06/01/2012 04:56 EDT | Updated 08/01/2012 05:12 EDT

4 Ways Boards of Directors Can Save Their CEOs

You can't let board members off the hook simply because they're not full-time employees of the company, or that on just one day per quarter they're presented with information on which they can't always get feedback. And that's why Richard Schulze has been forced to step down from Best Buy's board.

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In May, something happened at the top rung of the corporate ladder that you don't see everyday. Richard Schulze, chairman of Best Buy, was made to step down from his post.

Hey, wait a minute, you're saying. Wasn't Best Buy CEO Brian Dunn the culprit here? After all, he was the one who had what was called an "inappropriate relationship" with a female employee. And Dunn resigned, which certainly bolsters the assessment that he did wrong.

But here's the underbelly of that story. Schulze had known about Dunn's inappropriate behaviour for some time, certainly before that behavior was officially made public. In other words, by not taking that information about the CEO to the company's audit committee, Schulze did not monitor the actions of the CEO. And that's what boards of directors are supposed to do.

As chairman, Schulze was essentially guilty of covering up the whole mess. And, his dismissal shows that, if a chairman or any board director does not effectively oversee the chief executive, it might cost him his jobs.

Best Buy is allowing Schulze to serve on the board until June 2013, but with a mere honorary title. Hatim Tyabji, the audit committee chairman whom the board elected to replace Schulze, will begin his term this June.

Why is this turn of events so stunning? One reason is that we're used to seeing CEOs do the figurative perp walk for their intransigence. Seldom is a board member or, in this case, chairman, called on the carpet. But, with the replacement of Best Buy's Schulze, we see that a board did the right thing: blame the right party -- even though the person was one of their own -- and mete out a just dismissal.

Why don't boards do a better job of overseeing senior management?

One reason is that boards are way too submissive. Often they're afraid of insulting prospective CEOs, if they ask personal financial and ethical questions, or request that a candidate submit to a credit check. Other times, Boards assume that headhunters have done the due diligence. And let's not forget the "rock star" personalities of many CEOs-for-hire, whose demeanor dazzles the very people - Board members - who should be taking a hard line about hiring them.

Often the lines are blurred and too close for comfort. I'll put it more plainly. Board members are part of an insider's club. They serve at the behest of the very person they're overseeing.

But perhaps the biggest reason that boards don't fulfill their oversight responsibilities is they don't evaluate the most important risk factors that can lead to a CEO's downfall.

And you can't let board members off the hook simply because they're not full-time employees of the company, or that on just one day per quarter they're presented with information on which they can't always get feedback.

As Schulze's dismissal indicates, boards can do more. They can ferret out behavior that is not in and of itself illegal, but which is often the root of future trouble and raise red flags. These are the questions Boards should be asking of their CEOs.

1. Who is your mentor? CEOs often work in isolation. The few people within distance are often sycophants who are essentially "yes men." An enlightened board will ensure that their chief officer has a mentor - a coach or someone very senior that an ego-driven CEO can respect, trust and relate to -- who will hold the CEO accountable.

2. Where is the company most vulnerable? Any company, publicly traded or privately held, is vulnerable insofar as production and profits are concerned. However, some parts of an organization are more vulnerable than others, and boards need to know the location.

For example, where in the company are employees least likely to speak up out of fear or other repercussions? Perhaps sales people, out in the field, are engaging in risky behavior -- bribes or other questionable sales practices -- that supervisors choose to ignore because new accounts and money keep pouring in.

3. Is the company's reputation at risk? Everyone recognizes that the tangible value of a company is demonstrated in its stock price. But a company's intangible worth -- good will and the integrity of the brand -- is just as important. Boards must hold CEOs accountable for safeguarding an organization's less visible assets, and demand that CEOs quantify and describe their protective strategies.

4. Is the company at risk because of over-reliance on controls and regulations? The Sarbanes-Oxley Act of 2002 required companies to set up internal controls which require official compliance from senior leadership. However, in trying to adhere to these metrics, managers often can't see the forest for the trees.

Take safety issues. A company designates a new number that represents the maximum number of accidents it will tolerate. In its interest to uphold that number, management may try to ignore valid problems because it wants to keep the numbers low.

What Best Buy's board did was hold one of its own members, Schulze, personally culpable for not asking CEO Dunn the right questions, and not revealing damaging information about Dunn as soon as that information came to light.

The board's dismissal of Schulze is a good move. Only when boards have the courage to hold one of their own personally responsible for monitoring CEO behavior can bad behavior at the top change.