CREATING AN effective board and good corporate governance is hard; it demands much more than just following rules. Rules provide a foundation to build on but they can’t deal with every situation.
In 2010, GlaxoSmithKline (GSK) agreed a $750m (£476m) settlement in the US after a whistleblower, Cheryl Eckhardt, brought a suit on behalf of the Federal Drug Administration, alleging serious manufacturing violations at the company’s Puerto Rican plant. This followed her failed attempts, as an insider, to get GSK to address the issues.
The company has pages in its report and accounts detailing business risks and governance structures, and has a compliance department to work with whistleblowers. However, none of this worked because individuals in key positions did not live the company values.
To turn the framework of systems and procedures into an adaptable and resilient organism demands appropriate behaviours to be built on the foundation. Above all, it demands that the ideas and plans of the board should be challenged from within.
Independence of thought
A company board can find itself divided by profound differences on material issues, but robust debate is good: it shows the board is doing its job. It will usually result in a consensus and those who disagree will accept defeat. However, strong personalities may try to shut down debate or bypass a lost vote, because they are determined their views shall prevail.
“Independence of thought and challenge are encouraged, but little is said about practicality,” says professor Bob Garratt, a company chairman, consultant and academic working on corporate governance. “An expectation that an executive director would openly challenge a chief executive at a board meeting is known in psychology as a career-threatening opportunity. Few have been known to accept it.”
And this is the rock upon which governance theory founders. How can a constructive, free, participative, wide-ranging and challenging boardroom conversation be developed and maintained? A chief executive may exert pressure on direct reports or, through sheer force of personality, shut down debate.
This makes it harder for non-executive directors to challenge received thinking, since nobody around the table will speak in support of a contrary opinion. And the executive directors, who should be volunteering information to the non-executives, will hold back, preventing them from performing their role effectively.
Sir Fred Goodwin, former boss of RBS, is reputed to use this sort of brutal management style: a journalist in a Scottish newspaper reported that senior executives dreaded the Monday morning executive meeting. If they were so intimidated, what does that say about the quality of information supplied to the board?
It is critical that the chairmanship manages this and shapes the dynamics of the boardroom conversation to make sure that individuals feel free to speak. Someone who blocks that conversation must be led to a more open style of management or, in extreme circumstances, must be replaced.
Governance models focus on the role of the chairman, but the operation of an effective board is a joint enterprise. So the chairman’s first task is to ensure an effective partnership with the CEO who, in turn, leads the executive team.
The important word here is team, since none of the processes work if people do not work together. But the directors on a board may have different ambitions and self-interests. They may compete with each other for scarce resources, and it is not always the result that is best for the business that wins the day. The chairman and chief executive must manage this team, with the former doing so through management of the board meetings and the latter doing so as line manager of the other directors.
Selecting this top team is also part of the process of making it work. On the one hand, the chief executive must have a key role in selecting the team he or she will manage but, on the other hand, the nominations committee, with a majority of independent non-executive directors, must be aware of the importance of appointing individuals who will speak truth to power. Its members must also consider the diversity of the board and the contribution of non-executives, who are there to bring particular skills, expertise and contacts but, importantly, also to have the independence of mind to constructively challenge the executive team.
A key aid to the chairman in all this is the company secretary, who should report to the board as a whole. The secretary’s role is to facilitate board processes and ensure, among other things, full and timely provision of information, without which the basis for discussion and good decision-making disappears.
When there are big challenges, such as a dysfunctional board or an overmighty chief executive, it is almost impossible for other directors to ensure good governance without the support of a strong and capable chairman who can manage difficult balances:
• The chairman’s relationship with the chief executive is important but should not be so close as to preclude challenging or removing them.
• The chairman must manage meetings but not intrude too much. Too much contribution and steering reduce time available for others to speak and makes the chairman the problem, rather than the solution.
• Directors should be a coherent team, but not so close as to undermine the non-executive directors’ role of challenging the executive directors. And although they should be immersed in the business, they should not become part of the executive team, becoming party to thinking that they ought to be challenging.
• Independence of mind is important in non-executive directors, but that is a personal quality and is not always the same as having no previous connection with the company.
Ideally the boardroom conversation will establish itself naturally but the chairman and chief executive must manage it into existence where it does not and, in the last analysis, it is the main responsibility of a chairman to establish and protect it.
Brian Finch is a writer and business consultant. His latest book, Financial Times Briefings: Corporate Governance, has just been published