Investing in the Board

When a board behaves dysfunctionally, the reverberations are felt throughout an organisation, as conflicting agendas create cliques and an inability to realise effective strategy. With boards increasingly accountable, the importance of getting their composition right is paramount. Being able to draw on each directorial asset affords the greatest opportunity to do, rather than simply being seen to do the right thing.

A prime example of dysfunctional behaviour is critical information being withheld due to a lack of trust between the CEO and the Chair. Another is board members’ reluctance to challenge conventional wisdom with the result that ‘groupthink’ takes hold. Others include pushing personal agendas, contrariness, domineeringness, blame apportioning, hubris and megalomania, as well as an inability by some to value critique or support outcomes. All such behaviours risk leading to poor strategic decision-making, so reducing competitive advantage.

 

Diversified boards make for effective boards.

 

The key to remedying such behaviour is to prevent it happening in the first place. While it is important to achieve a blend of the right skills, character should also determine board composition, since bad character can act to paralyse a board, regardless of the formal processes in place.

Diversified boards make for effective boards. Strong female representation, an ethnic mix and a range of skills and experiences offer the greatest scope to meet any challenge. If an organisation has global interests, this too should be reflected.

Maintaining and building relationships is crucial to ensuring the board functions well. Meeting outside the boardroom to get the true measure of a fellow board member can help here, but it must be a strictly social occasion to avoid being compromised. Moreover, an astute director will help to encourage differing views, seek the counsel of each board member and make sure to validate their input.

 

The most important relationship is that between chief executive and chairperson.

 

The most important relationship is that between chief executive and chairperson. A power struggle here can lead to adversarial behaviour across the board and side-track an organisation from other pressing matters at hand. Since the Cadbury Report on corporate governance of 1992 there has been a drive to keep these roles separate to ensure greater transparency and checks on power. As 2013’s How to Make Boards Work: An International Overview notes, ‘the CEO plays a very important role as the mediator between the management and the board, (while) the chairperson’s role is more of a moderator between shareholders, other board committees’ members and the CEO.’

The Cadbury Report, since acted upon across the globe, also argued that independent directors should predominate, as they are less bound by obligation. Conversely, the perils of patronage are keenly illustrated by the emissions scandal that has engulfed Volkswagen AG (VW). As the Financial Times pointed out in October 2015, ‘the cheating was predictable because of VW’s lax boardroom controls and peculiar corporate culture.’

Nor has VW learned its lesson. Hans Dieter Poetsch, CFO at the time of the scandal, now oversees the subsequent post-mortem as chairman. Markus Dufner, managing director of the German Association of Ethical Shareholders described him as ‘a conflict of interest personified’ at the Group’s AGM.

The carmaker appears blind to the fact that disagreement is not dysfunctional, unlike its continued behaviour.

 

 

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