Reform follows dysfunction

The consequences for an enterprise with a dysfunctional board can be devastating. To make things worse, identifying the problem isn’t easy and fixing it takes courageous leadership
By John Caldwell

Dysfunctionality in the boardroom, while somewhat difficult to define, may be best characterized by U.S. Supreme Court Justice Potter Stewart’s famous expression, “I know it when I see it.”

Board dysfunctionality is a step function higher (or lower, depending on the scale) to board ineffectiveness. Having been exposed to two dysfunctional boards in my career, I can attest that consequences to an enterprise can be devastating. Ironically, boards are often oblivious to their failure to function appropriately. In fact, the predictable outcome of such a board’s self-evaluation would be no different than attempting levitation by standing on a skipping rope and pulling on both ends.

There are multiple symptoms of dysfunctionality and quite often there are several simultaneous factors at play. I liken this to my instructor’s pithy assessment of my abilities following a one-day, race-car driving school: “You have a bad combination of no fear and no talent.” For dysfunctional boards, it is often the lethal combination of dominating directors with conflicting agendas.

Conflicting agendas can take many forms. In the case of activist shareholders who attain board representation, it can be a thesis for short-term value creation that is at odds with other directors’ view of a longer-term strategy. It also could be as simple as strongly differing views—such as some directors favouring internal investment in sales, marketing or R&D while others supporting profit maximization. Personal agendas can also be at play, such as a board member’s desire to oust the CEO in order to take on that role themselves.

Dominant board members or CEOs can preempt the board’s function and effectiveness. Overbearing directors are often aggressive or even combative, accusatory rather than inquisitive. Interestingly, the caustic effect of such aggressive behaviour is readily apparent, yet the offending director believes they are acting appropriately.

Other symptoms of dysfunctionality include lack of order, dissension or even hostility at board meetings, lack of trust and disrespect amongst board members or with the chief executive officer. Off-the-record meetings in which a few directors reach decisions prior to board meetings are a bad sign and almost always divisive. As well, board member micromanagement—crossing the line into CEO’s role—can seriously undermine relationships and waste valuable time.

Dysfunctionality can also occur when a weak board of directors is juxtaposed with a powerful CEO. Such boards are characterized by lack of accountability, failure to challenge decisions, lack of constructive disagreement and a preoccupation with processes and procedures while ignoring critical issues.

The symptoms of a dysfunctional board are often apparent to those who are not the source of dysfunctionality. The challenge is what to do about it. The first step is to determine the root causes.

If dysfunctionality arises from one or more dominant directors or an overbearing CEO, the board can effect change but this requires courageous leadership. In most instances, the problematic behaviour is likely a long-standing practice on the part of the offending director or CEO. The remedy is not a complete transformation of the offending behaviour but simply eliminating it as an impediment to effective board performance. Often the board chair that allows bad conduct is not the one to make changes. Indeed, the first step is more likely to replace the chair. Difficult conversations are critical—either triggering the required behavioural change or, if unsuccessful, termination.

If dysfunctionality arises from the combination of dominant directors in leadership roles and an aligned CEO, bluntly, this is an uphill battle for the remainder of the board. It is unlikely to end well. In a widely held enterprise, board members in this circumstance have limited alternatives. Rallying the remaining directors is a very delicate process usually involving multiple off-line discussions. Unless these directors form the majority of the board and are committed to force change, resignations may be the only option.

John Caldwell is a veteran CEO and board member experienced in distressed situations and is the author of CPA Canada’s A Framework for Board Oversight of Enterprise Risk. E-mail: johncaldwell@rogers.com.

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