Six Signs a Board is in Trouble
13 October 2015 -
With Sports Direct, Volkswagen and Tesco all facing their share of boardroom difficulties this year, guest blogger Ben Stones takes a look at the warning signs that might indicate something is wrong at the top
An effective company board is critical to businesses success. From an inspiring vision and coherent strategy through to efficient operations and production, success or failure is often determined by what goes on at the top. Many of the recent high profile difficulties at Volkswagen, Tesco and Sports Direct can be traced back to problems that originate in the boardroom.
Below we outline six signs that should serve as an amber light that your organisation may be in difficulty. The signs are based on a recent survey of chairs and chief executives, combined with 15 years’ experience working with senior executives to improve company performance.
Sign one: Unwilling or unable to assess the relevance of board member experience and capabilities
A board that isn’t ruthlessly prepared to assess whether or not it is good enough now and for the next three years is taking a risk. Board member capability and experience can be neither relevant to the current situation, nor to the future direction of the business. Private equity firms are better than most when it comes to assessing board capability. But even they recognise the limitations of many existing due diligence processes that ultimately rest on human judgment.
This is where the chairperson is crucial. A great chair is committed to understanding board capability in situ and is able to identify where individual executives and non-executives must develop and improve. In a study of 40 chairs run jointly by PROPHET and EquityChair, we found that successful chairs have a strong appetite for difficult conversations about people issues – a preference that is 3.5 times higher than typical senior executives.
Furthermore, good chairs are highly analytical in their approach to decision-making. Chairs are prepared to think through board development carefully and understand the root issues. However, similar to private equity, chairs also recognise the limitations of existing board evaluation processes, finding online questionnaires unhelpful and the experience of being observed in board meetings a false picture of the truth. Our research also found that the most experienced person in the company at managing impartial development processes, the HR director, is rarely on the board and rarely consulted.
Tesco’s recent difficulties may well be down to a failure to assess board experience and capability. Until recently, none of the board members had any executive retail experience.
Sign two: Insufficient board understanding of the detail of how the business works and a lack of control
Corporate failures often occur when a board fails to understand its business sufficiently and ends up looking at inaccurate information that is critical to business performance, such as incorrect accounting or sales forecasts. This issue can occur when one or two senior executives monopolise information and knowledge, failing to share insight across the board.
This is arguably what happened during major corporate failures at Enron and WorldCom, where the board failed to understand what was really happening in the business.
It is vital that boards frequently ask themselves: “Are we in control of this business? Do we have an accurate picture of what is happening? What levers can we pull to impact performance in a controlled way?”. This requires taking a structured and analytical approach. Chairs’ strong preference for analysis means that they naturally want to get in control and like to have everything in its rightful place. This can be valuable in tempering over-excitement about the future prospects of the business that can sometimes mean boards get caught up in evangelism and entrepreneurialism.
Sign three: Pivotal relationships are not working; the chair and CEO not getting the best out of each other
Effective board performance is inevitably disrupted when key relationships are not working, such as the chair and CEO. They need a solid understanding of each other so as to get off to a fast start, know how best to work together and speak their mind without risk of pulling apart.
Despite its relative success, Sports Direct may perform even better with a clearer split between the CEO / chair role and a fully functioning board.
PROPHET’s research indicates five broad types of CEOs, and this can help the chairperson know how best to manage the relationship to the organisation’s benefit. CEOs tend to be one of:
1. The Entrepreneur / Evangelist – Likely to be a founder; a creative entrepreneur, assertive with a strong sense of the commercial opportunities.
2. The Architect – Likely to come from a technology / complex organisation. A designer of a complex organisation or product architecture.
3. The Operations Director – Likely to be an ex-FD or COO. They will run an effective, structured and safe organisation.
4. The Troubleshooter / Motivator – Likely to be ex-CMO or turnaround specialist, who will thrive in a fast paced turnaround.
5. The Salesperson / Organiser – Likely to be focused on long-term, structured influencing of people. For example, an ex-B2B sales director or a hub leader co-ordinating activities
Tracy French, HR director at Arrow Global Plc, describes the importance of focusing on these key relationships: “Even a very talented board with great experience needs ongoing support to ensure key relationships are in the best state. PROPHET analysis has been very useful for relationships such as our chair and CEO and the CEO and founder, to make sure they understand how each other like to operate.”
Good chairs need to consider what type of CEO they are working with and focus on how they can have a robust and productive relationship, addressing potential conflict or performance problems before they happen. Otherwise there is a danger that people start playing games and pull the board apart.
