[This was an essay on the blog, now turned into a post]
The board is responsible for making sure that it fairly represents the shareholders interests in seeing the company move forward. Most of the articles talk about their being good governance techniques such as attendance, reviewing the material before the meeting, etc., that are necessary but not sufficient for having an excellent board.
In this regard, it is like many other teams within a corporation. Each member has a responsibility that they seek to uphold but if that’s all they do, they will never become a great team. Great teams are unified by a common goal and a willingness to work together toward a common goal.
Most of the articles written on this subject effectively summarize the book “The 5 Dysfunctions of a Team”. It suggests:
- Trust is necessary to have good conflict
- Good conflict is necessary to have buy-in
- Buy-in is necessary to have accountability
- Accountability is necessary to have attention on results
- Attention on results is necessary to truly have results
That is, trust is required in order to ultimately have good results and is likely to be the most difficult one to build.
One of the things the articles do not mention, but which I find interesting, is that doing peer reviews is actually an excellent way to build trust. By each board member being able to openly talk about and share the results, they both make themselves vulnerable to others, as well as learn more about how they are perceived. In fact, I think most of the suggestions can be viewed through this framework.
This reveals what is different about a board than any other kind of team that is found within a corporation. Most corporate teams have a leader (“The Manager”) who has a stick to help align interests (“The Salary”). Within a board, you don’t have this centralized form of incentive. In addition, a board doesn’t have a clearly defined “Leader”. The chairman clearly ought to be the initiator, but there is no single source of incentive as clearly as there is with “The Manager”. Moreover, the board members all have differing personal interests besides their fiduciary responsibility to the shareholders.
This causes three distinct behaviors. First, it would seem that many people who sit on boards feel a certain amount of prestige. Therefore, their own reputation and/or ego is on the line and they are motivated to try to keep their position. Second, they are all motivated, at least in part, by impressing their peers. This is related to the former motivation but differs in that they are looking to impress those who listen to them (even if it isn’t necessarily helpful to the meeting at hand). Third, they also may have other interests: their own capital or their own time, which might cause them to skew what they think is best for the overall shareholders and business. This can lead to “group think” and its inherent lack of conflict which may not be beneficial to the board.
In other words, they are motivated to maintain their position on the board. But more than this, you have the CEO who is the primary interface between the board and the day-to-day operations of the business. The CEO is motivated not only by the things mentioned above but also by the desire to keep his job/position/authority/power. This can cause him to “manage his manager” in a way that, while not blatantly wrong, can downplay what is truly going on in the business.
So, a team of people with disparate interests, yet a common goal (even if only because it is required of them) is then gathered together to perform tasks toward that goal. Someone on the board needs to take steps to create an atmosphere where trust is developed: where the entire board can step together and do so without requiring too much of their time. This is where peer review could be so helpful, because it enables sharing of vulnerabilities with those on the board. Also, people need to understand how their candor with the board ultimately benefits their own personal interests.
Being on the board that creates a successful company leads to even greater prestige; candor is required to create a successful company.
By sharing openly and honestly with the board, the CEO can obtain useful counsel that can help him to succeed better at his job; the board needs to look at problems shared without trying to kick the CEO for the problems existing.
A final consideration, how should board members handle dysfunction in their ranks. This requires that the members mutually decide the need to incentivize activities that build the board toward becoming a stronger team, and actively discourage activities that subvert the team or create unproductive politics. If these things are not addressed quickly, they become nearly impossible to address. Secondarily, when companies are doing well, money is coming in, everyone is happy, it’s easy to get sloppy about building the team, yet when things turn sour, it’s too late to build trust.
The time to build great boards is now, especially if things are going well.