5 Red Flags That Reveal a Failing BoardAn interview with
The role of boards continues to change as companies’ stakeholder engagement expands and major new risk issues such as AI and climate transition planning become matters for board discussion. Seamus Gillen was the policy director of the ICSA, the Chartered Governance Institute in the U.K., and has spent 16 years advising clients in the U.K. and internationally on governance.
BRINK spoke to him about his new book, Building Better Boards: How to Lead and Succeed in a Changing World.
GILLEN: When I train directors of boards, the very first question I ask them is, “What is the purpose of an organization?” It’s the most important question in governance. The purpose of any organization is to create value. To my mind, the main purpose of a board is to take high-quality, strategic decisions, the best possible decisions to create long-term sustainable value for the benefit of its stakeholders.
When you approach boards from this view, governance becomes something different from the traditional view of it being a compliance issue, and an area of subject matter expertise. In fact, governance is an enabling concept, it’s a philosophy, it’s a mindset that looks at how we can use the way in which we run our organization to grow the value of the business model to its optimal state.
The Wider Ecosystem
What we’ve seen in the past decade, and particularly in the past five years, is a much greater awareness by boards that they’re operating in a wider ecosystem where they need to be aware of stakeholder perspectives, including shareholder perspectives.
The license to operate, which was a hackneyed expression from 25, 30 years ago, has now become a real issue about what license do we have to operate in society? That’s the way boards have changed.
BRINK: Obviously one major aspect of that is the rise of ESG — how should boards handle ESG issues?
GILLEN: ESG is a battleground now, and 2022 has seen a massive pushback against the concept, an attempt either by those who really understand its role to clarify its role, or by those who don’t understand its role to push back against ESG.
The Battleground of ESG
U.S. society, in particular, is becoming deeply, deeply polarized on issues such as ESG. We see the battle between Disney and Florida Governor Ron De Santis about Disney’s positioning on a number of social issues. We’ve seen former U.S. Vice President Mike Pence, who is positioning whether to run for the next presidential election disagreeing with the concept of ESG.
What ESG effectively is, is just another name for the way in which companies, from their perspective, need to position themselves in relation to the impacts they have on society and how those impacts get managed, how the positive impacts are leveraged, the negative impacts are minimized, and how they manage that relationship with their stakeholders.
ESG is effectively risk management. Therefore, where does ESG go inside an organization? It certainly does go to risk management itself, and to compliance, but it goes to a whole load of other areas of corporate activity, including strategy, brand and reputation protection, stakeholder management and ethics.
BRINK: What about the need for companies to manage transition planning to a net zero world? Is that the purview of the board, and if so, how should a board handle that?
GILLEN: We face two existential risks in the world in terms of every organization and corporates, in particular. The first is climate change and the push toward net zero carbon, and the second is technology.
The need to do something about climate change is absolute, and that is every board’s responsibility, because that is a material risk to their ability to continue to run their companies with a license to operate.
What matters is the quality of the conversation inside the boardroom. That will inevitably be informed by one or two experts on any particular matter, whether it’s climate change [or] ESG.
And for all material activities inside a company, there has to be a governance response, and that requires that the board is able to look at any issue. It can be through a specialist committee, or directors on the board who are, as we say, bilingual — they speak finance and they speak ESG, they speak HR and ESG, or compliance and ESG — they speak two languages. Or they ensure that they at least get specialist advice from the management function and/or from outside advisers.
BRINK: In the case of technology, it’s increasingly hard for the average board member to understand and grasp things like AI and machine learning. How do boards make coherent decisions around something if they don’t fully understand it?
GILLEN: Not everybody on a board is a qualified accountant, not everybody on a board is a HR expert or whatever. Boards are teams, and, as with sporting teams, we look to people to specialize in particular areas, and then there have to be degrees of trust and teamwork and collaboration and empathy and all of those important behaviors, so that a board can look to the one or two experts in any particular area, whether that’s strategy, risk compliance, or whatever, in order to guide them in their conversation.
What matters is the quality of the conversation inside the boardroom. That will inevitably be informed by one or two experts on any particular matter, whether it’s climate change, ESG, technology, risk compliance, whatever. When you see dysfunction creep in is when you don’t have that quality of conversation, because it then impacts on the quality of the decision-making at board level.
What Are the Red Flags?
BRINK: What are the warning signals or the danger signs of a poorly performing board?
GILLEN: An immediate red flag is when a board is not discussing the right issues. I will often find a board discussing issues which are not material and value-creating in terms of the future benefits for the company and its stakeholders.
Secondly, you’ll find the wrong people sitting around the table. One of the most critical aspects of any board is that it should be based on skills, but often you’ll find directors on boards who have no knowledge of the business at play. A fantastic example is Theranos, the blood test technology company of Elizabeth Holmes and her boyfriend, who are due to be sentenced in September. Here we’re talking about advanced med tech, yet three of the directors on that particular board were over 80 years of age and had no knowledge of tech, no knowledge of leading edge medicine or anything like that. They never asked questions about the technology and they never bothered to understand the market within which they were operating.
A third warning sign is behavior inside the boardroom: the bullies, the people who can’t stop talking, the people who say nothing and who contribute to “empty chair syndrome,” the chair who gives their view at the beginning of the conversation rather than at the end of the discussion. These are all warning signs.
Another is the board pack which is circulated days, or a day, before the meeting. It happens. I’m working with a board at the moment where a guy got into the car to get to the board meeting and in that two hour car journey, 10 more pages were added to the board pack on the electronic portal, so that when he got to the meeting there were 10 pages extra in the board pack that he hadn’t even seen.
Directors don’t always bother to get around the business — they go from one board meeting to the next without having learned what’s changed inside the business since the last time they attended a board meeting. Directors aren’t always trained, therefore they don’t get development in the subject matter areas, such as cyber or climate change, or risk, or whatever, that helps them stay up to speed. There are very badly run board meetings, which run over time. I’ve been in board meetings where the most critical issue for discussion got left to the last half hour.
Everything begins and ends with the board. Companies don’t fail, boards fail. And the question often asked when something goes wrong, like Theranos or Boeing or whoever, is where was the board, where were the directors? If the board isn’t working, then the rest of the organization won’t be working either. We need to get the top of the organization working. Because that’s the way in which value gets created for the benefit of all the stakeholders, for the shareholders and for society.