Cover story : Balancing board control

When New York radio host William B Williams dubbed Frank Sinatra “chairman of the board” it was recognition that the New Jersey-born singer ruled the music business. He was the boss, the leader of the pack, the dominant force in his industry, end of story. But, how much power does chair really have? And is it too much? As companies here in New Zealand demand more from their boards, just what style of leadership is expected of chairperson anyway?
Chairman of the board, or just chair as we tend to say these days, is still title that reeks of authority, swaggering metaphor for power. It conjures names such as Steve Jobs, Warren Buffett, and Rupert Murdoch. Or if you’re politically minded, chairmen Mao and Arafat.
Questions around just how that power is, and should be, exercised attract numerous academic studies, such as that conducted by Richard Leblanc from Canada’s York University. Given access to nearly 200 directors on 21 boards of North American companies, he came up with the ‘10 Cs’ of director behaviour. On the plus side of board leadership is the “conductor-chair”, who serves as hub for board activity; on the negative the “caretaker-chair” who can’t run meetings, handle dissent, or communicate well with management. Worst of all, he says, is the “controller-director” who dominates board for his or her own ends, using superior knowledge, manipulation, or even anger to get his or her way.
Yet describing what chairperson shouldn’t be is the easy part. By their nature, bullies stand out. Knowing how to handle chair-power in Goldilocks fashion – not too much, not too little, but just right – is much harder to pin down. For one, it depends on business’ size and maturity. For another, rules governing how chairs should lead their boards are neither universal nor especially detailed.
Companies may include requirements in their own constitutions, but the Companies Act, while it defines the meaning of director and board, is silent on what it means to chair board. It goes out of its way to say that the chair is by no means required to have casting vote and notes that even having chair is optional.
As Susan Watson, deputy director of Auckland University’s new Governance Centre says, “Under law chairperson has no more authority than other directors.”
The New Zealand Exchange’s corporate governance code only uses the word chairman once – to urge that the same person not hold that position and be chief executive at the same time. The Securities Commission’s guidelines encourage the same practice but go little further, stating that chairperson should be “formally responsible for fostering constructive governance culture”, “independent”, and should not chair any sub-committees.
The Institute of Directors is perhaps the most detailed, saying that chairperson sets the agenda for board meetings, ensures other directors receive “sufficient and timely” information and are encouraged to express their views, and is “the link” with management.
Nothing in those codes and regulations suggests that board-table Napoleans should thrive in this country; indeed, they seem to restrict more than empower. Our corporate traditions reinforce that. Joint CEOs and chairs have been unusual here, keeping company’s two power-bases in separate hands. Chairs are typically elected – and removed if necessary – by the board. Chairs don’t tend to hold majority or dominant shareholdings in their companies. And, as in most realms of New Zealand life, anyone getting too big for their boots in the boardroom tends to get short shrift.
In brief, chairs in New Zealand have little official power; they are expected to be the first amongst equals, not little tin gods.
The story, however, doesn’t end there. New Zealand chairs wield significant power, sometimes in destructive fashion. The Hawke’s Bay District Health Board, in one high profile example, was found after months of controversy to have “substantial problems” including “dysfunctional relationship” with management.
A closer look reveals that chairs in this country have fair array of power tools at their disposal. Soft power, that is.
Perhaps chair’s most blatant power-base is her or his knowledge of the company, and the place that knowledge comes from – close relationship with the chief executive. chair is CEO’s counsellor, mentor and sounding board. It’s one of the most crucial relationships in the company and other directors simply don’t spend as much time with management or glean as much knowledge.
“The key thing,” says Tony Caughey, who chairs five boards, “is that the chair tends to be closer to the business. Non-executive directors are often not particularly well informed.”
The chair and chief executive typically speak two or three times week – more often if major deal or strategy is being worked through. The potential for the pair to become
co-conspirators is very real, but it would be wrong to assume that it always plays out to the chair’s advantage. One experienced director who didn’t want to be named recalls chairman in the early 1980s getting too close to his CEO. The CEO pushed the company down “too many paths”, leading to the company’s demise. He also recalls another chair driving through merger of two large companies only to watch as his CEO’s strategy, long criticised by other directors, unravelled before their eyes.
For chair and chief executive alike, distance is as important as trust in their relationship.
Caughey is aware of occasions when between them senior managers and chairs have tried to ambush their boards and force course of action without proper consultation.
“The problems occur,” he says, “when the chair and the chief executive come with pre-determined plan.” He pauses before adding, “That’s happening less often than it used to.”
David Clarke, director of merchant bank Cranleigh, himself chair of five boards and member of two others, agrees that knowledge and access offer chairs significant power advantage over other directors. But that seldom amounts to domination.
“I’ve found that most chief executives are very wary about getting too close to their chairmen” out of concern they will want to dabble in operational matters, he says.
Often the problem lies with the other directors, he notes.
“There are boards I’ve known that have had particularly dominant chairmen. That’s reflection of themselves as people, but it’s also about the quality of the other directors.”
It should only take three competent directors on 10-person board to rein in heavy-handed chairperson, he believes.
Anyone who’s ever sat on committee will understand the other soft powers chairperson has to hand. He or she sets the agenda, times the release of information to other directors, calls meetings, starts and ends discussions, and summarises debate. In corporate New Zealand chairs can afford to spend more time on their directorships because they are paid more than other board members, often twice as much. Soft power it all is, but it’s open to rough, and very real, manipulation.
Roderick Deane, perhaps New Zealand’s most prominent chairperson, points out two other sources of chair-power. The man, who until 2006 chaired three of New Zealand’s five largest companies – Telecom, ANZ National Bank and Fletcher Building – and sat on the boards of two of Australia’s top 10 companies, says “a chairman has lot of influence over who will be the other directors as he usually leads the search… And over who will be the CEO.”
He emphasises the importance of diluting your power in that instance. “When I’ve been choosing new directors, for example, I’d usually have all the other directors meet them, check with referees and so on.”
With such organisational control resting in the hands of one person, Caughey says it’s vital that directors remember their job to represent all shareholders. It’s easy for certain directors, chairs included, to become advocates for just one significant shareholder and “have wishes that differ from wha