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Why Boards Go Wrong

The social dynamics of any boardroom are vital. Rob Goffee and Gareth Jones look at how dysfunction can take hold in the top team - and what to do about it.

Put together a group of strong-minded people. Arrange for them to meet six times a year. Have ambiguous performance targets for them. Recruit a number of outsiders - sometimes with limited knowledge of the industry or the company - into the group. Would they function as a team? We doubt it. Yet, this is how we organise corporate boards. They are brought together half a dozen times annually, with vague - sometimes non-existent - performance objectives and expected to provide decisive leadership and deliver corporate performance to increasingly exacting governance standards. Then we wonder why it doesn't always work out.

The reality is that, despite a lot of research and wise words from experienced directors on how boards should work, how they actually work often remains a mystery. The human dynamics at work in the boardroom are acknowledged as important but underinvestigated.

This lack of understanding was brought home some years back by the spate of corporate scandals in the United States. This led to calls for tougher governance rules, Sarbanes-Oxley, and a growing clamour around the world for tighter board controls. But adding more regulation to a system you don't understand is unlikely to solve the problem - and could be dangerous. As the literature of organisational behaviour conclusively demonstrates, bureaucratic controls often have dysfunctional consequences.

When management professor Jeffrey Sonnenfeld examined some of the most troubled companies, he found no obvious patterns of incompetence or corruption in the boardroom. In fact, the boards of these companies often exhibited best governance practices in terms of structural and procedural issues - for example, the make-up of committees, meeting attendance, board size and composition and financial literacy. They also scored highly on accountability mechanisms such as codes of ethics and conflict of interest policies. In these terms, they were 'good' boards.

So where did they fall down? As numerous governance reviews and consultants' assessments have since stressed, the significance of a board's 'prevailing atmosphere', 'culture' and 'tone' appear critical.

The Walker report on governance in the UK's financial sector, for example, recently concluded: 'principal deficiencies related much more to patterns of behaviour than to organisation' (p12). A particular concern (clearly missing in some of the worst cases of financial meltdown) was how non-executives could provide productive challenge without being regarded as disruptive or becoming isolated. The appropriate balance, Walker claimed, requires attention to the culture and style of the board - matters that require exceptional board leadership skills from the chairman.

Over the past decade, we have worked with more than 30 boards of major corporations and have interviewed many more chairmen and CEOs in an effort to better understand how boards behave. Our research suggests that two dynamics are key to understanding this crucial corporate theatre: the board's levels of sociability and solidarity.

Sociability is partly self-explanatory. It is a measure of the social interaction, specifically the extent to which individuals are helpful, empathetic and friendly towards one another. In a sociable board, members do things for one another because they want to - no strings are attached, no deals implied. High sociability relationships are valued for their own sake.

We have been to board meetings, for example, where serious business has been accompanied by good humour, laughter and a generally pleasant social atmosphere. Such meetings are often followed by a convivial glass of wine over a meal. Sociability often seems to come naturally - although the reality is that it typically takes years to build. But it seems worth it - for the benefits of sociability are not to be underestimated. They include, for example, facilitating information exchange, encouraging creativity and improving commitment. Yet the danger is that boards high on sociability and low on solidarity can become the classic stereotype of a mildly dysfunctional board - an old boys' club.

Solidarity, on the other hand, is an instrumental relationship - concerned with the head rather than the heart. Boards in which there is a high level of solidarity are characterised by a keen awareness of shared interests and tasks and clearly understood shared goals which benefit all parties - whether they like each other personally or not. High solidarity relationships are valued instrumentally for what they can achieve.

Arguably, much recent governance legislation has been an attempt to increase the solidarity of boards - in order to improve performance and so to better protect the interests of shareholders. But if this is at the expense of the undoubted benefits of sociable ties, then there are dangers. As one chairman remarked: 'When NEDs start to act like policemen they can become a divisive force on what should be a unitary board.' High performing boards work hard to combine high levels of both sociability and solidarity - but this is no easy task.

