Good Governance : Removing The Lump Under The Boardroom Carpet
Dr. Richard M. Furr and Lana J. Furr bring over 30 years of experience each to their roles as co-founders and principals in Furr Resources. They focus their work on developing high performance organizations, beginning with their work in assisting boards of directors in going beyond the Sarbanes-Oxley requirements to evolving the board to being a major strategic asset for the organization.
A licensed psychologist, Dr. Furr is a graduate of William and Mary and earned a Ph.D. in Organizational Psychology from the University of Tennessee. He was on the business school faculty at American University in Washington, D.C. He has authored chapters in books on consulting practices and has published articles in several professional journals.
Lana J. Furr is an honors graduate of Wake Forest University with a degree in communications. She began her career with a major national bank and then worked with three national and regional consulting and training firms. Lana has been honored as an ASTD Trainer of the Year and has been published in several magazines including Supervisory Management.
Their clients have included Microsoft, IBM, DuPont, Bank of America, Duke Energy, Sara Lee Corporation, British Oxygen, Martin Marietta, DHL, SunTrust and many other for profit and non-profit organizations.
Contact Lana by e-mail LJFurr@FurrResources.com
Contact Richard by e-mail RFurr@FurrResources.com
Check out the Furr Resources website www.FurrResources.com
The graveyard is full of boards that have been shown to be lacking in effectiveness and who left a legacy other stakeholders look at and wonder, “How could the board have let that happen ?” This has happened to for profit AND not for profit organizations with prominent organization leaders on their boards.
Of course the boards did not think they were doing anything wrong. In fact in many cases, everything “looked good,” at least on the surface, as best they could tell. In most cases it is not so much that the board was doing anything “wrong;” it is that the board was significantly negligent in its responsibility of holding itself accountable for effectively fulfilling its leadership role. Yet the outcomes were disastrous, or at a minimum, created a serious credibility gap with stakeholders. These same boards would probably have fired their CEOs long ago for the same degree of negligence. Think about all the companies that no longer exist as a result of bankruptcies or were acquired due to weakness when others in the same industry have continued to thrive. That difference is a function of strategic leadership, starting with the leadership effects of the board.
No one likes a root canal except a dentist, and even then, it depends on whether s/he is the one in the chair. Many boards and CEOs look at obstacles to optimal effectiveness in their board and have a somewhat comparable reaction in the sense that the thought of addressing the “real” issues with the board is anticipated to be just too painful. The common solution is to “play it safe” and do some board education rather than real board development.
With board education you can always invite someone to the board’s retreat to talk about legal issues, financial matters and, oh yes, going over the strategic plan would be good too. Or you can send a few directors away to a course on fiduciary responsibilities, risk management or the latest legislation. While directors clearly need to be informed about these matters, creating real movement in the boardroom requires the board to see itself in a different light, own what it sees, set a course forward and hold itself accountable for executing that course. This is development, and a board must hold itself accountable for its own development.
Common Board Development Frontiers
In our research and work with boards, even good boards have some common development frontiers that put their legacy and the performance of the organization at risk. The most common scenario is that of an effective, usually visionary, strategic thinking CEO who tells us he/she needs more strategic help from the board and is struggling to get it because of the competencies on the board and the board’s processes and practices. The question is usually about, “How can I get the board to see what it needs to do to develop itself to be an effective strategic partner with me in preparing this organization for the future ? I feel like I usually have to drag the board and I can’t tell them that. I need them to discover that and take responsibility for developing the board.” And that is with basically a good board and successful organization. Genuinely weak boards rarely seek to develop themselves until it is too late.
Some development frontiers arise from the composition of the board in terms of its members and their mindset, competencies and personality. Other frontiers arise from practices that have been operating either by design or default.
