SOX isn’t the biggest problem, it’s the interpersonal relationships. Here is a way to move your board from dysfunctional to optimal.
   

Although he was wearing a forced smile, the bank’s CEO left the board meeting with a number of negative emotions running through his head: anger, disgust, and most of all, frustration. More than anything, he wondered how he could ever get through to the #*@x*! board on the really important issues....

Seem familiar?

Despite all that has transpired regarding boards of directors and executive management teams since Enron and WorldCom and Sarbanes-Oxley came to pass, the primary preoccupation by executive management and board members continues to be with the relationships between the two parties, rather than the structural or procedural issues typically associated with board governance. In fact, in our ongoing strategy work with boards and managements, we often hear of increasing concerns about the troublesome relationships between them, and the corresponding costs to the organization, placing these challenges on par with traditional hot-button concerns such as regulatory burden and competitive pressures.

 

The reality is that most problems with boards and management are not about corporate governance “best practices.” Rather, they are the challenges stemming from the personal interactions between them micromanagement, ill-defined roles, dominant personalities, egos, group factions, weak communications, mismatch of skills and styles, and an absence of a sense of direction. Most alarming: Few executive managers or board members have any real clue how to effectively solve these relationship challenges. Sometimes they don’t even recognize the depth of the problem, or the importance and value in optimizing board-management relations. Or they lack the power or authority to address the situation.

Four levels of relationships
Relations between boards and management can often be characterized by one of four different levels of interpersonal dynamics (at some institutions, their level evolves subtly over time; in other instances, their evolution is more purposeful and calculated):

Minimizing – The party who possesses actual control over decision-making (traditionally the CEO in community institutions; but in other instances, the board is the one really in control) does only what is required or essential in working with the other. Interactions outside of regular board meetings, such as planning retreats, are for show and the appeasement of the other party; no real substantive change is usually forthcoming. The primary aim of the dominant party is to avoid interactions with the other wherever possible.

We still hear CEOs say, “I don’t get my board involved in strategy or planning.” In one instance a president reported that his predecessor had intentionally kept his board of directors in the dark regarding the technical components in critical oversight areas such as risk management and financial controls. “They don’t need to know this,” was a common refrain.

Minimizing by the CEO may encompass the entire board, a group faction, or an individual. “If I could just get these two guys off the board, my life would be so much easier,” is a sentiment frequently heard in private conversations.

Controlling – The aim here is to maintain control and direction setting, and not cede any real authority to the other party. This is often accomplished by not “making waves” or addressing any tough issues directly. In other interactions, the party in control may give lip service to the other, while eventually ignoring or overruling their inputs. The other party is there largely to ratify or implement the decisions—the proverbial “rubber stamp” relationship.

We have seen repeatedly in controlling relationships where the board is left out at the periphery of direction setting (which should be a key responsibility of any board today). In such cases, the strategic plan is completed by the CEO and his/her management team, and a filtered version, purged of details or controversy, is then submitted to the board for “approval.”

 

Another common occurrence is where the board itself is dominated by a powerful single director, or a small group. In one instance, a controlling faction became disenchanted with the CEO of a West Coast bank, and despite strong organizational performance relative to his peers and the support of the majority of the remaining board, the CEO was ousted by the controlling faction. In another example, the board so dominated that it frequently ignored its own management team, and the expertise it possessed was wasted.

Emerging – Here, both parties are making an honest attempt to share authority and involve the other party in decision-making, but some festering issues (e.g., micromanagement, personal biases, insufficient communications) result in suboptimal relations and performance overall. Strong personalities may also produce a climate that inhibits trust and candor.

Collaboration is a common trait of an emerging relationship. But when it exceeds its intended boundaries, it can easily lapse into micromanagement. In one situation, a new member of a board was elected largely because of her outstanding reputation as a marketing wizard. Unfortunately, her knowledge and enthusiasm for all aspects of marketing led her to repeatedly query and challenge the effectiveness of specific advertisements and special promotions, and encroach on the supervision and evaluation of marketing and business development personnel. The bank’s top management was left in a quandary as to how they could continue to gain from her well-intended inputs and expertise, but avoid her constant second guessing of decisions by operating managers.

Optimizing – This is where both parties collectively achieve their potential by defining and adhering to appropriate roles; sharing authority, information, and decision-making; and providing critical oversight of the other to fulfill their required duties. Both are fully engaged, properly focused, constructively involved, and consequently, high functioning. This creates a climate of mutual respect, trust, and candor.

In cases of optimizing relationships, we see the directors maintain a strategic orientation in their thinking, focus on the overall direction of the institution, and keep oversight at the forefront of their duties. Optimizing boards avoid managing the organization, and do not immerse themselves in operational details. They place the interests of the institution and its stakeholders first. All directors are actively involved in a variety of meaningful ways. And management is effective in educating and providing all necessary information to the board in carrying out its oversight mission. One director remarked to us that he learned more and was “more involved in one year” in an optimizing environment created by a new CEO, “than in 15 years combined” with the prior management team in a less-than-ideal setting.

