How Strong Boards Fail

If you’re an effective Board, you’re at the top of your game. You know the business, you contain the risks and you spot the opportunities. But the strongest Boards also look for ways to get stronger. These Boards are aware of the weaknesses inherent in their strengths.

Board Reviews help prevent cracks appearing in Board functioning

Even strong Boards can have cracks

Many of you participated in Egan Associates’ May snap poll exploring whether your Board was dysfunctional. Egan Associates was gratified to find that a large proportion of Boards report they are overall in very healthy shape.

Of those who completed the poll, 77% indicated their Board was highly effective. Only 13% gave responses that indicated the existence of some issues and just 10% provided answers that showed their Board had some serious problems.

In our work, we have found these statistics hold generally true, yet with a caveat. Even when Boards are running smoothly (by their own assessment), there is usually at least one Achilles heel. This problem if not addressed could be the path to failure for a highly effective Board. Common issues we have encountered in our work are:

  • Board Renewal – Too often strong Boards allow themselves to settle into an established “way of doing things around here”. Hero Directors serve beyond their “use by” date and time for replacement. Worse, new Directors are often drawn from the same background as their predecessors. What effective Boards do is monitor their world to determine what skills and capabilities they need both now and in the future. Then they demand of the Nomination and Remuneration Committee an active plan for renewal and succession that the entire Board revisits at least annually.
  • CEO vs Chair Conflict – Three common challenges occur. First, the Board may be dominated by a strong Chairman. Even if governance appears sound, Directors must make an active effort to ensure they monitor management on their own terms. Second, the Board may appear to be managed by a strong CEO. In this case, the Board must assert its responsibilities so as to avoid being regarded as a “rubber stamp”. Third, an equally strong CEO and Chairman may be in conflict. This often occurs where the founder or a very long-serving individual is in either role. Because this conflict is likely to surface not only while handling relatively minor issues but also while dealing with significant operational and strategic matters, the Board as a group needs to recognise and manage this conflict firmly.
  • Strategic Erosion – It is too easy for Boards that are hitting the ball out of the park to fall into the trap of accepting assumptions presented by management to support the business strategy. Whether those assumptions are about access to capital, the projected growth of a market, the likely direction of technology, options presented by regulations or government, or opportunities around new products or services, the Board’s job is to ask questions. Directors must challenge, ask “what if” and explore alternative futures. Only then can they make informed decisions that minimise risk and maximise corporate success.
  • Diversity – When Boards do navigate the renewal hurdle to embrace diversity, the term is often interpreted to mean only gender diversity – Australia’s lagging progress on gender diversity in Boards has been high profile. Unfortunately, once one or more women are recruited to the Board, it’s often business as usual and the benefits of diversity reflected in race, age, training, work experience and culture are not brought to the Board table, which can lead to a narrow perspective. The Board may convince itself that it is governing and making decisions appropriately, but it is looking through a narrow lens and thus runs the risk of failing in its endeavours.

Although these areas are important, they are not an exclusive list. Other problems we have encountered include when Boards:

  • Focus on operational rather than strategic issues;
  • Have a restricted risk appetite;
  • Experience challenges with management providing Directors appropriate Board papers;
  • Struggle with the balance between managing compliance and seizing opportunity;
  • Are indecisive or less forthcoming than they should be in communicating with stakeholders (whether customers, proxy advisers, shareholders, competitors or government);
  • Lack knowledge about how technology impacts the business; and
  • Lose sight of their purpose during a capital event such as a M&A etc.

No matter how well read Board members are, or how in tune with governance, many will miss their Board’s one Achilles heel. It will be specific not only to the Board, but also to the Board in the particular circumstances it is operating.

Boards must be self aware to be able to consistently see past their own success to detect and neutralise weaknesses before they become points of failure. One way to achieve this is through a process-led Board Effectiveness Review held at least annually.

The irony is that this weakness will in many cases be the flip side of the Board’s greatest strength. A fantastic CEO may leave succession issues in his wake. A dominant market share in one industry may leave the company vulnerable to cyclical change. This is why strong Boards treat Board Effectiveness seriously. They have too much to lose: they can’t afford to fail.

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