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Governance
The three types of toxic board culture and how to avoid them
Is your board trapped by groupthink, dominated by a controlling chair, or gridlocked by cultural clashes? Here we identify boardroom traps and show you the best way out.
Boards have two conflicting roles to play. The first is to support management in driving long-term value and growth; the other is to hold them accountable. Directors are expected to be a mentor, coach, and advisor as well as a supervisor, monitor, and watchdog. What is often referred to as the ‘directors’ dilemma’ requires a balancing act, and the modern board is failing to achieve it, putting the sustainability and competitiveness of their organizations at risk.
Directors often get trapped into performing one of the competing roles, and it has little to do with their expertise or competence, neither of which is a guarantor for good governance. In fact, in our analysis of over 30 problematic boards, we have found that the behavioral culture of the boardroom either enables or prevents directors from focusing on what matters most.
Through our work with these boards, we have identified three common ‘traps’ that impact boards across the world. These traps are found in private businesses as much as in publicly listed ones.
In this article, using illustrations from our work with family enterprises specifically, we help you identify which trap is standing between you and success in the boardroom and offer practical steps to overcome it.
Which trap are you in?
Happy board trap
This is a common environment in which directors struggle to fulfil their board duty due to their alignment and unwavering loyalty to the CEO. Within this trap, there is the deluded board that intellectually buys into management projections of the take-off, or turnaround that never happens. It is often reassured by upbeat reports based on aggressive accounting and rosy projections, and ignores credible warnings of heightened risk, distracts itself with minor decisions, and expresses faith in the ‘perpetual maybe’ of a turnaround.
The second is the empathetic board, comprising members who emotionally identify or sympathize with the chief executive, with little knowledge of the firm’s industry. Board members engage in groupthink, easily find a consensus, and frequently arrive at unanimous decisions.
We saw this unfold in a property development family business in the Middle East and North Africa, 100% owned and controlled by two second-generation brothers who had succeeded their father in their late 40s. Each had successful business experience and an equal stake, but the eldest led as CEO whilst the youngest ran a separate company and sat on the board as a non-executive. They were strong individuals with experience and expertise across the financial services, private equity, and property development sectors. The brothers selected board members; meetings were frequent but short – around six per year, each lasting just two hours, followed by lunch. The members of the board tended to agree quickly with the leading brother and made decisions unanimously. The brothers displayed a respectful and mature attitude and were keen to learn from best practice. They had asked an advisor to observe a board meeting, and in the meeting in question, the CEO proposed an investment which the younger brother opposed due to it sitting within an unpromising region. He acquiesced with a classic ‘false yes’ out of filial loyalty.
The investment was significant in relative terms at $50m, the value equivalent to 10% of the company’s turnover, and at the advisor’s insistence, that part of the meeting was re-run immediately. The role of a board member is to challenge the executive, despite respect levels or blood ties. What occurred at the reconvened meeting was a rich discussion, exploring in-depth the elements that board members did and did not like about the proposed investment, and what they needed to identify to secure a better one.
“Dominated by their chair, CEO, or owner, dominated boards are too controlling and fail to perform their coaching and advisory role”
Dominated board trap
Dominated by their chair, CEO, or owner, dominated boards are too controlling and fail to perform their coaching and advisory role. Businesses can thrive with a strong, dominant leader, often the case for concentrated ownership structures in family enterprises, but when the leader’s approach is no longer suited to a changed context, the board is unable to adapt and change. These boards can be broadly subdivided into two categories. The first is the autocratic board ruled by intellect and fear and dominated by the autocrat’s fast thinking on topics he or she is familiar with. The leader is often unaware of their leadership style, and decisions are taken rapidly without space for opposition.
The second subcategory of the dominated board is the guru board, ruled by emotion and charisma alike. Decisions are driven by the guru’s perspective and his or her ability to shape others’ opinions. When some disagree, rather than forcing through their view, the guru is more likely to use persuasion to assemble a majority coalition.
We noted this in the case of family business, Banco Espírito Santo in Portugal. It was led with remarkable success for many years by Ricardo Salgado, great-grandson of the founder. His guru status was forged by the dramatic recovery he led after a decade of exile that followed the bank’s nationalization in 1974. When the family was permitted to operate again, following re-privatization in 1991, Salgado, fourth generation, took a leading role in restoring the bank’s fortune, as well as expanding and diversifying the family’s business interests. To rebuild and diversify the firm, Salgado used the family’s holding company based in Luxembourg, which was set up to preserve the firm during the years of exile. As the conglomerate expanded, so did its complexity. Conflicts of interest grew as the bank lent money to other parts of the family empire. Different branches of the family began to fall out with one another. However, de facto control remained with Salgado as chief executive of the main bank, which began to face accusations of mis-selling products to savers.
The head of the investment bank, derived from a different branch of the family, began opposing Salgado’s strategies and policies – in particular, the rising debt and the misstatement of liabilities that had come to light during an investigation by the Bank of Portugal. He and other senior family members sought to have Salgado removed. However, the family council, consisting of five branches – four family and one non-family – voted against his removal. The reason? Salgado dominated decision-making; meetings were closed, and, for many years, not even minuted. Ever the dominant leader, he faced down his critics and appealed directly for support to stay as chief executive. The bank later collapsed after his dramatic arrest.