Mindset, Competencies and Personalities
A great deal of what happens on a board has to do with who is on it, what each director brings to the table, and the way directors actually relate to each other. As a result, the board forms a micro-culture at the very top of the organization that has a leadership effect by its actions, or inactions, on the rest of the organization. Like many other individuals and groups, directors may be quite unaware of the effects of what they do. Many of these effects are unintended, quite real, and often of great consequence to the organization, its long-term success and sometimes its very survival.
A frequent challenge is the lack of competencies among some directors. Also, the personality in which these competencies are packaged has a significant effect as well. The competencies needed on the board should be guided very intentionally by the corporate vision and strategy. Many boards are “stuck“ with directors whose talents do not fit what the board needs now, given its vision and strategy. Money, often quite a lot of money, is paid to directors who do not contribute when the board would be raising a ruckus with management if it did the same thing with well-paid, under performing managers. Seats on the board are occupied by these underperforming directors when the board clearly needs to add some new, capable talent and experience that can contribute to strategy. In today’s environment of increased director liability, well qualified board candidates want to know something about the talent at the boardroom table before they agree to serve, and they can see what the gene pool in the boardroom looks like.
But personality has its effects too. We know of many boards that have directors who are otherwise bright, experienced and capable of contributing but their belligerent, volatile, obstructionist, “my way” approach makes it difficult for the board to do its job. This is even more significant when that person is the chair, a large shareholder or “powerful” figure in the community others have to deal with outside the boardroom. They may also be an extremely cautious or overly detailed individual who keeps the board’s focus down in the details or paralyze others with the fears of what can go wrong.
Sometimes the challenge on the board is a mindset of “entitlement.” As we write this article just this morning, we had word from a financial institution that its board does not want to do a board development process. The informal word is that most of the directors are afraid it will lead to change, possibly requiring them to leave the board when most have been on the board for 25 to 30 years. Since the organization is successful, the board sees no reason to change its membership or what it does. The CEO and progressive members of the board are very disappointed. In fact, a couple of years ago that same board lost a couple of progressive new directors shortly after they joined the board because of the board’s resistance to change. The current directors, most of who are retired, want to stay in the “club” and be able to take the nice trips and be engaged in something in the community that gives them status. Such a board has the unintended consequence of finding it difficult to recruit and retain strong new directors. The directors feel they are entitled to continue on the board because they have been there so long and they enjoy the “perks” of membership. This mindset of entitlement is never expressed directly. But its expression is vivid in decisions that are made resulting in avoiding any process of substantive board development. They love going on a retreat to a nice place and having a speaker on some “safe” subject.
Sometimes the challenge is an adversarial relationship between the board and CEO. This often happens, AND is accepted, when the organization appears to be performing very well and the performance is attributed to the CEO. The CEO may be a “high control leader” who wants his management, and the board, to do things his way. When directors question his “recommendation,” they are made to feel they really do not understand. After seeing this a few times, recommendations are merely accepted, and rarely challenged. Good directors leave (why do they need me ?) and “yes men” remain creating a compliant board that does the CEO’s bidding.
Yet another challenge on many boards is “playing the directors game” which includes the tacit Code of the Board-- i.e. “I won’t mess up your playhouse if you won’t mess up mine.” Additionally, norms evolve suggesting to new directors that they are to be seen and not heard for a year or so because they obviously do not understand the business, and therefore, cannot meaningfully contribute. We know of a chairman who actually would tell new directors this bit of “wisdom” when they came on the board.
Another challenge is directors who lack the time to adequately prepare for their board work. In some cases this is because their “day job” is so demanding especially the way they do it, e.g., they have to be involved in everything. Other cases of inadequate time arise when a director is on so many boards that he/she does not do justice to them. We have often heard them proudly proclaiming, “I’m on 14 boards” –and this director was CEO of an organization.