Unfortunately, the ugly truth about board-management relations is that few institutions are operating at the optimizing level. A recent survey by USC’s Center for Effective Organizations (et al.) confirms this: only 24% say their board regularly voices opinions which conflict with the CEO’s; just 37% indicate their board consistently acts with courage and takes appropriate action. Our own observations over two decades are consistent with these findings. Historically, we have found board-management relations at most institutions to operate at either minimizing or controlling levels. Today, we are seeing an increasing number of emerging and, to a lesser extent, optimizing environments. But there remains much room for improvement at most institutions. The key question for the rest of us is determining which level you are operating at, and at what cost to your institution?

The costs of these suboptimal relationships can be enormous. Absent a logical, consistent, and comprehensive strategic direction, achieved through careful deliberations between the parties, the institution is at great risk of being blind-sided in addressing the critical issues facing it. Joint meetings can easily deteriorate into time-wasting perfunctory check-offs of agenda items. Other negative consequences include ineffective management and/or oversight, missed growth opportunities, exposure to unnecessary risks, and loss of revenue.

Working better, together
So how can your institution move towards developing an optimizing relationship? After all, many CEOs live in fear of their boards. Indeed, their very career rests largely in the hands of these directors. Similarly, boards are often intimidated by their CEO; afraid to question or challenge, and risk becoming the “odd-man out.” For both parties, interacting with the other can easily deteriorate into a necessary evil, making one’s life miserable.

But the new reality is you must strive for improvement in your board-management relations. The costs of ignoring a suboptimal relationship are just too great. While the relationship between CEOs and boards is typically complex, and any total breakdown of that relationship generally results from many factors, the sudden departure of a CEO often suggests that the relationship had become suboptimal. This is attested to by the recent, well publicized experiences of HP (where Mark Hurd replaced Carly Fiorina), Capmark Financial (formerly GMAC Commercial Holding, where William Aldinger III replaced Robert Feller), and Home Depot (Frank Blake replaced Robert Nardelli). Other less visible examples are also plentiful. One East Coast mid-size institution is on its third CEO in recent years, largely due to relationship issues between the board and management. Fallout has included a deterioration in performance, and regulatory orders to improve relations between the parties.

Moreover, in today’s post-Enron environment, greater and more effective involvement with the board is a necessity. Current regulatory and legislative pressures continue to redefine the roles of public boards. And the complexities of running an institution today demand greater skills and guidance from directors.

The good news: Board-management relations can indeed be moved from a suboptimal level towards optimizing. To effect change, there are a number of prerequisites required of all participants. Foremost is the recognition that the relationship would benefit by seeking positive change, and a determination by all to make it happen. Even for those institutions who would characterize their relationship as “good,” both parties must recognize the need and understand the value in seeking further improvement.

Each participant must also put the organization ahead of any personal aims. For directors, it’s all about representing shareholders’ interests in setting an effective direction for the institution, and overseeing execution of those plans. For the CEO, it typically requires working with executive management and the board in charting an effective course, and navigating the successful execution of the plans to achieve desired results.

Finally, improving the relationship isn’t necessarily about “getting along.” Candid exchanges, if constructive and targeted towards the betterment of the institution, should be welcomed. For some directors, this may require a shift in mind set; from that of a club member seeking fellowship, to a dedicated focus on performance of their fiduciary responsibilities in representing others.

With the proper prerequisites in place, some sort of deliberate intervention by an objective and independent third party is usually required to achieve the desired improvement. Ideally, you would begin with a baseline measurement from all participants to assess their needs in and satisfaction with organizational direction and effectiveness, personal role fulfillment, and the corresponding working relationship between the parties (you may think of this as a sort of “health checkup” on the relationship). Using this data, commonalities and differences among the parties can be identified, highlighted and prioritized for intervention. Possible remedies should also be researched and evaluated, and a time line for implementation and monitoring progress established.

Communication alone usually goes a long way towards resolution. Explicit recognition of the challenges, and seeking an understanding into why they exist, can often be enough impetus to bring about improvement in a number of cases, if reasonable minds prevail.

While each institution will find they have a unique set of issues, and must tailor solutions to fit their own situation, we have discovered four elements common to all optimizing relationships.

1. Management and the board must allocate sufficient time to ensure open and comprehensive exploration of the strategic issues facing the organization. This includes ready access to any information needed, in order to generate informed guidance and contribute towards making effective decisions.

2. It is imperative that boards improve both the depth and balance of the skills they bring to the relationship. We are often asked what is an appropriate role for a board of directors. The answer depends on the skills and experience they offer. Broadening their individual and collective skills will encourage a greater and more meaningful role. One should keep in mind that where controversial issues persist, it is best to yield to those who possess the greater expertise.

3. Strengthen communications. The CEO and chairman must set the tone and foster a culture of open communications. This should encompass encouraging constructive and probing questions, taking turns as devil’s advocate, even welcoming dissenting views.

 

Moreover, once the deliberations are done, don’t insist on unanimous agreement. Instead, seek majority consensus, with the willingness of all participants to embrace the eventual decision.

4. Those with optimizing relationships require performance accountability for each participant. This includes measurement and evaluation of individual director and CEO performance. Neither position should be considered a tenured post. Have a mechanism to remove weak performers.

By employing these four solution principles, coupled with your own effectiveness in addressing your unique needs, you should be able to move your board-management relations towards an optimizing environment. Directional work can once again become stimulating, with challenging questions resolved in an open and creative setting.

 

Indeed, in moving your relations from ugly to optimizing, it can be a pleasure once again to work together. BJ