Power is Brokered

The dynamic between a corporation’s board of directors and its CEO is among the most important relationships in the business world. It is a delicate dance that can be cooperative or confrontational. But because this relationship unfolds mostly behind closed doors, these relationships are not well understood.

“There is an ongoing negotiation of power between board and CEO,” said Michael Withers, professor of Management & Organization at the University of Notre Dame’s Mendoza College of Business. “By the time a conflict between a CEO and a board of directors reaches the Wall Street Journal, it’s already at a fever pitch — and we’re only getting a small snapshot of what actually went on.”

Withers, Dana Bement, assistant professor at Mendoza, and their co-authors published Corrective Governance in the Boardroom: A Negotiated Order Perspective in the Academy of Management Review. In it they share their theoretical model that predicts the ways that negotiations between boards and CEOs will unfold.

Although boards typically wield the power to fire and to hire, CEOs can have a lot of agency within this dynamic, depending on the circumstances. Some CEOs use their relationship with the board as an opportunity to obtain feedback and shape strategy. Others view the board as overseers who are there to make sure that things are done right.

When a company is underperforming, its board needs to decide what will be done about it. The board typically has the power to discipline, demote or dismiss a CEO. Even when a company’s performance is poor, its CEO does not always pay a price.

“Some boards might fire an underperforming CEO or demote them by removing a title like ‘chair of the board,’” said Withers. “But sometimes boards will also give a CEO a second chance. In some cases, the board will even give a CEO additional powers after a governance crisis, so they are able to take charge and fix the problem.” 

One of the key variables that affects how negotiations will unfold is dependency, which is the extent to which the company needs its CEO. A top executive can have unique industry knowledge or unusual clarity of vision that make them difficult to replace.

“A company’s perceived dependence on its CEO is a key determinant of how a negotiation will unfold,” said Bement. “Is the CEO beloved by shareholders and employees? Do they have an obvious successor? If a board is aware that they need the CEO, they will approach this type of negotiation with different expectations and with different options.”

Consider the case of Tesla, an electric vehicle maker led by the high-profile CEO Elon Musk. Musk’s popularity among Tesla shareholders makes him a singular figure within the company. It would be difficult for the company’s board to replace him with anyone else, and that dependence shows up in the stratospheric pay packages that helped make Musk the world’s richest man. Because Tesla is so dependent on Musk, he has a great deal of leverage in any negotiation and is able to secure support for initiatives a different CEO could not.

“Dependence is firm-specific, but it is the unique expertise that could lead a board like Tesla’s to give its CEO a compensation package that has never been seen before,” said Bement. “That kind of dependence changes the dynamic of how you negotiate with a CEO if, for example, the most recent quarter isn't going as well as the board would like.” 


Former Disney CEO Bob Chapek found himself in a very different situation. He was perceived as too easily replaceable. Chapek, who assumed the CEO role in 2020, guided Disney through a turbulent period. During the COVID-19 pandemic, Disney’s theme parks were forced to close and its box office revenues bottomed out. The company’s earnings suffered, and a series of public relations blunders made matters worse. 

Meanwhile, Chapek’s predecessor Bob Iger maintained an office at Disney headquarters, and sometimes publicly criticized Chapek’s business decisions. After two years of Chapek’s leadership, Disney’s board voted to dismiss him and reinstalled Iger as CEO. Iger’s ongoing presence at Disney made it that much easier for the board to make that move. It reduced the company’s dependence on Chapek. 

Times change, but some things stay the same

Historically, a corporate board of directors was seen as a spot  for people who were friendly with management. That began to change after major corporate scandals such as the collapse of Enron in 2001. The Sarbanes-Oxley Act was passed the following year, and it requires corporate boards to be independent of company management. 

Still, Bement and Withers argued that the level of similarity between a company’s board and its CEO does affect how that company navigates challenging times. When a board can relate to the CEO on a personal level, the directors tend to have a higher degree of confidence in the CEO’s leadership.

“If the board and CEO are the same gender or race, or if they have similar educational background and experiences, it can make for a friendlier relationship between the two,” said Bement. “You are much more likely to see a cooperative relationship when this is the case.”

These warm feelings can lead to greater leeway. Directors could be more likely to view broader market conditions or external factors as drivers of poor performance and be more willing to give a CEO another chance to improve. 

“When a board and CEO are tightly interconnected, they are motivated to keep working together,” said Bement. “And if there is any question about whether a CEO is responsible for what is happening, the board is more willing to give the CEO the benefit of the doubt. But there are limits, and eventually, that benefit of the doubt goes away. Any CEO only gets so many chances, no matter how similar they are to the members of the board.”

According to Withers and Bement, board members must be aware of these dynamics. Companies should seek an appropriate level of board independence. When board members have strong affiliation with a CEO, they are more likely to be cooperative. If they don’t like a CEO on a personal level, the relationship might be more contentious. Either way, it can affect the way a company is governed.

“If a board knows the company really needs their CEO, they will approach them with different expectations, with different options, and with a different negotiation approach,” said Withers. “It could take a governance episode to bring this issue to a head. It can make a board realize the company has a really strong, powerful CEO. The board might decide not to discipline the CEO, but also be more likely to find ways to reduce that dependence in the future.”