A board which scores highly on sociability has a number of obvious advantages. Sociability can foster teamwork through the sharing of information and openness to new ideas. A healthy level of sociability also means that the directors will feel close to and identify with each other - an important prerequisite if individuals are to show the commitment necessary to help the board succeed.

But there are also pitfalls. A common misconception is that because the board is sociable, board members will automatically exhibit solidarity. This is a dangerous assumption. Friendly or polite behaviour around the board table or over a meal is no guarantee that objectives are shared and interests aligned; that members may not be undermined in the corridor.

There are other downsides. The prevalence of friendly relations may allow poor performance to be tolerated. It is not pleasant to rebuke or fire someone to whom you feel close. Indeed, we have been struck by how often experienced chairmen have found it difficult to confront the poor performance of likeable non-executive members - often with considerable status and reputation - whose board performance is inadequate.

In addition, high sociability environments are often characterised by an exaggerated concern for consensus. In the boardroom, this can limit debate over goals, strategies or simply what needs to be done. As a result, the best compromise may be applied to problems rather than the best solution. At worst, boards are feedback-free zones. This may explain both the appeal - and the perceived threat - of applying formal 360-degree feedback techniques assessing the performance of board members.

In the boardroom, consensus may be the last thing a company needs. After a brief boardroom debate, the legendary General Motors chief executive Alfred P Sloan is reputed to have said: 'So I take it we are now in complete agreement.' His fellow board members nodded. 'Well, then I propose we come back and discuss this when we no longer agree,' retorted Sloan.

Now let's consider the other critical dimension: solidarity. A strong sense of shared interests in the boardroom is vital to achieve, for example, clarity about the organisation's goals, the agreed method of reaching them and how they will be measured. A board is unlikely to achieve its vital monitoring functions without high levels of solidarity.

But, as with sociability, solidarity also has a downside. Excessive focus on goals, measures (and associated procedural governance requirements) can be oppressive. It may limit strategic creativity and close down the space to explore new ideas. Tightly driven, agenda-focused boards may give little opportunity to reflect creatively on bigger strategic questions - again a common complaint among directors we have interviewed.

In other cases, an appearance of solidarity is inappropriately imposed by excessively powerful chairmen or CEOs. As Walker remarks, the 'illusion of unanimity' is often a result of overpowerful (but historically successful) CEOs who may in effect close down dissent. As a result, weakened board members walk over the cliff in perfect step.

The most effective boards we have observed seem able - when required - to retain high levels of both sociability and solidarity. But our research shows that sustaining these relationships is a delicate balancing act. Understanding what's involved takes us to the heart of the chairman's leadership challenge.

To begin with, let's acknowledge a significant difference in the way that each of these relationships is fostered. Sociability is visible for example, in how people talk to each other, in social occasions, in humour which is shared and so on. It is typically built through social interactions which are 'little but often'.

Sociability may be built by increasing opportunities for social interaction, by reducing formality and by limiting hierarchical differences. It is also helped by skilful recruitment of compatible people; by looking after those in difficulties and by encouraging the sharing of personal interests and emotions.

Solidarity, by contrast, is intermittent and contingent. In this sense it is 'invisible'. But it should emerge - fast and clearly - when needed. It is built in distinctive ways: by developing competitor awareness, by creating a sense of urgency and by setting demanding standards. High solidarity is also developed by a well-defined idea of the external enemy, by stimulating a will to win - and by celebrating success.

Building a social architecture that combines these relationships presents two major problems. The first is the tendency to instability. That is to say, there are inherent characteristics in sociability and solidarity that make them difficult to maintain simultaneously and in equal measure. High sociability, for example, is difficult to combine with a ruthless focus upon performance. Equally, high solidarity prompts fast responses whereas high sociability may demand time to ensure individual commitment.

Second, there is the problem of perceived infallibility. Tightly knit, successful boards - high on both sociability and solidarity - often generate an exaggerated belief in their own abilities. Board members begin to believe their own propaganda. Think, for example, of the criticisms that came the way of Steve Jobs during his first tenure at Apple; Rick Greenbury's board at Marks and Spencer; and Sir Fred Goodwin's leadership at RBS. Apple's recent batting away of the technical problems associated with its new generation phone are a warning. Such problems can recur.