There are a number of challenges that have to do with the way the board does its work and manages itself. A common challenge is that the board’s agenda keeps it focused on tactics and details rather than more directional, strategic leadership issues. Boards usually tell us they would like to have more time in meetings to discuss direction and strategy. However, with most boards that occurs, if at all, only annually at a retreat. Typical meetings may involve long sessions with Senior Management staff reporting on what is already in the 100+ page board package, a look in the rear-view mirror at historical performance. Tactical thinkers on the board, i.e. most of the directors, may stay engaged while strategic thinkers “check out.” This also causes the boundary between the board and management to blur as the board becomes more involved in matters management should be held accountable for handling.
Related to the preceding practice, is the problem of the board becoming a “rubber stamp” board versus proactive one. When the board is overwhelmed with, and expected to be involved in, tactical detail, it is very likely to defer to management. The directors begin to question whether they really fully understand the matters at hand and trust management to have done its homework. The more confident the CEO and management appear, and the more detailed their reported thinking, the more the directors are likely to defer to management’s recommendation after a few questions. When we hear boards proudly claiming how they always have full agreement on all decisions, we wonder how easily they defer to management’s thinking. Also, to the extent the board is merely approving management’s research and recommendations regarding what is needed, and is not contributing its own ideas from its exposure outside the organization, it is not being proactive, merely reactive. A good CEO needs a board to bring thoughts to the table from their outside experience and exposure to counter balance any management myopia.
Another challenge is that in many organizations directors do not meet the increasingly demanding guidelines for independence, and boards do not have their own governance policies that define the criteria for independence. The most common cases involve directors from law, consulting or accounting firms who do work for the organization, other vendors working for the organization, primary customers or non-profit benefactors having a director on the board. However, quite often this is justified by the directors’ belief that, in this case, it is okay because this particular director is a “good person.” The director whose independence is questionable will often politely challenge the need for a change.
Boards often have term limits and retirement age policies ----which are not followed. This “director for life” norm results in seats being occupied, and paid for, in lieu of being able to bring on new directors whose talents fit the needs of the organization and its vision and strategy more closely.
Avoiding the Lump under the Carpet
It is interesting in interviews how so many directors, especially the best ones, can articulate the board’s challenges such as some of those mentioned above. While directors know this lump under the carpet exists, and the boardroom dance is around the lump, they are reluctant to get it out from under the carpet and deal with it. There are a number of reasons for this reluctance to confront the issues even though by not dealing with them, the lump just grows and creates greater risk for the organization.
It is the personal relationships and/or fear of change that causes boards to avoid dealing with challenges. The board does not want to hurt the feelings of camaraderie……to disturb “the club.”
Most of the time boards do not confront the lump because of the tacit Code of the Board. Directors do not want to force the issue with colleagues whose continued membership on the board would be called into question for reasons such as the person 1) is a nice person, 2) “has been” a good contributor in the past, 3) is a large shareholder or 4) may be “connected” in ways through external (business or even spousal relations in small organizations) relations that others find threatening or awkward. Directors can also see themselves possibly wanting to be a “director for life” for economic or status reasons at some point and do not want to change the default policy of not enforcing the written policy.
Boards avoid healthy development processes because opinion leaders believe everything is okay and, based on what they see in performance indicators, it may in fact be okay. Therefore they, as a board, do not need to do anything different. This is the “if it aint broke, don’t fix it” mindset.
Boards avoid development because leaders (usually the chair or CEO) do not want to “stir up” something they do not know how to handle. This is the “let the sleeping dog lie” scenario. They hope maybe the challenge will go away or, at a minimum, a successor will have to deal with it. Of course with a “director for life” norm this could take a while.
A leader may avoid dealing with something he/she can see needs to be done. That leader may even recognize consequences of inaction in dealing with it but tends to believe there is no known way to deal with it so it gets put off to deal with what the leader knows how to handle. The leader is even skeptical that anyone else has a way that might help. This is the “fear of the unknown” scenario.
Sometimes a development process is avoided because the CEO or Chair actually wants a compliant board that can be easily controlled rather than one that challenges his thinking. To expose a board to development processes, and thereby have the board more fully assume its proper role, would be avoided.
