September, 2012

When a Board Strays Toward Trouble

The task of diagnosing looming trouble typically falls to board leadership.

Patrick R. Dailey

All boards go through rough patches. Change events always trigger reassessment of norms, relationships, processes and expectations. Reassessment often happens individually and subliminally. It is rarely verbalized at the outset but the gears are, no doubt, turning on the inside. At some point, uncertainty, resistance, passive-aggressive behavior and corrosive forms of dysfunctional behavior may emerge. Consequently, change always presents a challenge to the prevailing board culture—colloquially, a challenge to the way we do things around here.

Patrick R. Dailey

If your board has experienced change, and whose hasn’t, then you have experienced the testing of the cultural rules and dynamics by directors. Rough patches do emerge in the behavioral dynamics of any board. These range from mild and virtually undetectable reactions to severe boil-ups. Early recognition and corrective action are essential to preserve the work ethic and spirit of a high-performing board, one that also must satisfy its directors’ expectations for professionalism, adherence to sound governance practices and the protection of one’s personal reputation.

Large Problems Typically Begin as Small Problems

Typically, behavioral problems start small. And just as typical, these problems don’t just magically disappear. Left unchecked, small issues tend to fester and morph into larger issues that become more visible, more destabilizing to the conduct of a board, and more vexing to resolve—the ones we read about in The Wall Street Journal such as Hewlett-Packard, Yahoo, Best Buy, Chesapeake Energy or News Corp. Tackling small problems is easier than large ones.

Understanding Board Culture

Simply, culture implicitly communicates the rules for behaving in a team. Culture teaches the dos and don’ts. And, culture will penalize those who fail to abide by the norms and unwritten rules. Every board develops a unique culture and the ground rules are defined by the factors presented in Figure 1, “The Board of Directors Culture Model.” The five factors capture the elements of board culture which are most significant in defining the cultural ground rules of a board—these factors represent the norms, standards and values that will be learned by newly appointed directors, played out in the everyday functioning of a board, and those factors which will be tested during times of change and re-assessment. For a full description of the board culture model see “Understanding Your Board’s Culture“ (NACD Directorship, September 2011).

Diagnosing Trouble Ahead

Astute board leaders are sensitive to the early warning signals of trouble—those looming rough patches. They have lots of help with best practices and professional advice. Notably, the National Association of Corporate Directors publishes white papers and other resources that advocate good governance practices. These papers are part of a library of recommendations for structuring boards, operating with transparency and independence and renewing board competency. NACD’s Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies is important reading for chairs and all directors for building boards that work.

The task of diagnosing looming trouble typically falls to board leadership: the chairman, presiding director or committee heads, but it is the task of all directors to be alert to matters that impact governance, threaten their fiduciary responsibilities, their reputation and their personal satisfaction from board service. No one wants to be on a lousy board.

“Diagnosing Board Trouble” (Table 1, below) is a reflection of the Key Agreed Principles filtered through behavioral dimensions of the Board Culture Model. The diagnostic factors in the Table present early indicators of behavioral dysfunction. Diagnosing Board Trouble was not created to troubleshoot policy, regulatory or financial threats. The indicators are organized within the five culture factors of the model to facilitate diagnosis and problem solving.

Addressing Problems

Individual Problems. The beauty of addressing problems while they are small is that the problem is likely not entrenched, and a collegial chat from a designated and respected board colleague often brings unwanted behavior and sentiment back within acceptable culture standards. The board moves forward constructively.

Board Problems. Collective problems pose greater risk and challenge in how and when to bring a matter up for discussion. Group dynamics will typically lead a board to discount or dismiss a matter as untrue or irrelevant. Regrettably, formal board evaluation procedures don’t often put much of a spotlight on the behavioral matters addressed in Table 1. So, the task falls to board leadership for testing the waters and pushing forward to open the problematic indicators for discussion. Some boards choose to hand out the Diagnosing Board Trouble chart and empower any board member to bring forward concerns or the need for discussion. If the dysfunction is yet to be ingrained, problem solving can operate without much resistance; if the dysfunction has become ingrained in the culture, the challenge of change and making change stick is formidable. The board must make a commitment to change and have milestones to gauge progress.

Attempting to Correct Individual Behavior Using Group Talk. In the spirit of collegiality and perhaps tact, often the disruption or dysfunction a single director creates for the board is not brought directly to the individual for correction. Instead, the problematic behavior is teed up and discussed as a matter for the full board to correct as if the full board was the culprit—group talk. Not isolating and correcting the problem with the individual will trigger resentment by those who operated within the ground rules and are now puzzled at why they are being corrected. Best to treat the problem director not the full board.

Recommendation

Develop an “Our Way” Statement. Because dealing with “soft issues” is often unfamiliar ground for boards, it is valuable to author a one-page statement of the board’s culture—address beliefs, attitudes and behavioral expectations for the way things should be done. Communicate differing levels of intensity to signal what is of high importance and adherence. Importantly, identify those behaviors that are contrary to the board’s expectations. This brief statement sets expectations for how directors work together.

Tailor the Chart: Diagnosing Board Trouble. To reflect those unique and likely troublesome matters occurring on your board, edit and adjust the diagnostic items in the chart. Discuss the tailored chart and reach consensus among directors that the chart leads the board in the right direction. This supplements the “Our Way” statement as a diagnostic tool. Add the tailored diagnostic chart to your board’s annual board evaluation process.

Provide “Our Way” and the Diagnostic Chart to newly appointed directors. Have a board member or someone from the nominating committee preview these documents with new directors.

Keep it Relevant. Periodically review “Our Way” to ensure it reflects the expected culture of your board. Revise the Diagnostic Chart to enable small problems to be dealt with early on.

Patrick R. Dailey, Ph.D., is a partner in Board Quest LLC, a board of directors consultancy, and serves on the board of the NACD Atlanta chapter. He can be reached at 310-400-9992 or pdailey@boardquest.com.