Developing Good Governance: Board Culture is the Key
SVDX member Jennifer Davis writes about board culture and good governance:
Developing Good Governance: Board Culture is the Key
By Jennifer R. Davis
Imagine stepping into a board meeting where each member is tense and has their guard up? It would be extremely difficult for those board members to make decisions rather than re-litigate prior decisions because one or a few members refused to agree or accept what was previously decided. This scenario is a nightmare for board members and executives alike because the board is not meeting one of its main objectives: performing effective oversight in the best interest of the company. Every Board of Directors struggles with creating a high performing board. But an often-overlooked strategy in the process of building this culture of excellence and high performance is implementing a board culture that facilitates strong governance.
We often know the what of these struggles. We see fractures in governance or culture, and we know that these areas are crucial to director and board success. However, too often we struggle with the how – the steps we can take to create this ideal board. These concepts of good governance and the right board culture do not have to operate independently of each other. In fact, they are closely and causally aligned – cultivating one naturally engenders the other. By creating a structure that allows for healthy dissent, interpersonal engagement, trust and respect, a Board of Directors can quickly increase its engagement, participation and investment. All of which will lead to higher performance and successes that belong to the entire board. Here are some common-sense tools for establishing a board culture.
With only four board meetings per year and committee meetings that do not include all members, it is difficult for individual board members to get to know one another and create a unified culture. A board may comprise very prestigious and accomplished individuals, but that does not mean the board is an inherently effective leadership function. Often, the board members are a rotating group of strangers. In order to increase trust and respect between board members, it is important to weave in some periods of engagement that are not centered on the work at hand. Try building into the agenda activities that allow members to engage on a personal level and exchange information about their lives. Build into the framework (and culture) of the board experience opportunities to bond over meals and activities. Do this during the time members are already together for the meeting such that individuals do not immediately retreat to their respective corners once the meeting has concluded for the day. These moments of interpersonal engagement allow the members to relate to one another on a deeper and more personal level that will bring them closer together when handling board business. Furthermore, when disagreements arise in the boardroom, as they inevitably will, if the board members know each other on a personal level, trust each other, then they can disagree respectfully and solve issues more quickly, and with less conflict. On one board I was on, a board member and I learned through a board team building activity that I studied abroad in the same area that the individual lived. We bonded over these shared experiences, and our professional relationship strengthened. With this stronger relationship, we became more to open to each other’s dissenting views on topics during board meetings and were increasingly willing to find common ground. Once a culture of mutual trust and respect is established and encouraged, governance becomes innate in how the members engage, rather than acting as a set of rules that are constantly policed and enforced.
There are two areas of culture that most directly impact the governance and culture of a board. The first of these are director term limits. It is important for the board to recognize when independent directors are too entrenched and are no longer bringing value or new ideas. When an independent director starts to feel a sense of possession or ownership over the corporation, it is likely time for them to step aside. It is likely that the director is no longer operating in the best interest of the business or its stakeholders. In that instance, the independent director may begin to act more like a dependent director.
There are times when certain directors are no longer what the corporation needs to grow and move forward. As a first step in preventing directors from outlasting their usefulness, boards should make sure that 1. the number of terms a board member may serve and 2. the number of years per term are both set to a number that is best for the company’s overall business and strategic plan. This can be accomplished through specifying term limits in the bylaws, and through effective and regular feedback regarding each board members’ contributions. This will ensure the board is maintaining a regular influx of new ideas that are aligned to the company’s current and future direction.
The second area of culture that directly impacts good governance structure is extensive, frequent and detailed feedback. Building a strong board culture benefits from evaluating each director against the needs and strategies of the corporation. It is important to institute an annual review of the board members. The reviews should be completed by all board members, including a self-review, and the executive team. The feedback should be discussed openly during a board meeting session. Particularly harsh feedback can be presented in advance of the meeting by the board chair to the respective director. Executive sessions during regular meetings should be used for constant feedback as well so that discontent or issues do not linger or carry over to later meetings. However, this process requires the board to have established a high level of trust and openness to be most effective and impactful.
A culture of trust and openness on the board also helps with maintaining the boundaries between oversight and operations. Oversight is a gray area that is difficult to navigate. Board members set the direction and strategy for a company, govern the company and ensure there is good management as part of its oversight function. This oversight requires a certain level of operational insight from the management team in order to be effective. However, in receiving that operational insight, the board should not cross into managing the operations of the company. The board members should not inform the executive team how to do its job or execute. A board chair or fellow board members should feel comfortable in meetings ending a discussion or interrupting a director that is taking a board conversation into the weeds on operations. The more a director may know about an industry or topic the grayer that balance between oversight and business operations may become. For example, when a board has an external lawyer as a board director, that lawyer’s duty as a board member is not to assume or delve into the role of the company’s general counsel. The lawyer-director must be mindful of using their legal knowledge in furtherance of its oversight function and not in the specifics of the legal operations of the company. When a board has fostered a culture of openness, it is easier to hold each other accountable during conversations that take a turn too far into a business operations discussion.
It is important that the chairperson engage in one-on-one conversations with fellow board members in order to pull out the best in each board member individually, thereby strengthening the whole board. The chairperson has a great deal of influence in shaping the culture of the board by advocating for what they believe should occur, but not telling each board member what to do. By using different types of questioning methods, a chairperson can lead the board on the journey it would like the board to go. Through the questioning, each board member becomes more reflective and, as a result, a better board leader.
Boards must trust their corporate executive team to do just that: execute. A cultural implementation that can assist is encouraging the board and executives to get to know each other and learn about their respective areas of expertise. There should also be an open line of communication for questions between board directors and executives. If possible, boards should visit the company as well, so that they present as approachable and accessible to the executive team. If visiting an office is not possible, for instance in remote-first companies, consider having one board meeting during a company onsite/offsite. This can help foster a sense of collaboration and trust plus give insight and visibility on how the company is operating.
Having a culture of open communication and easy trust helps with over indexing on strict rules that can make the board culture too rigid. The bylaws are the cornerstone of how the board operates. But keep in mind that when the board communicates well, every minute detail does not need to be reflected or changed in the bylaws for the board to govern well and effectively. Open communication allows for flexibility and interpretation. For instance, if certain decisions are required to be made collaboratively, that decision does not need to be a documented change if the board already has a culture of open communication. It will function perfectly as a board custom that can carry through as a governance mechanism. Additionally, there may be business discussions that require a bit of flexibility, where this leeway is significantly more helpful than its more stilted alternative.
Ultimately, the board is a group of individuals, all with their own lives and responsibilities outside of the board; it may be necessary for officers and committee chairs to lean on each other to be most effective when life happens, as it does to us all. This is where grace, empathy and cultural awareness is critically important. Boards must understand how to communicate with each other to be able to effectively flex, adapt and understand the customs they create outside the written document.
Boards should not strive for perfection in all things, including in their culture and governance practices. Instead, the goal should be creating a culture that effectively ensures good governance practices without having to constantly refer back to the bylaws. Boards should create a culture where dissent is celebrated. If topics are explored with curiosity and trust, dissent cannot completely derail discussions. Board members should be comfortable speaking openly and honestly with each other and the executive team, consistently thinking about what is working and what can they as a group do better. This open reflection allows constant insight to how the board is governing collectively, since it is only by working together that a board of directors can be an effective and powerful force for the company which it represents.
Biography: Jennifer R. Davis, Esq is a board of directors professional with a background in law and engineering. She is based in New York City and can be reached via email at jennifer.r.davisesq@gmail.com.