The Director’s Dilemma – December 2019 Edition
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The Director’s Dilemma - December 2019
This month our dilemma examines the possible responses when a 360-degree board review comes up with unexpected, and unwelcome, results.
Robert chairs the audit committee of a large listed board that he joined a few months ago. Unusually, his company has a process of asking the audit committee to review the board’s appointment. Robert read the previous performance reviews and saw that they were very ‘compliance oriented’ and focused on whether the board had performed all the actions in their charter, constitution, and other contractual agreements.
The board has been meeting its obligations and Robert believes it is performing well based on his short experience and the calibre of his fellow directors.
Robert decided that he would bring in a specialist company to do a more ‘performance oriented’ review. He hoped that this might highlight areas where the board could improve rather than confirm that the board was meeting obligations. The decision was endorsed; a provider was appointed to do a board self-assessment and a brief investigation of management and major shareholders’ views.
The results are in. As expected, the board rated itself and its processes highly, shareholders were also pleased and particularly complimented the chair on accessibility and open disclosure. Management, however, felt the board were not adding any value, required far too much detail in reports which they then appeared to pay scant attention, and to be dismissive of management’s concerns and expertise.
Robert and the chair are both shocked. They had no idea management felt this way. They are sure their colleagues will feel the same. However, they accept the truth of a unanimous opinion and want to move fast to understand and remedy the issues.
How should Robert start to fix this?
The “blindspot” is the engagement of the Board with the management team and the Board culture and attitude towards this needs to be addressed.
The Board believes its’ responsibility is to make sure that the company is meeting its’ fiduciary duties. The executive team believe that its’ responsibility is to drive the company performance. Both parties may well be delivering against these goals but the fundamental challenge for both is to deliver a balanced performance for the whole company that meets the needs of underlying shareholders. Therefore, both parties need to align and enhance collaboration against shared and agreed objectives, delivering sustained shareholder value in accordance with corporate governance.
Robert therefore needs to move the Board culture slightly away from a completely ‘compliance orientated’ culture and whether or not the Board had performed all the actions in their charter, constitution and other contractual agreements and engage further with management. If management feels the Board is “not adding any value, requires far too much detail in reports which they then appear to pay scant attention to and are dismissive of managements concerns and expertise” then Robert and the Board need to address this as it could damage performance of the company.
The Board needs to change its culture to be more engaged with management and have better communication with the executive team. Following the Board Audit, coaching of the Board Members and executive team could be undertaken. The roles and responsibilities of both parties should be redefined. A suggestion could be to implement a ‘buddying system’ for example, the Chair could be paired with the CEO, the SID with the COO, the Audit Chair with the CFO and the Remuneration Chair with the HRD. This would naturally improve the communication between the Board and the executives rather than have it forced and contrived. Additional Board meetings could also be put in place and regular communication/ meetings with the Chairman and Chief Executive could be scheduled to foster better engagement. As a new member of the Board, Robert could play an instrumental role in changing the culture.
Of all the elephants, in all the boardrooms, differing perception of board performance between executives and directors is the biggest. Once seen it must be mentioned, and then managed.
A good first step is for board and management to discuss the review. This is best done in a neutral and hospitable environment. Ideally the consultant who led the review should facilitate, and validate the different opinions. Once everyone is clear that each team values the other team’s perspective, they can explore areas of agreement and possible solutions.
Both sides need to be candid about hopes and fears. Directors need to explain why they want information, what their duties are, and how they rely on reports – even if they don’t discuss them in meetings. Management need to describe the behaviours that cause feelings that directors don’t value their expertise or share their concerns.
Once both groups have a shared understanding of the issues, they can agree practices to resolve them. These might include:
- Specifying maximum length for board papers
- Providing time in the agenda for management to question the board on how papers have been received and what issues they see with the topic
- Ensuring that questions ‘on notice’ from the board to management are routed through the chair or CEO to avoid overload
- Spending time working as a team on developing strategy or solving problems
- Providing training on governance for the executives and on the business issues for the directors
- Socialising to build personal relationships between board and management.
- This is a dangerous situation that can be resolved if both sides work with goodwill.