What makes a Board successful?

The reporting season is showing that Australia is not operating as well as we could be. Dividends are up and media attention has not been on profits, which have been mediocre, but on shareholder activism. The last two weeks have seen public complaints result in the Chairman and Chairwoman of both Australia Post and Commonwealth Bank cutting Executive pays and the resignation of Grant King as Director of the Board of BHP a mere 6 months after his appointment.

Governance is an increasingly sensitive issue, with Directors being asked to be more accountable for the activities of a company than seems practicable. Directors are frequently non executive, meaning that they are not engaged in any role in the firm beyond their Directorship which may comprise a few days a month and is much less than most employees.

The Board is appointed to protect the shareholder interests, and Directors are expected to adhere to the highest ethical standards and as a Board ensure that such standards are also exemplified in the Company they govern. The trouble is the situations attracting the current ire of the public were created by hundreds or possibly thousands of decisions made in the past, using assumptions that may no longer hold true.

Yes, a Company must be held to account for its actions and yes a Company has a social responsibility as well as a responsibility for shareholder returns. This is undisputed. But its not a Directorship issue, it’s a human issue. When Ahmed Fahour, the CEO of Australia Post, negotiated his pay deal he did it with an intelligent Board who at the time thought the deal was suitable. The high payout may be a reflection of the then Board’s pessimistic view of the enterprise upside potential, rather than Fahour’s negotiating prowess, but the negotiation would have been complex and effort would have been expended in making the terms fair. And like the appointment of Grant King at BHP, at the time the decision was made, using the assumptions the Board thought relevant, the decision seemed sound.

The Boards for BHP and Australia Post would have required exemplar disciplinary skills to avoid these problems. It is logical to say that those skills were lacking when one or more of the decisions were made. That is not to say the Boards lacked intelligence, but rather it is the impact of a Board being comprised of people and not robots.

It is expected that Board members will be rational in their decision making. This is not a simple thing. It requires a perfect balance of cognition and affect that will enable the group to explore the issue fully. Affect is a general term used to describe both moods and emotions. Each individual brings their affective state to the decision making process.

Activists desire that the Board exhibit empathy, putting themselves in the shoes of investors. Empathy requires compassion which at its height means feeling the pain of others. The activists request is not unwarranted as Directors are in place to protect shareholder interests. The trouble is, pain is something most beings avoid and so pushing into it is not natural.

Good decisions require affective states which are neither highly positive nor negative. It is assumed that negative states are best avoided when making decisions as the decisions will be tinged with its dark hew. Indeed there is more chance that a decision will be avoided than made when under this affect. Negative states inhibit the working of the brain, information is accessed on an as needs basis and key matters can be over looked. A person who engages in negative emotions will collect more information than needed, and find it difficult to identify the real issues and dig into them. Negative states interrupt processing. As complexity builds negative states become stronger.

Should the focus then be placed on creating a positive state? Positive feelings encourage flexibility and creativity and so it seems appropriate to encourage them but there is a limit here too. For example, consensus is an important output of a Board discussion, but this can be hampered by positive affect. Research on auditors has found that when positive emotions exist, valuations of inventory had lower levels of consensus. Boards are commissioned to achieve consensus, so extrapolating this research to the Board shows this affect can be problematic.

In addition higher levels of both negative and positive emotions will limit the choices the individuals make. A happy person wants to retain their feeling of happiness and so be disinclined to ‘spoil their good mood’ thus not digging deep enough into contentious matters. (Was this a factor in the initial discussions with Fahour limiting modelling of potential payouts?). Whereas a person suffering negative emotion is drained from the energy needed to keep this state in place. She wants to avoid feeling any more pain. Reversion to status quo is a frequent output from these situations, as is failing to ask the important questions.

Whatever the reasons for the current problems it is clear that growing shareholder activism will add more complexity to the decision making pot. As complexity grows so does the need for a balanced viewpoint. The Chairwoman has a vital role in the decision making quality. It is her job to ensure the Board atmosphere and the affects the Directors bring to the table are turned into something which is ‘just right’ for the decision. Like Goldilocks of the Three Bears, she needs to understand the situation and the people involved, and guide the affects to the levels appropriate. This requires a level of attention that is not easy to sustain, thus necessitating a Board culture of deep and actively nurtured trust.

Study after study has shown that teams, like a Board, perform best where three conditions exist: Trust, a sense of identity (that belonging to the group is worthwhile) and group efficacy (the belief that the group can perform more effectively working together than apart). With these three elements in place, participation, cooperation and collaboration will be engendered. Only when all persons at the table feel able to question the affect state of the people at the table, in a manner which will bring that state to balance, will Directors be able to provide the level of skill that activists demand, and deserve.

Directors are being called to act in a way that is needed. They must put the shoes of all stakeholders on their feet when making decisions. It is difficult to do, as digging into the potential problems is painful, but it is not impossible. A successful Board combines the might of the cognition and affect of all the members at the table in a way that suits circumstances. It is incumbent on the Chairman or Chairwoman to ensure this occurs. That this profit season has seen these significant issues arise is sending a message to Directors that they need to be ready when issues arise again. Because they will. Nasty surprises always happen.

Further reading:

Bartlett, Geoffrey 2012, “The effects of an implementation timelines, strategy buy-in, experience and affect on balanced scorecard based performance evaluation and bonus allocations” Arizona State University, Doctoral Dissertation

Chanticleer, 2017, “Post calls time on excessive pay” AFR, 26-27 August 2017

Druskat, Vanessa, 2015 “Building the emotional intelligence of groups” Harvard Business Review Vol 79 (3): 80-90

Editor, 2017, “A profit warning for everyone” AFR, 26-27 August 2017

Mintzberg, Henry, 1976, “Planning on the left side and managing on the right” Harvard Business Review July-August 1976: 49-57

 


Jennifer is a strategy implementation coach who helps leaders turn their strategies into results.

She assists executives and business owners to achieve goals such as improved profit, productivity, leadership skills, business value. Her services are Business and Executive Coaching, Group Facilitation, Strategic Planning, and advising on Board Governance.

 To find out how she can help you, call +61 439 520 182 or email.