Board malfunctions

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By Jean Pousson – Senior Consultant with the Institute of Directors (IoD)

 

 

Boards, like families, are dysfunctional – it’s purely a question of how dysfunctional! It would be naïve to assume that simply assembling a group of highly qualified (and highly paid) professionals in a team guarantees that they will operate harmoniously and effectively.

In the UK, recent troubles at Carillion, BHS, Patisserie Valerie and Eddie Stobart – to name but a few – have highlighted where their boards did not perform as expected by all of their stakeholders. Every board malfunction will have its own set of circumstances but, in my experience, there are issues that keep cropping up.

Size Some boards are simply too big. Many very large organisations operate very successfully with a board of just seven or eight directors. The size of the board should not be commensurate with an organisation’s size but should depend on its complexity and the skill sets that are required. A board that is too big will result in unfavourable dynamics, cluttered agendas and discussions that end up being too superficial in a race to finish the meeting on time. I have had discussions with numerous directors who admitted to not contributing when they should have done, for this very reason.

Meeting set-up The wrong setting, wrong seating, wrong time, wrong timing, bad agendas, and board papers not sent in before the deadline all contribute to a bad meeting. These are easy fixes but often the issue of legacy prevents change. One chair told me that its board ‘always meets on a Monday’ with no reasoning behind it beyond habit.

Decision making Incredible as it may sound, I have observed board meetings where decisions are not made even after lengthy discussions! It is good practice to mark some agenda items as ‘for discussion’ and others ‘for decision’. This sends a clear message that decisions have to be made by the board.

Mix and composition There should be a healthy balance of experience on the board and diversity should not be limited to gender or ethnicity, but should encompass thinking, expertise and age, because experience is great – as long as the future resembles the past. Unfortunately, uncertainty is intrinsic in nature and woven into organisational life.

The board composition, therefore, needs to reflect a balance of capabilities that can cater for changing industry dynamics.

Dynamics Directors may not see each other regularly, particularly if they’re based in different locations, so it may take a while for strong relationships to develop within the group. We always recommend the whole board (including non-executives) gets together for dinner the evening before its meeting, which allows for both social and business catch-ups and is a very good way to prepare for the next day’s session.

Personal agendas Directors may have conflicting agendas, depending on who they represent, and they can easily fail to recognise that, as a board, they have collective responsibility to contribute to the success of the company. Here, good chairmanship and a lack of bias around the table is required to smooth these potential sources of conflict.

Inductions Despite a huge amount of guidance on this topic, many newly appointed directors are still not getting sufficient training or an induction before they join. This means that they effectively have to learn during the actual meetings and are unable to make any meaningful contributions.

Training/continuing professional development (CPD) Many years ago, a chairman told me, ‘when you become a director you will have two job descriptions. The technical job description that the CEO will appraise and your director job description that the chair will appraise’. The two jobs are very different. CPD should therefore be a requirement for both newly appointed directors and long-standing members.

“I see many directors blissfully unaware of their legal and regulatory responsibilities and unable to critique and add value, even where discussions merit challenge”

If directors are not sure where they might have skills gaps, there are useful online tools that can help. These review competencies across key areas of the job, including skills, knowledge and mind-set, and benchmark them against professional standards.

Responsibilities I see many directors blissfully unaware of their legal and regulatory responsibilities and unable to critique and add value, even where discussions merit challenge. They rely on technical experts and are too scared to ask what they consider to be a stupid question. But so often it is the stupid question that brings out the truth: ‘why are we doing this?’, ‘what could go wrong here?’.

When lawyers or finance professionals start engaging in ‘loophole talk’ (i.e. ‘we have found a loophole that will legitimise this transaction’) it’s potentially a red flag. Again, the stupid question, ‘why do we need a loophole?’.

The CEO It’s not unheard of for successful CEOs to forget what made them successful and start inhabiting a made-up celebrity persona. They may think they are infallible and, like Julius Caesar, develop ‘tired ears’ and stop listening. Worse still, fellow directors may not challenge effectively if they feel intimidated by someone’s past successes. The board therefore becomes ‘chloroformed’ and dangerously passive. There is the old joke that if two people always agree, then one is clearly superfluous!

The chair As board facilitators, the chair is there to ensure the leadership team operates well, to manage the dysfunctionalities already mentioned, to deal with bad behaviour and silly political games and to ensure full contribution from all.

However, Omerta (the Sicilian Mafia’s code of silence) has no place in the boardroom. The chair should also possess a solid, strategic antenna (more on that later) and his/her role extends far beyond the board meeting. A good chair will always be in touch with all of the board directors. I know one chair who makes a point of contacting all directors a few days after each board meeting to get more feedback and thoughts as to how the meeting went.

