The damage done by dysfunctional boards

  • Date:01 Apr 2013
  • Type:Company Director Magazine

Very little can be more damaging to an organisation than a dysfunctional board. As Kylie Hammond notes, it is bad for the bottom line, can tarnish or destroy entire brands and leaves an ugly stain on the reputations of the company’s directors.

Leo Tolstoy’s Anna Karenina opens with the line: "Happy families are all alike, but every unhappy family is unhappy in its own way." And so it is with unhappy boards.

There are many forms of dysfunction within boards, some that can be easily addressed and others that can be more difficult to resolve.

In my experience, when a board becomes dysfunctional, nine out of 10 times the problem is simply that the wrong mix of people is in the room.

People are appointed board members because of their expertise, experience, great reputations and networks, and often due to their strong personalities. This mix can create its own challenging issues.

There are a range of reasons why individuals sign up for board positions in the first place, and understanding these can go a long way to explaining dysfunction in the boardroom.

In some instances, individuals pursue board roles purely for ego’s sake, believing the role will look good on their CVs, rather than out of a true interest in contributing to the board and in doing their fair share. I know of one board in the aged-care sector where several directors simply don’t turn up for regular, scheduled meetings.

Issues can also arise when people are not remunerated appropriately – perhaps they are there on a volunteer basis, so it becomes a lower priority for them.

And sometimes it is simply the lack of a good chairman to keep everybody in line and to direct the conversation to where it needs to go.

Whatever the causes, the first and most vital job for any board is to identify whether it is performing admirably, or whether there is work to do. There are many outward signs of board dysfunction, including:

  • Churn in the boardroom and among senior management – constant comings and goings are not a good sign.
  • A CEO who is often seen to struggle because he or she has little support. The opposite is also true, of course. When a CEO has way too much power and runs rampant it can be a sign of a weak board too.
  • The business constantly fails to meet key objectives. This is particularly noticeable when other organisations in the same sector are performing well.
  • Constantly disappointing financial results compared with organisations in the same industry.

The effects of a dysfunctional board can be severely damaging.

The business will undoubtedly lose good people and will make bad decisions. But sadly there is not always a quick fix.

When it comes to removing or retraining specific directors, and then having new directors voted in, a good deal of damage can be done in the time this takes.

That is why a regular performance check is vital to catch problems early and before they become serious.

Don’t Just Join Any Board

For those being invited onto a board, it is important they don’t simply accept out of a sense of being flattered. Of course it feels good to be invited into such a position, but taking a seat on the wrong board, or the wrong seat on the right board, can be a very bad career move.

Before joining a board you should conduct vigorous due diligence.

Ask for copies of the board minutes from the last 12 months and study them to see what has been agreed and achieved, how many directors showed up to meetings, and whether decisions were reflected in the company’s strategy and performance.

It is also essential to study the calibre of the other board members. Find out what experience they have, what they have done in their past careers and what their reputations are like in the industry.

Most importantly of all, check out the chairman. Often a board’s performance will reflect the talent and management abilities of its chairman. After all, this person is the board’s manager.

The chairman should oversee each meeting and keep discussions on track and on topic. At the same time, he or she should recognise when there is an issue, when a topic is too big to be solved in one meeting and when offline meetings, or further information-seeking sessions, are required. A good chairman will recognise when specific directors are struggling or not pulling their weight, and will take action when that occurs. And when certain directors are overly forceful in their opinions, a great chairman will restore balance and ensure every voice is heard before a decision is made.

A thorough check on a board is vital as problems are often not so visible from the outside. After all, a board’s job is to appear balanced and always in agreement even when it is not.

How To Mend A Broken Board

The safest option for a board is a constant health check. Just as medical experts tell us the best cure is prevention, the same rings true for boards that wish to avoid serious problems.

The ASX Corporate Governance Council recommends a regular review of board performance. The council is not prescriptive about how this review is carried out, or how often, and this should be left up to the board to decide.

A very good start is for a board to simply sit together to discuss how things are going in terms of board performance.

The more complicated and larger the business, the more regular and thorough the review should be.

Some boards opt for an extensive review by an external and independent consultant, including off-the-record interviews with board members. This sort of review should result in recommendations around what the board is doing very well and also around where it needs to improve.

As this review process becomes common practice, boards will find important external bodies, such as major investment firms and ratings agencies, will seek evidence that such reviews are taking place.

In summary, every action a board takes should be for the benefit of the organisation. If it becomes about the aggrandisement of individual directors then, quite simply, there is a problem.

Some tips on how to avoid a dysfunctional board follow:

Look for signs of dysfunction. These include:

  • Regular resignations and appointments.
  • Organisational underperformance.
  • The constant missing of objectives.
  • CEO and senior management struggling for support.

Do proper due diligence on any board you’re invited to join, including:

  • Request meeting minutes from the past 12 months and read critically.
  • Investigate the backgrounds and reputations of other directors.
  • Take a careful look at the chairman as the person with most influence over board performance.

When on a board, ensure your performance is always up to scratch by:

  • Scheduling regular discussions and feedback sessions with the board on the topic of performance as individuals and as a team.
  • Considering bringing in external and independent consultants to analyse your performance as a board.
  • Benchmarking your performance over time to ensure constant improvement.

 

Kylie Hammond
Founder and CEO
Board Portfolio