For the past 25 years, I have been advising Boards and Top Management Teams, and having served on both public and private for-profit Boards, it did not escape me that each Board has its own characteristic, rhythm, social construct and level of effectiveness. Boards are a mystery to most people (directors and researchers alike) especially as it concerns the questions of what makes a board good versus bad, active versus passive, engaged versus indifferent.
To try to answer the question of what makes a Board good or bad, I went back to school to study the “board phenomena.” I had hope that with an intensive study of boards (and a PhD), I would be able to enhance the effectiveness of my advisory work and help boards harness the incredible talent resident in their individual Directors to produce, as a team, economic value-creating leadership.
After a year of reading over 300 research articles, books and practitioner accounts, and speaking to my circle of board Directors, I was able to design an effective context for the first phase of my research. The fundamental problem was that evidence existed (GMI ratings) that the majority of low corporate governance ratings for U.S. publicly-traded companies are attributable to poorly-performing boards. This scared me, and should scare anyone who owns a share of stock!
Passage of the Sarbanes-Oxley (SOX) and Dodd Frank Acts of 2002 and 2010 respectively have had a material effect on corporate governance of US firms ? heightening public scrutiny of board behavior and causing companies to reevaluate both board composition and internal controls. On a governance stage more brightly lit by such legislation and resulting evaluation, my research draws on “theatric” theory to examine boards as “actors” whose individual and collective performances can enhance or diminish the quality of organizational governance.
One of the most respected executives and board members in the US is Warren Buffet, but even Warren has faltered, admitting in his 2002 annual report, to succumbing to the power of social pressure by: “…too often (remaining) silent when management made proposals…judged to be counter to the interests of shareholders.” If the “Oracle of Omaha” found Boardroom dynamics challenging, what does that say for the rest of us mere mortals that serve on Boards? The research question became obvious -- What are the enablers and impediments to Director participation in Board deliberations? What makes good boards good and bad boards bad?
With this premise, I selected directors from organizations with high and low governance quality GMI ratings. The research process involved semi-structured interviews with seldom-sampled US small- and mid-sized enterprise (SME) board members of companies with high and low governance quality ratings (GMI). My research reveal factors affecting their behavior in and out of the post-SOX boardroom ? and the consequences of that behavior on board culture, tenure and overall performance. The research results illustrate how board member behaviors ? both individually and collectively ? impact board quality. There were three major paired findings of the research: 1. two distinct realms of the boardroom, 2. two types of conflict that exist in the boardroom and 3. two different recruiting strategies and how that influences governance quality.
Two Distinct Behavioral Realms of the Boardroom
There are two “realms” of the boardroom – front stage (the formal boardroom which is a stage for the information dissemination and decision ratification) and back stage (committee meetings, informal dialogue between board members, working meetings) where the work actually gets done. Each realm has its corresponding social norm. The front stage is characterized by more “collegial and congenial” climate and the backstage where directors have a more open and direct communication. Directors who have difficulty distinguishing these two realms and their corresponding social norm are typically regarded as “disruptive”, “uncooperative,” “overbearing,” “overpowering, or “egoistical” because they confuse appropriate behaviors in each realm.
Two Distinct Types of Conflict
It turns out that there is something quite powerful in the way directors speak to one another. My research revealed that there are two kinds of boardroom conflict – cognitive conflict and affective conflict. Cognitive conflict is essential in generating value, whereas affective conflict destroys any chance of generating value:
- Cognitive conflict is task-oriented, with a focus on how to get things done and achieves optimal results – the dialogue around cognitive conflict can sound like: “I don’t think your idea will work, maybe we need to look at it a different way….have you thought of this?”
- Affective conflict, conversely, is emotionally-oriented and focused on personal differences or shortcomings between people – the dialogue around affective conflict can sound like: “I don’t think you have good ideas and you don’t understand the issue”.
This is a subtle but powerful distinction, as cognitive conflict addresses ideas or points of view with an opening for something creative, innovative and positive, whereas the affective conflict is a seeming attack on the capabilities and perspective of the individual – making this personal and limiting.
Two Recruiting Sources
My interviews showed a consistent theme – there is a relationship between board governance quality and prior personal relationships of board directors. High governance boards cast a wide net when recruiting directors, and often recruit people with whom the other directors did not have a prior relationship. My study showed that close to 70% of high governance-rated board directors were “strangers” when they joined their board, while only 25% of directors recruited to low governance-rated boards were unknown quantities.
Putting It All Together
This brings us back to the question – what makes directors participate or stay silent in board deliberations and what makes good boards good and bad boards bad?
We found that:
- Directors that readily recognize the two realms of the boardroom tend to be perceived as productive and contribute value to boardroom deliberations effectively – they follow the rules in each realm. This leads to more productive board/committee sessions.
- Good boards recognized affective conflict and addressed it, whereas bad boards recognized affective conflict, but are less willing to address and resolve it. We’re all human and no matter how experienced and professional we are, it’s easy to allow affective conflict to seep into our conversations, especially when tensions are high, time is limited and there’s a lot at stake (like most boardroom environments).
- There is a relationship between board governance quality and prior personal relationships of board directors. High governance-rated boards cast a wide net when recruiting directors, and often recruit people with whom the other directors did not have a prior relationship. Close to 70% of high governance-rated organizations board directors were “strangers” when they joined their board, while only 25% of directors recruited to low governance-rated boards were unknown quantities. This leads us to consider “independence” of directors in a new light – not just independent from the company, but independent from other directors.
- Boardroom dynamics are influenced by prior personal relationships: We found that when a director had a prior relationship with a newly-recruited director – one that exists beyond the boardroom – directors are driven by their desire to maintain a congenial relationship with one another – to not “rock the boat” of their extra-board relationship by addressing affective conflict in the boardroom. Conversely, in high governance-rated boards, where directors only have the boardroom as the context of their relationship, it becomes even more important to address affective conflict to make sure that the work environment be productive. Directors are not willing to “sweep issues under the carpet” for the sake of keeping “peace” when the health of the company is at stake.
The Story’s Moral
What can we learn about creating good boards? Recruit the best people you can by casting a wide net to get the most experienced, most connected people. It’s imperative to look beyond your personal network because recruiting your pal to the boardroom could turn out to be the enemy of the stakeholder and the downfall of governance quality!
Solange Charas is the President of Charas Consulting, Inc. (www.charasconsulting.com), providing comprehensive strategic HR consulting to organizations. Solange is a seasoned professional with over 25 years of experience in both senior-level consulting and c-suite corporate roles in firms including The Hay Group, Ernst & Young, Arthur Andersen, Havas Advertising, Benfield and Praetorian Financial Group. She started Charas Consulting in 2000, and serves clients in the area of governance advisory, Human Capital program design, metrics and optimization, team coaching, and M&A due diligence. She has an MBA in Accounting and Finance from Cornell University and is currently finishing her PhD in Management from Case Western Reserve University. She is an Adjunct Professor at Touro College and frequently speaks and writes on the topic of Boards, HR metrics and team performance.