Board dynamics – what boards need to know

Company performance relies on a well-functioning board but not enough companies are placing effective board dynamics at the top of their priority list, according to experts in the field.

Boardroom interviewed Associate Professor at the Faculty of Business and Law at AUT University, Coral Ingley, and Meena Thuraisingham, Principal at BoardQ, a Melbourne-based advisory practice working with boards and top teams. Both agreed that board dynamics required greater focus.

They said that while it was generally accepted that board dynamics mattered, there was not enough understanding of how these dynamics actually impacted on decision-making and, ultimately, company performance and shareholder return on investment.

It was this overall lack of understanding of the pervasive influence of board dynamics that inspired Thuraisingham to study the impact of board dynamics on director decision making for her PhD. She found that non-executive directors, while sharing similar beliefs about board accountability for strategy, differed in how each went about exercising this accountability. This led her to believe that there was a social dimension at play.

She set out therefore to study more closely the human dimension to the governing of public corporations. She hoped that it would contribute to a more balanced, fuller understanding of what really goes on when boards contemplate big ‘bet the farm’ decisions such as acquisitions or divestments.

Her research, based on a group of 15 large ASX listed companies, looked at the hidden social structure within each board and its ramifications. This hidden ‘hierarchy’ was a consequence of a largely sub-conscious process in which directors made subjective judgements about each other’s legitimacy to influence a given decision on the basis of their experience and expertise.

Thuraisingham said this hidden hierarchy shaped the degree to which a director would listen to the perspectives of others and how divergent views are resolved - in effect, who listened to who. She said it was important that this hidden social reality was made visible and its effects fully understood by directors.

“Stable boards require a balance of trust and mistrust. It is this productive tension between cohesion and harmony on one hand and dissent and discord on the other, that keeps a board dynamic healthy.”

This, she argued, was particularly true when debating significant decisions such as acquisition. The chair played a critical role in such debate. In addition to having great facilitation skills, a chair needed to create a safe environment in which dissenting voices can emerge and create the space for unspoken concerns to surface.

When asked what personal attributes effective directors brought to the boardroom, Thuraisingham said that they needed to demonstrate both humility and courage.

“What I mean is that directors need humility to know they may be wrong, to trust the wisdom of others, but also have the courage to practice detachment from the majority view and not concede to social pressure to conform to an overwhelming opinion. This goes to the core of the role of an independent director – the ability to practice independent mindedness. This is of course easier said than done as it is often difficult to find humility and courage in the same person.”

Directors were often appointed based on their commercial expertise, knowledge and functional expertise, rather than for example their skills in constructive dissent. These social skills were crucial to read the dynamic, skilfully navigate discussions and make a valuable contribution to major decisions.

“Nominations committees may also have to consider the effort that needs to be invested in the individual and collective development of directors so that a healthy dynamic grows and thrives.”

In this climate of rapid business disruption and change, Thuraisingham said it was especially important that boards had quality discussions where a wide range of views could be expressed.

Ingley agreed, saying that dynamics varied one from one board to the next and so each board needed to work out for themselves their interpersonal relationships and these would change over time with tenure changes.

Appointing new board members was an opportunity to balance the dynamics with a mix of different personalities and leadership styles and should never be a shoulder tapping exercise.

There was no one correct formula for an effective board makeup and dynamic but using psycho-metric testing, professional search firms and/or Institute of Directors’ advice when appointing new members were common tools.

Ingley said the attributes needed by effective directors were emotional intelligence (EQ) and emotional agility (E-agility). EQ is awareness of the social skills you need in any social situation while E-agility is a deeper understanding of how you personally react in different situations and your impact and influence on others.

“New Zealanders are no better or worse than boards elsewhere for these types of skills but the key is in developing the skills. Board members don’t often come to the table for the first time with these attributes.”

Companies needed to invest in board member development through facilitated workshop sessions, workshops, role play, simulations and the like so members could reflect on behaviour and change together if required. These tools could help a dysfunctional board become an effective board although some problems were difficult to fix such as weak chairs, grandstanding and domineering personalities.

Ingley said a common problem with New Zealand boards was our “fairly passive-aggressive kind of culture

“This passive-aggressive behaviour means we don’t like confrontation so tend to let situations build up until they are intolerable and then are not well handled. That’s why it is important for board members to have the emotional agility to cope with situations before they become intolerable.”

The key to identifying problems was effective, regular board reviews, Ingley said.

“Better boards have effective reviews but some are just box ticking exercises to satisfy compliance requirements rather than trying to improve board effectiveness. This is a missed opportunity. New Zealanders often get defensive about reviews but they should be about board development and intellectual honesty. Board members need to be socially mature to look at themselves critically and use these evaluations as a personal development tool.”

Ingley said in her experience, the majority of people who accepted board positions genuinely wanted to make a positive contribution to that board. Therefore they were usually responsive to change when it was required.

“Boards are acting in a very challenging environment with the rapid pace of change – digital, social, economic, political – and so they need to be vigilant and be aware of assumptions and falling onto negative habits of interacting. The good news is there are many tools and third parties that can help improve board dynamics and effectiveness and thereby boosting company performance.”

Published in Boardroom Jun Jul 2017 issue