Boardroom dynamics

As such, corporate secretaries have spent much of the last few years making sure their boards meet the requirements for independence and their audit committee has a financial expert on board. But meeting these requirements alone does not guarantee effective leadership – Enron was, after all, renowned for its good governance blueprint. 

Besides structure, there are other intangible reasons why boards fail. These include having an over-dominant CEO or chair, or a submissive board. Additionally, boards displaying ‘groupthink’ – faulty decision-making by a group that doesn’t examine all alternatives – or that lack direction are also dangerous. How can those in charge of governance recognize and resolve these problems, ensuring their company’s board dynamic is a healthy one? 

Directors’ personalities have a powerful impact on how a board functions. ‘You want people who will challenge each other, debate and analyze things to ensure due diligence is done on whatever issue is on the table,’ says Roger Raber, president and CEO of the National Association of Corporate Directors (NACD). ‘If you have a dominant CEO and a passive board, it leads to disaster.’ 

Some famous examples of recent years include Vivendi’s Jean-Marie Messier, Global Crossing’s chairman Gary Winnick, and WorldCom’s former CEO Bernard Ebbers, all of whom brought their firms to the brink of disaster, with little protest from the board.
 
Directors and corporate secretaries can help remedy dominant behavior during the selection process, and even after problems surface. ‘Distributing decision-making duties and putting up boundaries against runaway leadership; improving selection, education, and evaluation of board members; and offering coaching and counseling to executives showing signs of narcissism are just a few of the ways to manage an over-dominant CEO,’ says Manfred Kets de Vries, a clinical professor of leadership development and chair of leadership development at the Insead business school in Fontainebleau, France.

But even directors who demonstrate independence of thought run the risk of being passive. Groupthink can affect any group of people – boardrooms are not immune – and this psychological phenomenon often makes directors quiet and unable to defy others. 

Directors, for the most part, tend to be collegial, and sometimes in order not to ruin that collegiality they avoid criticizing one another. ‘Members of a board are usually very respected and powerful and it can be quite uncomfortable for their peers to give feedback, particularly if there is something negative to be said,’ explains Edward Lawler, professor at the Marshall School of Business at the University of Southern California. ‘People don’t want to embarrass themselves, and they are also concerned about embarrassing others, because they are normally in a prestigious position. They want to fit in.’

Taking action

Advisers to the board, such as the corporate secretary and the general counsel, can help prevent groupthink by forcing discussions. For instance, if the CEO makes a presentation, the corporate secretary or the legal counsel could pose questions that need to be asked, and make sure board members play devil’s advocate. 

‘I’ve seen this tactic be very successful in many cases, such as in M&A situations,’ points out Steven Barth, a partner with the Milwaukee-based law firm Foley & Lardner LLP, and program chair of the firm’s National Directors Institute (NDI), a directors’ educational symposium. ‘I’ve been at board meetings where the investment bankers or transaction lawyers make the board ask the right questions in order to ensure a good governance process is undertaken in evaluating that type of transaction – that’s the job of a good boardroom adviser. If the board is not asking the right questions, it’s incumbent upon the advisers to the board to make sure the right questions are asked, and addressed, by the directors. Look at the Michael Ovitz contract situation at Disney. Had the advisers in that room forced those questions to be asked about the terms and conditions of Ovitz’s employment and severance package, they would not be facing the issues the board has now.’

Clear roles

Defining the role of directors and the board is also vital to keeping boards healthy. For instance, if directors aren’t clear about what they are supposed to be doing, and how they can add value to the company’s strategy, boardroom operations will most likely be affected. In most cases, when directors and senior management view their roles as being ambiguous or overlapping, one of two things most often occurs: conflict or withdrawal.
 
‘Corporate secretaries can encourage the critical dialogue among directors and executives on what it means in their context to ‘govern’ and what it means to ‘manage’ – and what the purpose and boundaries are of those roles,’ explains David Anderson, president of HRI Corporation, an advisory firm that helps boards and management teams enhance their performance. ‘This is especially important in distinguishing the roles of board chair and CEO. Establishing leadership boundaries creates a structured and acknowledged system for checks and balances of power, reduces the likelihood of conflict and provides a forum for resolving conflict when it does arise.’

Directors who are aware of how their skills can benefit the company are also more confident in contributing to discussions, and can apply their expertise to improving specific areas of the business. ‘My background is in financial services,’ notes Raber. ‘I have been on a few financial services boards, and I can’t imagine serving on other boards where I don’t have the specific expertise, even though I might be a good fiduciary. When considering a company, directors should know how their backgrounds can contribute to the firm’s strategy and goals.’

Finally, when directors know where their skills can be used and how far the realm of their power extends, chances are they will have a better picture of what kind of behavior is expected of them in key areas such as the level of preparation for meetings, the level of interaction between directors and executives during and between board meetings, and the appropriate level of input in developing and testing corporate strategy, risk and operational performance, concludes Anderson. 

Ultimately it pays for governance officers to work above and beyond merely complying with the rules, and focus on the dynamics that work best for the board. As Raber notes, ‘I look at corporate secretaries as gatekeepers to the board. They work with the governance and nominating committees, and advise us on recognizing personal criteria for future board members. We get a lot of calls from companies about this and we find the firms with a corporate secretary who is truly knowledgeable about the process and criteria for nominating directors, beyond what is required by law, are more likely to be
successful with their governance.’