So how can instability on the one hand and complacency on the other be avoided? Although responsibility lies collectively with the board, the chairman is a key figure and two leadership skill sets are vital: situation sensing and the management of social distance.

Arguably, the ability to read a situation - and where appropriate - rewrite it, represents a chairman's primary skill. It is what will allow board balance to be sustained and instability to be avoided. It enables the chairman to sense when and where subtle adjustments are needed in the sociability/solidarity mix.

There are three separate, but related, elements to effective situation-sensing. The first is made up of observational and cognitive skills. Board members see and sense what's going on - and then use their cognitive skills to interpret these observations. The danger is that seniority brings with it increasingly sanitised information. Effective board members cut through this, picking up and interpreting soft data - for example, they sense when morale is shaky or when complacency needs challenging. They collect information, seemingly through osmosis, and use it to understand context.

By contrast, highly task-oriented individuals often neglect this basic observational work. They rush into action before fully understanding the situation - sometimes with very negative consequences.

The second element of situation-sensing is made up of behavioural and adaptive skills. Having observed and understood the situation, board members adjust their behaviours.

The final element of effective situation-sensing involves the use of their own behaviour - role modelling - to change the situation. For example, if chairmen would like to see closer interactions between non-executives and executives below board level (a regular failing on many of the boards we have worked with), the best strategy may be for chairmen personally to initiate more deep dive, on-site visits - using their eyes and ears to bring back what they have seen in the business.

The second vital board-level skill is the ability to manage social distance. This concept describes the degree of social intimacy between individuals. Chairmen, and other non-executives, need both to fiercely identify with (ie, get close to) and separate themselves from their executive colleagues on the board.

Closeness helps to evoke a necessary sense of loyalty, affection and empathy. It enables the chairman - where necessary - to act as mentor and confidant.

But distance assists in communicating a sense of edge, reminding people of the job at hand and the overarching purpose of the collective endeavour. It also allows the 'confidant' to ask the awkward question.

So, skilful chairmen are able to choose the right moment to remind others that there is always room for improvement, no matter how good they think they are.

When establishing goals, objectives and the rules of the game, distance is also essential. Norms, values and standards need to be communicated as non-negotiable. These are the bedrock on which operations are built.

Distance is again required when a board member wants to step back for a better perspective on a complex, multifaceted issue. Preserving distance may be the only way to see the full picture.

Distance is managed by the context of the meeting. The language used and non-verbal cues are formal rather than relaxed; individuals establish that the space is theirs; they use as many signals as they can to stress their authority, and they make sure the signals are consistent.

In communicating, messages may be kept short, direct, and authoritative - avoiding conditional forms of verbs ('could', 'should' and 'might') and using active sentences and personal pronouns. It might also involve using silence and editing out the conversational preliminaries designed to ease social occasions.

But there are also moments to use social closeness to strengthen bonds and to show positive emotions. This may involve taking a more active interest in the 'person' beyond the board role, helping those in trouble; or simply listening when others need an ear.

It is rare, even at such senior levels, to find individuals equally proficient in both modes. We regularly coach chairmen, for example, to identify their default mode and then practise hard the other mode that they may underuse.

Although we know they are important, it is not possible to legislate for 'good' board relationships. Equally, simple pleas for 'trust' or the 'right' culture are - on their own - unhelpful.

Boards are social constructs - their balance is precarious and even if a mix of high sociability/high solidarity is achieved, the risk of complacency remains. Understanding the social architecture of boards sheds light on the challenges faced by chairmen - but shared by other board members - and the critical (but learnable) leadership skills of situation-sensing and managing social distance that can help them to succeed.

- Rob Goffee is a professor of organisational behaviour at the London Business School. Gareth Jones is a visiting professor at IE Business School in Madrid. They are the co-authors of The Character of a Corporation (Profile Books, 2003); Why Should Anyone Be Led By You? (Harvard Business School Press, 2006) and Clever (Harvard Business Press, 2009).

Credit: Management Today