The gridlocked board trap
Some boards become gridlocked, unable to make decisions, because of deep-rooted divisions and rival power bases. Again, there are two board types in this category, the first refers to those with an objective conflict reflecting clashing but genuine differences on the board around the strategic direction of the business. A healthy board can discuss the issues openly and intensively, and then subject important decisions to a vote. However, when there is no willingness to compromise, divisions can become prolonged. Leading indicators are one or more directors who repeatedly express an arbitrary no that blocks decision-making.
We saw this scenario unfold within one family business, the Tata Group, where genuine differences existed over strategic direction. Cyrus Mistry was the sixth executive chairman of the group and the first outside of the family in its 150-year history. Mistry wanted to make a more profit-focused corporation, closing or selling off unprofitable parts whose interests included aviation, cars, salt, computer services, and energy. For Ratan Tata, his predecessor as chairman, some of the less profitable divisions were part of the group’s heritage and values and could not be sold without destroying its identity. Alongside diversifying, Mistry wanted to increase the group’s transparency, ending the practice of awarding generous contracts and favors to friends, which later came to light in court papers relating to the start-up AirAsia.
Mistry claimed he was not given the autonomy to run the group, and in turn, the board said that he should have given them more information on important matters. The power struggle continued when the holding company voted to remove Mistry as chair, five months before his contract was due to expire. It was reported that in advance of the firing, Tata had hired six major PR agencies and several lawyers.
The second type of gridlocked board is one suffering from cultural conflict. A key indicator of this is the continual labelling by directors of one another outside the boardroom as belonging to different sub-groups with different beliefs, habits, and ways of working. A common cause is a merger, when two companies from different nationalities or those that were formerly engaged in strong market competition come together. The phrase ‘they are not like us’ is a clear indicator of this type of trapped board. This is where a board becomes dysfunctional and splits.
Boards with a dominant leader, on the other hand, need more forceful intervention and have difficulty engaging their leader on strategy, organizational culture, and ultimately, their leadership style.
How to overcome it
If you are a happy board, you may loathe challenging the CEO on business performance, compliance, and risk, as it can disrupt your supportive relationship. However, to add true value, you must ask tough questions and hold management to account. Happy boards often need a new committee structure, process, and information to put the spotlight back on performance, compliance, and risk. Happy boards can often escape the trap by using board workshops to put proper evaluation, process, and committee structure in place to ensure that the board fulfils its monitoring and supervising role.
Boards with a dominant leader, on the other hand, need more forceful intervention and have difficulty engaging their leader on strategy, organizational culture, and ultimately, their leadership style. Their dominant presence suppresses the acknowledgement and discussion of these make-or-break issues. The challenge is to get the dominant leader to first accept that they are dominating, which is affecting the board’s effectiveness. The second is to agree to play a different role. This is difficult because the individual is an imposing presence, not only psychologically, but in practice is often in control of the key decision-making forums. It requires board members, activist shareholders, and other critical stakeholders to confront the leader with the reality of the situation.
Where a board shows signs of becoming gridlocked, the substantive issues should be separated from the personal as early as possible. In well-facilitated discussions, participants can identify the personal issues, which may be thwarted ambition, frustration, and so on, and separate them from strategic issues, including genuinely differing opinions on risk-taking or global expansion. The latter are amenable to debate and either compromise or majority decision, but typically, gridlocked boards have difficulty discussing the diverging interests and styles of the board factions. They lack a climate of trust to facilitate the discussion of sensitive differences. Once gridlocked boards become dysfunctional, the only way out is often a radical change in the board’s composition, if not the firm’s ownership structure.
The ideal board culture will not only allow but also encourage its members to drive long-term value and growth while simultaneously holding management accountable.
Conclusion
Board members have always had a pivotal role to play in organizational success; however, today’s increasingly complex and turbulent business environment makes their role a critical one, and their success is dependent on the quality of their interactions with one another.
The ideal board culture will not only allow but also encourage its members to drive long-term value and growth while simultaneously holding management accountable. It will generate trust, facilitate and celebrate differences, create the right context for decision-making, and manage conflict. It will do so while fostering an inclusive and transparent environment in which its members embrace their responsibility with moral authority, independence, and integrity. It will facilitate critical thinking, openness, and a culture of learning.
Boards must have a unified voice arising from a blend of backgrounds, personalities, perspectives, and dynamics in the boardroom. In the case of family enterprises, alignment is crucial for the long-term sustainability of a family legacy; however, family boards must host diversity of thought, critical thinking, and emotionally intelligent leaders who can hold wealth owners and their managers to account over decisions that might not make sense from a financial or socioemotional wealth perspective.
The boardroom culture is central to a robust governance arrangement, and the most successful family and nonfamily enterprises today are governed by board directors who are dedicated to upholding board culture with consistent values and behaviors. They are also supported by a management and leadership team that wants what is fundamentally best for the organization, rather than putting personal ambitions and interests first and, in the process, setting the board up for failure.
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