Sometimes a board will avoid development and playing a more assertive role because it fears losing the CEO who the board thinks would not like them to be more assertive. We have seen some CEOs be very emotionally expressive about what they like and do not like and watched the board back down from doing what it really should do. This, and the preceding challenge involving the CEO, is an example of what we call the “hostage” scenario. The board permits itself to be held hostage by the CEO.
Board Development Does Not Have to be like a Root Canal
Much of what drives boards to “play it safe” and settle for board education rather than board development is about preservation of something valued, e.g., “membership in the club” or protection of an income stream. That is a fear of loss or fear that what you do unto others now will be done unto you at some point in the future.
However, board development does not need to be a fearful process like a root canal. Experience says repeatedly that directors who go through a fair process of reflection about the board’s practices and their own contribution to the board think it is a very helpful process when done the right way. In fact, our experience is that boards usually express great appreciation to the CEO for having brought a process to the group for getting the lumps out from under the carpet in a way that respects everyone. It allows weak members to begin to question their value-add and begin to think about “maybe it is time for me to move on.” It is easier for them to choose to leave than to feel forced out.
Keys to the process for minimizing discomfort are :-
- Trusted leaders on the board must step up to the plate and lead the board into doing something it instinctively resists doing. This may be the chair, CEO or the executive or governance committee. We have encountered governance committees that had been formed but that had not done anything. At the end of the work they indicated, “Now we have a meaningful job to do.”
- Focus on and call the process “development” rather than board/director evaluation. It’s about “packaging” the process in a manner that makes it palatable. Directors like to think of themselves as being past the point in life and career when they will be “evaluated.” Egos get in the way. More of them can accept a process of reflection in preparation for a retreat.
- Lead the board firmly and confidently to doing what it needs to do-a board development process rather than a more passive “whatever you want to do” kind of approach since their first reaction is to do nothing or something “safe.”
- Use a third party, rather than self evaluation, to facilitate the process. Professional guidance is needed to optimize trust and to assure the desired outcomes and movement are achieved. Not just any consultant will do. Attorneys and strategic planning consultants typically do not have the skills to design the process and facilitation skills to deal with the human dynamics involved.
- Use a high quality well-researched, comprehensive and well-constructed instrument that asks directors to reflect on the board’s practices compared to “best practices.” Many boards take the easy way and find an overly simplified “20 question” survey in a book or online that does not allow for an adequate scan of best practices. When done well, directors say the process is very helpful and “thought provoking” because it asks them to consider practices they have never considered but, on reflection, think may be a good idea for them. Directors take their cars, a reasonably valued possession, in for a regular preventive maintenance service, where the cars are attached to a computer which checks all the key systems noting which ones need attention. Regular scanning against a comprehensive array of expectations of effectiveness is considered good practice---except in many boardrooms.
- If directors are very cautious about director evaluation, let directors evaluate themselves, the group as a whole and define important competencies of directors before peers evaluate each other. Use this as a “heads up” that a peer review process will be used a year later on the same competencies. This gives directors a year to reflect on where they think they would stand in such a process and choose to “opt out” by leaving the board, develop themselves to meet expectations or get their act together.
- Use a retreat process that allows adequate time for discussion of the data, highlights issues directors raise and feed in best practices on their issues, i.e. what do good boards do about the same issues. Create a process for the board to explore and set developmental goals for itself.
We have seen boards very rooted in their approach, with members who have been on the board for 30 years or more, make significant movement in addressing the lumps under their carpet. Creating a development process that helps them discover the issues and provides a fair process for owning and dealing with the issues works well. It is far superior to telling directors that what they are doing is wrong, letting them continue down a path of doing nothing, or allowing them to do only the “safe” things, that over time leaves a legacy that threatens the organization.
© Copyright 2004, Furr Resources, Inc. Greensboro, NC