How to avoid dysfunctional board culture

Friday, 02 September 2022

Denis Hazbic
Change Focus Group psychologist

    Board culture has a powerful influence on the relationship a board develops with management and its approach to governance. Organisational psychologists at Change Focus identify four common cultures we see in boardrooms and provide pointers on how to diagnose the dysfunctional ones.

    Considerable publicity has resulted from failures and lack of oversight driven by dysfunctional board cultures in recent years. These include patient horror stories that have come to light in the review of the cosmetic surgery sector by the Australian Health Practitioners Regulation Agency (AHPRA), and the Royal Commission into misconduct in the banking, superannuation and financial services industry.

    There is no doubt a healthy board culture is increasingly recognised as an important element of effective governance and indeed organisational performance. But unlike other factors contributing to board effectiveness such as industry knowledge, governance expertise or financial acumen, board culture is less clearly defined or understood. Board culture, or consistent patterns of behaviour, values and mindsets in the boardroom, have a powerful influence on the relationship a board develops with management and its’ approach to governance decisionmaking.

    Not to be confused with organisational culture, board culture emerges from the history of a particular board, the problems and challenges it has faced and the patterns of behavioural dynamics (i.e. director personalities, decisionmaking processes, group maturity and collective behaviour) that shape board discussions over time.

    While a board’s deliberation and decisions should be flexible to the issues it is addressing, each board tends to have a dominant cultural mindset that is relatively stable over time. This means a board tends to be consistent in how it approaches problems and the way it relates to the organisation and management. Even when new directors join the board, they tend to be inducted into the board culture and then go on to replicate it. Only through significant changes associated with external challenges or high director turnover or changes in the chair do board cultures change quickly or substantively.

    Building on a growing body of research on the formation and telltale signs of ineffective board cultures, the organisational psychologists at Change Focus have developed a model to diagnose and understand board culture and recognise tipping points where an effective culture slips into dysfunction.  In our work, we identify four common culture archetypes operating in Australian boardrooms.

    Too close to see: The overly collaborative board

    In the ideal world, board members operate within their governance roles in collaboration with an executive management team focused on delivery.  Management members are viewed as trustworthy professionals with whom the board works and supports to achieve the best results for the company. At its best, this collaborative partnership leads to free and frank exchanges of views and information between directors and management and a dual focus on both business outcomes and governance oversight.

    Taken too far, however, an overly collaborative relationship where directors view management as trusted equals and teammates can compromise the board’s role of independent oversight. While board and management share a mutual purpose to advance organisational objectives, their roles in this endeavour are not the same.  An open co-operative relationship with management should not undermine a board’s independence, nor compromise its key roles of ensuring prudent corporate management, holding management to account and pursuing longer-term interests of shareholders and other stakeholders. 

    Director and IT governance expert Jason Wilk (FAICD) tells of a board that was too close to management to evaluate risks objectively. While going through a tech transformation, this financial industry player relied heavily on internal experts in deciding to upgrade an existing system, rather than adopting a new platform.  He says, “Management’s familiarity with the current platform blinded them and the board to its flaws. The lack of rigorous independent evaluation of this approach cost the company three years, several million dollars and a competitive lead in their market.”

    Suspicion eroding trust: The overly sceptical board

    At the other extreme is the sceptical board, where directors believe they must closely monitor and control management, and do what is good for themselves, rather than serve the long-term interests of the company. Based on agency theory, this governance approach emphasises the board’s role of representing the interests of owners and focuses on where this conflicts with the interests of management. A healthy dose of professional scepticism lies at the heart of boards monitoring organisational metrics, auditing finances and pressure testing management decisions. 

    However, continual wariness about management intentions and constant critical evaluation of their actions can create a culture of mistrust in the boardroom and in turn erode the relationship with management. The result can be defensiveness by members of management who, feeling under siege from their board, may focus on good news and be less open when things are not going so well. Unfortunately, when problems come to light (and they usually do) directors feel blindsided and justified in their suspicion – and the cycle of mistrust deepens.  Signs of an overly sceptical culture include: Management keeping critical information from the board (e.g., poor or ambiguous board papers), a tense chair/CEO relationship, the board rarely acknowledging good work by management and a tendency for directors to constantly delve into business operations.

