Board Implosion
How to avoid the unthinkable
What do Credit Suisse, Uber and WeWork have in common? They are organizations whose boards suffered extreme internal disagreements over the strategies of their company’s CEOs, resulting in reputational and financial damage. In a sense, their boards imploded.
Boards are built to govern. They are intended to be a check on the abuse of power, representing shareholder interests that could be put at risk by an overly aggressive leader obsessed with growth at all costs or putting personal interests above those of the company. When the board itself becomes so divided that it is unable to agree on a course of action, who steps in to sort out the mess? Answering this question is important, because the consequences of allowing board dysfunction to paralyze decision making by the board can be severe. Beyond reputational hits, investors can lose confidence in the company’s leadership, depressing stock prices. Deadlines for taking action can be missed, incurring significant opportunity costs that may not be recoverable. Failures to act in the shareholders’ best interests can result in fines, lawsuits and the removal of key executives. Customers and key employees may flee, further exacerbating difficulties and extending the window of recovery. Competitors and activist investors may seize the moment to strike, causing permanent harm.
For better or worse, boards are composed of human beings who are subject to emotionally induced irrationality. The same strengths that make people strong board members – experience, passion, commitment, integrity, deep obligation to fulfilling their duties – makes them vulnerable to polarization on issues over which well-informed and well-intended individuals can disagree. Should the company’s future be put at risk to pursue a once-in-a-lifetime acquisition opportunity? Should a CEO with a stellar track record be removed because there was a highly visible safety incident that occurred on their watch? How severe should the board’s response be to the discovery that the company is using suppliers who condone child labor or take bribes in exchange for preferential pricing? Should the board accept or reject an offer of 20% over current share price by a third-party investor known to decimate companies they acquire?
When disputes over such matters erupt in the board room, many people can be hurt and positions can be taken that leave scars that hamper future board interactions. It would be best for the board to resolve such differences quietly through internal means but this is not always possible. Before things go public, the chair can send matters to committee, delay decisions to let things cool off, or engage in shuttle diplomacy to bring warring factions together. Mediators can be brought in to help resolve the dispute and restore functionality. In rare instances, if there’s enough time, steps can be taken to replace board members to reflect the will of shareholders or replace extremists with moderates.
If none of these moves work, the dysfunction of the board will probably be exposed. At that point, in a highly regulated industry, regulators may intervene to protect public interests. In less regulated cases, either increasing pressure brought to bear by shareholders or the negative effects of being in the public spotlight may force board members to settle their differences. If they are unable to do so, the full negative impact of the situation will be felt, resulting in the damage to the company spelled out earlier. Added to this, individual board members can face individual lawsuits as they are held personally liable for financial losses.
Clearly, no board wants to reach this state of extreme dysfunction. What can board chairs or others do to prevent this from happening? Here are some suggestions; feel free to add others.
Plan for the unimaginable. Be prepared for a situation in which the board reaches an impasse. Agree in advance on procedures that will be followed under such circumstances. Whether it be to bring in a mediator or after a certain number of votes empower the chair to decide, know and agree on what will happen.
Clarify shared values. Boards should discuss their highest ideals for the board and company rather than assume that all board members share the same values. While difficult, these discussions can help to cut disagreements off at the pass by referring to areas of shared agreement.
Pay attention to active listening and behavioral norms. When the heat rises, our willingness to listen goes down. Specifying and enforcing norms of good behavior on a regular basis lays the groundwork for keeping things under control when the going gets tough.
Provide board education. At least some members of the board may not have experienced the aftermath of a board imploding. Help board members understand what is likely to happen next if disputes can’t be resolved.
Employ a jury of board peers. Bring in a small panel of highly respected individuals to hear both sides of the argument and rule objectively as a jury in a trial would be asked to do. This is a variation of the mediator solution that can seem fairer to some.
Avoiding the board imploding in the first place should be the number one goal. Afterwards, it can be hard to pick up the pieces. While the primary responsibility for doing so rests with the chair, other board members can press for attention to this matter as well. Once the board is imploding, everyone pays the price.