Why Boards Fail

 

pic why boards fail

Ian Muir, Director at Keeldeep Associates Limited, wrote an interesting book on how boards interact and collaborate. His findings led him to conclude why boards fail and how to improve their effectiveness.

 

While researching his book “The Tone From The Top, how behaviour trumps strategy,” Ian Muir interviewed the chairmen of a quarter of a trillion pounds of market capitalisation. He was particularly impressed by their commitment to board effectiveness, board evaluation and enabling open dialogue. This included allowing sufficient time for free-format discussion. Several said that the best boards not only have the right balance of challenge and support but they encourage open debate. In short, those boards are safe places to raise concerns. In today’s climate of cyber-risk, ethical risk, geopolitical risk, compliance risk and of course the risk of doing nothing – boards need to be open, diverse and self-aware. They should welcome the dissenting voice and understand the “why.”

 

The tone from the top means that the actions, decisions, language and behaviour of board members send profound signals throughout the organisation. One CEO said that for the right reasons, “one sacking is worth a thousand memos.” He wanted to make a stand against poor performance and unethical behaviour. A Chairman said that if RBS had had just one woman on their board, they would never have gone ahead with the disastrous acquisition of ABN Amro. This was because he felt women board members are more likely to say: “tell me what could go wrong, not just what will go right.” Recent studies show that diversity trumps ability.

 

The journey to a leadership position often takes people from IQ to EQ, from “left brain” analytics to “right brain” relationships. But sometimes we come across senior executives, even board members who aren’t aware of the shadow they cast. They don’t quite see that their every move, every word and their behaviour send signals that are interpreted. Ian Muir gives an example: The executive team of a private equity owned business was recovering after an IPO had been “pulled.” They had split into two camps and tribalism was crystallising. Despite great efforts to contain their differences within private meetings, line managers could feel the tension when they presented to the top team. When the blind spot was pointed out, the executives were startled that so much was being read from their behaviour. And it was shockingly accurate.

 

The chairmen he met were very much in tune with danger signals and all were on the lookout for dysfunctional behaviour. More than twenty per cent had replaced board members whose ethics or behaviour weren’t up to the highest standards. This might sound a little harsh but several chairmen said that a dysfunctional board is terminal – for the individuals and often for the organisation.

 

So what are the danger signs that board members should be on the lookout for? What should they do when they experience something that’s not quite right?

 

No doubt we can all list some horror stories such as not making decisions, or an “us and them” culture. But his research and thirty-two years in corporate life, latterly as an Executive Committee member of a FTSE150, led Ian Muir to identify the following danger signs. If your board has two or more of the following, you need to take action:

 

  • Lack of meeting structure
  • Lack of strategic focus
  • Getting wrapped up in minutia
  • Not using the right numbers for reporting or forecasting
  • Backward looking not forward focused
  • Too much time spent on next month instead of value creation
  • Insufficient diversity and insufficient breadth of experience
  • Group think
  • Bickering, especially where there’s a focus on personality
  • The dominance of personality: “my way or the highway”
  • Not holding management to account
  • Failing to deal with under-performance
  • Lack of drive or commitment
  • Not setting an appropriate Tone From The Top

 

Almost all these warning signs are behavioural. The good news is that it ought to be within the power of the top team to fix them. The challenge is to recognise the signs, agree to address them and to fix them sustainably. Success is predicated on the quality and depth of relationships within the board.

 

All directors should have a private line of communication to the Chair. If the Chair is the problem, there must also be a private channel to the senior independent director.

The company secretary is another line of defence in raising concerns, especially if the company secretary has received similar representations from other directors. Without breaching confidentiality, talking to a trusted mentor or outsider can provide a sense-check, especially for anyone new to a board position.

 

Any sign of fear around the boardroom table is clearly unhelpful. And that leads Ian Muir to a note on remuneration. Much has been written about executive pay recently but he proposes a thought on non-executive pay. He believes it should be sufficient to attract and retain the best NEDs but never so much that the recipient feels he or she can’t walk away if they are ethically compromised.

 

Boards that prevent dysfunctionality are serious about board processes and effective governance. They undertake proper board evaluations with trusted external providers who understand their business. They have proper individual reviews between the Chair and each board member. The best have individual director development plans. They conduct 360-degree reviews of the Chair and overall, the whole board scores highly on the following capability hierarchy: The foundation is a high level of mutual trust. That enables effective conflict resolution. In turn, that facilitates high levels of commitment. Finally, very clear accountabilities enable a strong focus on results. Many Chairmen have said that when these five qualities really are evident, there is a low risk of board failure.

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Perhaps anyone planning to join a board should devote significant time and energy to due diligence on how the board approaches the way it works, ethics, governance, its tone from the top and the signalling that comes from it. Partnering with the right search firm can help.

 

Ian Muir, Director, Keeldeep Associates Limited advises on executive assessment, board evaluation, top team facilitation and senior HR consulting. He has advised listed plcs, private equity owned businesses and in the not-for-profit sector. He is also the independent member of the remuneration and appointments committee of a UK regulator.