CORPORATE GOVERNANCE : When boards go bad – Chapter One – good people, bad board

Like any group of people, boards go through bad spots all the time. Most come right again – usually through the luck of external circumstances, an executive and company that start performing better, or changes in their membership.
A board’s success and failure is at all times about its people: their personalities, motivations, skills, and communications with one another.
A central premise is that an effective board is one with excellent communication between its members, management, and staff. board in crisis is board that is almost certainly failing to communicate.
There are two types of crises that affect boards; crisis affecting their whole organisation (eg, Mighty River Power’s customer death), and the crisis within board itself (eg, Vector Energy’s board spat over its chairman’s operating style).
In the middle of board crisis, like any human challenge, people can be seen at their worst and their best. Some lash out. Some hunker down. Some take brave actions. Some keep their head and attempt to lead the board through to an answer.
At your next board meeting, take look around the table and work out which sort of person each of your colleagues may become in crisis.
This knowledge is critical. Board members are normally chosen for their governance and sector experience and knowledge of organisational operations. They are not generally chosen with anywhere near the same psychological consideration given to ordinary staff members or senior management candidates.
Adding to the challenge of forming group that can operate well together, boards meet infrequently, base decisions almost solely on (poorly prepared and read) board papers, and spend most of the time isolated from one other.
Given this less than ideal start, it is not surprising that the mettle of board is easily tested and overwhelmed in crisis. The difference in whether board or the organisation survives said crisis is whether there is at least one board member who keeps their head and at least one of the members rallies behind them. Studies of group dynamics show that these people can either keep things going when others opt out of action, or their determination will carry others along with them.
You have major problem if that crisis leader is not the chairman, as it will cause significant delays and worsening of the crisis before the real hero gets to step up.
The factor that will keep all of the board members unified, even those who hunker down and lash out, will be communication between them (as well as realisation of fiduciary responsibility and personal impact). And then, most essentially, communications with executives, staff and external stakeholders.
(We will talk about what good internal board and board-to-executive communications in crisis are like in the final part of this series.)
But for the moment, know that the central solution to crisis is having at least one board member who will stay focused on the values of the organisation and will dedicate half their time in the crisis to communicating.
When is board in crisis? There are two types of board dysfunction:
1Inherent dysfunction. Poor communications, ill-defined roles, and members poorly suited to leadership and assigned roles. This magnifies the dysfunctions experienced in crisis.
2Inability to respond to crisis.
a. Pre-crisis. The inability to identify crisis due to denial, poor relationships with management, or failure to stick to the governance role.
b. Mid-crisis. The urgency and severity of the crisis causes variety of human reactions which are either conducive to resolving the crisis, or prevent it.
Recognising crisis is the first task, and is therefore the first regular failure of board that goes bad.
The extraordinary event that creates crisis can be obvious; an accident that harms or threatens people, hostile takeover, serious cashflow deficit, or the failure of subsidiary. Examples that come to mind include Enron, the Hemel Hempstead oil terminal explosion near London, and the Air New Zealand Mt Erebus crash.
Boards and their management teams are always juggling with minor challenges of some sort, so the tougher crisis to spot is something ordinary that is about to become extraordinary.
The slow-burning crisis emerges when board does not have good relationship or communication with the management team.
Issues can be hidden from boards, deliberately or otherwise, by management. Poor monthly financial performances or customer churn can be excused or adjusted, major projects and marketing drives can obscure the serious competitive threat they are either trying to address, or are missing. Cost cutting can make performance look better but may have increased risk of hardware failure or lowered customer service.
Management is most often motivated to obscure the truth about pending crisis because there is an adversarial relationship, or simply poor dialogue, with the board.
All of these things are about ‘company’ in crisis. They become the catalysts for ‘board’ in crisis when they cause or expose serious dysfunction between board members. The dysfunction then handicaps the board from carrying out the governance role in unity.
One objective in getting an organisation through crisis is that the board appears unified. Public dissent between members is not uncommon but will almost always exacerbate the stresses by worrying stakeholders, customers and creditors.
Thinking again about the crisis caused by major calamity, it is surprising how many of these events will fail to motivate board into action. They often seem completely unable to grasp the enormity of the threat to their organisation. An example is Exxon’s response to the Valdez grounding. In an infamous television interview, the board chairman failed to explain away report he admitted he had not read.
Some experts have pinpointed arrogance and denial as the single biggest obstacle to seeing crisis or change in environmental reality. (Jagdish Sheth, The Self-Destructive Habits of Good Companies).
Given the high average age of board members, it is interesting that Sheth likens the cementing of these traits to the bad habits of people getting older and more prosperous – inflexible, myopic, smoking, drinking, and eating unhealthily. They are not inevitable and can be countered, but are often associated with growth and success.
A board with members tending to these bad habits, or for whom success has reinforced casualness, can easily underestimate the enormity of an instant event crisis. Even when they grasp the problem, these traits mean they will still be slow and uninspired in reacting to it.
Whether it is an instant or emerging crisis, the first failure of the board is therefore to recognise it. The length of delay in recognising the crisis will exacerbate the magnitude of the board’s dysfunction when it tries to react to it.
Sometimes board never gets to grip with the crisis, or its dysfunction means it does not come up with winning solution. Events will rapidly overtake them. Shareholders or stakeholders will turf the members out, or the company will financially collapse.
The crunch point of board crisis is when the board has recognised the crisis and its members are reacting variably to it. We will examine this period, with real-life examples, in the next article.

Some principles of board leadership and communication
The intention of these articles is not to deal with the principles of good governance. These are well established and documented in management literature. It is important to note that their practice is variable, and that the breaking of them (such as meddling in operations) is, in my experience, major contribution to board in crisis. For clarity though, my view is that board’s job is to represent shareholder interests by providing strategic guidance for the organisation, making decisions about the purpose and future of the company, and monitoring the performance of management.

Mark Blackham

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