Directors with Drawbacks

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Sections of this topic

    Nobody’s perfect!

    Here are three common issues that can hamper even skilled, ethical and intelligent directors:

    Committee thinking

    It is important to remember that a board is not expected to perform as a committee. Committees are groups of representatives brought together to resolve an issue in a manner that is acceptable to each of the groups represented on the committee. This is quite different to a board which must develop the most advantageous solution for the organisation regardless of the potential impact of that solution on other organisations or individuals.

    The public sector uses a lot of committees, often under other names, to broker compromises to otherwise intractable conundrums. This is a highly important function and one which the sector does well. However, this is not the function of a board. New board members with extensive committee experience or public sector backgrounds can have trouble adapting to their new role. This is especially so when the issue is not explicitly addressed or considered. Many people who are excellent committee members wonder why the behaviours that made them successful in a committee environment fail in the boardroom.

    Conflicted Relationships

    The most common conflicted relationship on boards is that of the CEO, a member of management and (usually) also a director. When the CEO is also Chairman (or President) this is exacerbated. It takes a very special set of skills to enable a director to move easily from the role of a manager presenting to the board and accepting direction from the board to the role of a director, independently assessing the proposals of management and overseeing their actions to ensure they suit the strategic aims of the company. Setting remuneration becomes very difficult when there are a large number of executives on the board.

    Another relationship that is common in federal organisations (those with state, branch or chapter structures where each state branch or structure is represented on the board) or joint ventures is the ‘two-tier director’. These roles require the wisdom of Solomon as decisions about funding and capital structure will inevitably involve one party ceding for the other to gain.

    Family companies have very complex relationships and it can be difficult for directors to actively discuss contentious issues with people with whom they live in close family relationships. Generationally diverse family boards can have the widest range of viewpoints to assimilate into a single agreed strategy.

    Shareholders

    I have heard it said that a shareholder in the boardroom is much like a mother-in-law in the bedroom; intensely interested in the outcome but a great hindrance to the procedures!

    A good director acts only in the interests of the company and never from his or her own personal interest. Many shareholders like to see directors have ‘skin in the game’ and ask that the director (especially in a start up or small listed company) acquire a significant parcel of equity in order to align his or her interests with those of the shareholders. This creates problems:

    1. Nobody really knows what is significant to another; apparently wealthy people may be geared to excess or apparently impoverished people may be truly wealthy.
    2. If the shareholding is so large as to be significant to the director it is large enough to tempt the director to act to protect the value of that holding at certain times, which may suit the director more than the company. Timing becomes an issue.
    3. Insider trading immediately becomes a possible issue; directors know when dividends are to be declared, how projects are faring, if potential acquisitions exist and other price sensitive information before those items are progressed to the stage where an announcement may be made.
    4. If the director leaves they will probably sell their stock and that will affect the shareprice.
    5. If the director is able to gain voting control with the support of a few others the company has effectively been taken over but no control premium has been paid to the ordinary stockholders.

    Of course there are always examples of boards where these conflicts are well managed. Consider Harvey Norman, a listed Australian company where the major shareholders, CEO, founder, Chairman’s wife, CEO’s husband and some longstanding employees are all members of the board which appears to function well and deliver acceptable corporate outcomes.

    There are many other sources of impediment to director and board success which I could not cover in this brief post and which may, on occasion, be more serious than the three I opted to discuss here.

    Which have you encountered in your dealings with boards, and, more important, how do you overcome the drawbacks to achieve success?

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    Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.