Board of Directors: Cultural Evolution

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In another situation an insurgent board member realized that the capital structure of the company was not being properly monitored. She aggressively pressed the CEO for information about outstanding warrants and options. The CEOs initial response was that these matters were not a concern for the board and that he had no responsibility to report on them. The situation devolved into open conflict with the independent director (supported by a majority of the board) employing counsel. The CEO threatened to counter by doing the same. In an attempt to avoid open warfare, I was asked by the board to intercede as a mediator. Both parties accepted me. After a bit of research, I discovered that the CEO had actually granted options and warrants (and sold common stock) significantly in excess of the authorized stock for the company. Needless to say the lawyers involved made fat fees while cleaning up the mess. A secondary effect was that the board of directors took a big step in the direction of becoming a collaborative board.¹

It is often a useful construct to think of senior management as predominantly the tactical part of the company. They do indeed engage in strategic planning but, by the nature of the business of business, their focus must connect back to the current year, quarter and month.² The board should begin with the strategic – taking the long view of the shareholders as their starting point – and connect back to the tactical as a measure of the effectiveness of the implementation of the strategic.

If the board is going to make the journey through the insurgent to collaborative status, it must develop the ability to have detailed discussions across the whole range of complex issues that normally affect the future of a company. Quite often initial efforts to build a basis for these kinds of dialogs is a signal that it least some of the board members have come to the conclusion that the board needs to evolve beyond the insurgency state. One or more members may begin lobbying for the services of a facilitator to help the board along the way.³ If they’re lucky, other members will take up the cause and the board will be on its way to collaborative status.

It is very hard to overstate the importance of the development of a culture of secure and collegiate communication. In order for the board to be effective, members must feel confident that their views, however divergent from those of management or their colleagues, will be welcomed and taken into consideration by the board at large. The principal reason why this evolutionary step is essential relates to the function of the board and its obligation to maintain a long view, strategic vision which is focused principally on protecting and extending shareholder value. Because the board normally finds itself considering complicated issues involving multiple options – because the board, in order to fulfill its function, must sift through the volumes of data provided by management as well as that provided by its own sources – and because an approval of a particular strategy may have serious, long-term implications for their constituency – the shareholders – the communication protocols which the board weaves into its culture, in large measure, determines whether or not the board will be able to meet its responsibilities.

Once the board enters its collaborative phase, the further evolution of a professionalized and collegiate culture becomes critical. This new culture must support – indeed cultivate – the kind of collaborative dialogue which is critical to the effective functioning of the board. Members must feel so secure in their relationships, prerogatives and positions on the board that they freely express opinions and engage in discussions on the complex issues which bear heavily on the future of the company.

The principle enabler for the emergence of a collaborative board is often the recognition, both within the senior management team and among board members, that the interests of management are not coincident with those of the shareholders. Although in the early stages, there may be a credible argument that management can adequately represent these interests, in the later stages of corporate growth it becomes clear that management’s interest in participating in the cash flow and equity value generated by the business has some unavoidably negative impacts on shareholder value. Once this realization settles in it becomes apparent that there needs to be an empowered, collaborative board of directors which counterbalances the interests and tendencies of management. The board then rises as a countervailing force within the company. One of its principle remits is to assure that management’s avarice and relatively short term perspectives do not substantially negatively impact shareholder value.

This counterbalancing of the interests and tendencies of management is a essential for the effective operation of a major corporation. Without a collaborative board, management will be free to pursue its own interests and often magnify the impact of its own shortcomings. Recent history is full of examples where shareholders have suffered greatly because the board of directors did not fulfill its obligations.

© Dr. Earl R. Smith II

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Related Articles:

• Successful Board Assessment Models

• Good Governance – The Compensation Committee

• Sound Audit Committee Governance

• Good Governance – The Chairman’s Role

• Governance By Visionaries

• Corporate Ethics and Compliance – Board Responsibilities

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1. This was not the last battle that this CEO had with this particular board. His attitude was that this was ‘his company’ and he should be allowed to do as he pleased. In his view, the minority shareholders were gaining benefit because of the value he produced for them. In return they should sit down and shut up. Eventually the conflict found its way into the courts – the CEO was removed. The board recruited a new President. The company’s shareholder value, which had been suppressed as a result of the CEOs attitude and actions, now began to be realized.
2. And sometimes the current week or day
3. As history teaches us, it is easier to start a revolution than to end it productively. An experienced facilitator can often dramatically increase the chances that this transition will be made successfully and that the end result will be a collaborative board. The alternative is generally a constant insurgency or a return to in-house status.