The PROPHET study found that lots of chairs work with several CEOs at the same time. They have experience working with different types of people, flexing their style to adapt to different CEOs.
Sign four: Insufficient focus on negative power dynamics
A common problem, particularly in owner-manager businesses, is with power dynamics. When the power of veto resides with a single (or a few) founder(s) or investors, and when there is not an aligned vision among the board members, this can either stir up a hornet’s nest or an acceptance of the current situation. Sub-optimal decisions are made because the whole board does not really understand who and how decisions are actually being made.
Each board has its own unique mix of power dynamics, influenced by share structure, who holds the knowledge, who has the right relationships, who has the influence. A good board checks whether or not they understand how the dynamics are working and the potential effects on the business.
Some boards, however, simply don’t hold these conversations: they may think talking power and relationships is too soft n issue; not required; too risky; too personal; too conceptual. Yet a failure to do so is a lead indicator of organisational failure. Without effective collaboration and challenge, board decisions can easily become unaligned by inconsistent implementation.
One type of dynamic that PROPHET research regularly uncovers is a hugely varied appetite among board members for teamwork, open debate and frank discussion. Some board members like to work and think independently whereas others prefer to work collaboratively. So too there is a big variance in the extent to which senior executives embrace conflict. By understanding differences, and preparing in advance for how to deal with potential problems, it is far easier to broach the difficult topics when they arise.
Family run businesses often suffer from this issue, where difficult conversations don’t receive airtime. Volkswagen is arguably the highest profile current example.
Sign five: Failure to understand what drives senior executives
Boards rarely take the time to fully understand the motivations of senior team members who work in the business full time. A board that fails to tap into senior executives’ preferences and goals, including how they may want to create a long term legacy, may fail to inspire them. Boards and investors alike generally don’t engage with this sort of discussion; they tend to prioritise an analytical focus on the numbers or the three year plan. Tapping into what is driving people can be transformational for a business.
There are many examples of CEOs who lose momentum, when they find themselves at the helm of a business that is no longer of interest to them. For example, Net-A-Porter founder Natalie Massenet recently quit despite the lure of further riches post-acquisition. Boards shouldn’t lose sight of the fact that not everyone is driven by financial goals alone.
PROPHET research shows that good chairs have a natural preference for thinking about people’s motivations and are open to the concept of vision. Conversely, investors’ profiles typically show that they are likely to shy away from discussions around vision and motivations. They would be wise, however, to recognise that this is not just about coming up with a catchy strapline. It is about working out what is going to motivate executives to get behind the business, commit to its success and want to see it through. Executives care about what they do, are working full-time in the business and most get up each day to achieve something they are proud of, rather than just hit a set of numbers.
Chris Liddle, executive chair of the 260 people strong architect firm HLM Group said: “Even though the members of our board have known each other professionally and personally for many years, it is important to keep refreshing our relationships and our understanding of what we personally want from being involved in the business. As part of our 50th year, we have focused on how we can have the highest performing collaboration across the board and a genuinely aligned board fired up to continue our success.”
Sign six: Lack of focus on the end goal to keep the business on track
Boards need to discuss how things will end, or identify the next major stages of company development. These conversations need to take place on a regular basis. It may seem far off, but without having regular exit discussions, or identifying how or when key people are likely to continue or walk away, a business risks getting itself into an almighty mess. Owner-managers find it particularly difficult to focus on exit, and tend to get caught up in the day-to-day, or in-year profitability over taking the decisions that may create longer-term value.
Boards can be blissfully unaware that key people are counting their days; assuming that they are committed to seeing through the business plan when in fact they are preparing for their next move. When businesses know how individuals feel and what their plans are, they are able to manage this – or do something about it. In the absence of such information, they can end up with nasty surprises and need to react quickly to fill a post.
HR directors can be critical in brokering these difficult discussions. It becomes much easier to handle these types of situations simply by putting the issue on the table early on. The discussions may need to be navigated sensitively, taking time to allow people to articulate how they feel about their futures. Making sure exit is not the elephant in the room can be crucial to planning ahead and mitigating risk for a business.
In our experience, the six signs listed above provide a clear indication that a Board may be in trouble. A lack of focus on any one of these can quickly become a major problem and sometimes fatal for the business. All of the issues can be addressed, but getting the right relationships to have the right conversations is often the hardest step.
Ben Stones is managing director at PROPHET Profiling, a senior team profiling solution designed for leaders to fast-track business team performance and shape strategy implementation with HR partners. It provides insight for senior executives to help identify how to get the best out of their colleagues, key relationships and teams, as part of shaping and implementing strategy.
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