Chair vs CEO The dynamics between these two individuals is a source of constant interest and sometimes bemusement. I have sat at board meetings where you would be forgiven for thinking that the CEO was, in fact, the chair. Conversely, I have seen board meetings where you would struggle to quickly identify the CEO.

Non-executive directors (NEDs) Legally, non-executive directors have the same statutory responsibilities as their fellow executives. They bring independent judgement and constructively challenge directors; they are not there to make up the numbers.

NEDs have a key role to play to maintain a level of professionalism in terms of their technical expertise and director expertise, but not stray into executive territory, particularly if they have come from high-profile executive positions.

Humility and delegated matters No director can claim to have knowledge and expertise on all board matters. Business is complex and there are always things that can blindside a board. Equally, the board is not the only decision-making body; some matters have to be delegated, otherwise it would have to meet every day. It always amazes me when directors suddenly all become experts or there is incessant micro-management, which results in unworkable agendas.

Never be shy of seeking professional advice, even though the final decision (and responsibility) rests with the board. Humility should never be confused with failure – far from it.

Strategy The board is responsible for setting the strategic direction of the organisation but, sadly and all too often,  it simply does not have the nous to take the organisation forward. If strategy gets too little air time, the board has the wrong conversations, it confuses tactics with strategy, its reviews are superficial and any decisions are based on who shouts the loudest or on poor assumptions.

Current financial success can often hide impending strategic failures (ask Nokia), which is why the chair needs a good strategic antenna, ensuring that the process of strategy creation is robust, which will hopefully lead to value-creation outcomes.

Risk This is an integral part of running any organisation and it is the board’s role to set the tone and oversee good practice. Regrettably, risk management can become very staid and formulaic. I often look at companies’ risk registers but see no new risks listed – yet we know that these emerge all the time. Some risks may not be sufficiently decomposed. Cyber risk, for example, can manifest into a multiplicity of different outcomes. In addition, risk may not be monetised, i.e. the financial impact of an eventuality might not be recognised in terms of revenues, profitability, cash flow and ultimate solvency.

A question that I always ask boards and directors is: ‘reflecting on the last 12 months, what has surprised you? And should you have been surprised?’

Feedback A trend I’m seeing increasingly, and which I applaud, is where boards take a few minutes to reflect at the end of the meeting to consider how it went: what worked well and, perhaps, what worked less well. On each occasion where I’ve observed it, this feedback is owned by a different director and done in an honest and sincere environment, not in a point-scoring manner.

More formally, it is good practice for the board (and its directors) to subject themselves to regular reviews, preferably carried out by an external expert. Directors are typically the highest paid individuals in the organisation, so why not subject them to some appraisal? Such appraisals can take many forms, but the recommended methodology would include:

  • Sight of the last board evaluation report
  • Sight of the last 12 to 18 months board and committees’ minutes
  • Directors (and other senior personnel who may also attend board meetings) completing a comprehensive, anonymous questionnaire, exploring their knowledge and understanding of all aspects of corporate governance, risk, strategy, board dynamics and more.
  • Analysis of any significant variances in the responses
  • Analysis of each director’s response against the average response
  • One-to-one interviews with each director, lasting about an hour to an hour and a half (possibly going back later with further questions)
  • Observing a typical board meeting
  • Preparation of a report and presentation to the board for discussion
  • Feedback after three to six months to see what actions have been undertaken

Directors are often well aware of issues within the board, but it takes an outsider with no vested interest to point them out. The one-to-one interviews also allow the external facilitator to ask some really hard questions, such as:

  • What would make someone not like you?
  • What are fellow directors saying behind your back?
  • Is your voice being heard at board meetings?
  • Have you ever felt like resigning? Why didn’t you?
  • Are the organisation’s values evident in the boardroom?
  • Reflecting on your board meetings, what would you change and what would you keep?
  • How do you monitor your individual performance as a director?
  • What mistakes have you made as a director?
  • What are the biggest risks facing the board (as opposed to the organisation)?
  • If you became chair, what would you do differently?

In summary

A collection of good directors does not automatically mean a good board. Teams are riddled with dynamics that are often difficult to see, spot or even correct. We are dealing with a collection of high-powered individuals who will all have experienced success differently, and who will have many different views on the issues and solutions.

Some boards work well, some succeed in spite of themselves while others simply fail. Success in organisations has never been so fragile; nothing is forever and therefore the responsibility falls on the board to navigate the organisation, set the direction, and steer with care and sensitivity. Directors are people after all. As a recruiter once told me: ‘We advertise for CEOs, and human beings turn up’. Good luck!

 

About the Author:

Jean Pousson is a senior consultant with The Institute of Directors (IoD) and he has many years’ experience around supporting directors and boards. As well as the directorships he currently holds, he trains between 600 to 700 directors per year on IoD professional development courses, alongside work conducting board reviews and consultancy.