    Director Marion Macleod (FAICD) believes you cannot overemphasise the importance of healthy, open, respectful relationships between board and management. She says, “In the boards I’ve been on, the cultural tone is often set when the directors walk out of the boardroom and interact with management and staff. We set the tone around being respectful, wanting to hear a range of perspectives and reminding ourselves that our role is to be clear on strategy and to support management to deliver on it.”

    All care, no responsibility: The advisory culture

    Skills-based boards are seen as best practice – ensuring that each director contributes unique knowledge and capabilities to the pool of talent on the board. This approach focuses on the intellectual capital within a board, the industry experience, expertise and networks that can augment management’s capability and help the organisation to grow. When this advisory culture is operating well, directors have a focus on applying their minds to achieving business objectives, supporting management and providing oversight.

    However, when an advisory culture goes too far, boards may act as if their primary role is to undertake good analysis of problems and provide advice to management about the best options, and that it is management’s role to choose the way forward. Such boards forget their fiduciary duties to not just provide the best thinking, but to make the best decisions and produce outcomes that advance the organisation. Directors are not advisors, consultants or interested bystanders, they have skin-in-the-game and they are accountable for making good decisions on behalf of shareholders and members. Warning signs that a board’s culture is becoming overly advisory include: A lack of board responsibility for business outcomes; management controlling the agenda in board meetings, hard questions not being asked by the board and directors being non-committal around critical decisions.

    Director Claire Davis (GAICD) recalls, “…a CEO who remained respectful in all board interactions, but over time seemed to value the input and oversight of directors less and less. The CEO ended up assuming everything they put to the board would be supported. How to address this?  Remind directors that they are responsible for board decisions, not the CEO.”

    Power in the boardroom: The personality-led board

    Like moths to a flame, boardrooms seem to attract powerful, charismatic and passionate people. While these are good traits in leadership roles, they can be poison in collective decisionmaking forums such as most boards. The personality-led board is where the CEO, chair, or those with the strongest voice or biggest ego tend to overpower other players, with the consequence being a board dominated by a narrow range of views or interests.  

    The dominant director derives their power from either a reputation and forceful personality, control over a sizeable proportion of the shareholding, or by co-opting the power inherent in the chair or CEO positions. Importantly, the personality-led board may be functional. Sometimes the powerful director makes good decisions for the benefit of the company. However, more often than not, in their drive to assert themselves and marginalise other board members, the powerful individual will make mistakes that lead the board and even the organisation down the path to failure. 

    Tell-tale signs of personality led board culture include: The CEO overstepping their level of authority; the talk time being controlled by the dominant person or their allies; other directors’ views being ignored or discussions cut short; decisions being made outside board meetings; and over time, other directors either withdrawing or submitting to the leader.  

    Director and advisor Simon Rumore (FAICD) has seen these dynamics with CEOs. “It is my observation that in most professional organisations nowadays, we’ve moved beyond the domineering chair. More common now is the domineering CEO, especially in medium to large NFPs where the board may not possess the skills and directors are primarily passionate volunteers. The professional CEO can at times overpower a non-professional board.”   

    Director Louise McElvogue (FAICD) shares her perspective. “I have seen where diversity of perspectives is discouraged, because a difference of opinion is interpreted as oppositional behaviour or taken personally by a powerful director. I have also seen a dominant personality overpowering others, more through control of the agenda and discussion than classic overbearing behaviours.” 

    In conclusion, there is nothing inherently wrong with any particular board culture. Each promotes a valid and useful perspective of organisations and their performance. However, when a singular cultural mindset is taken to the extreme in the boardroom or is viewed as the only valid perspective, then board effectiveness is likely to suffer.

    More about Boardroom Mastery

    Boardroom Mastery™ is a transformational three-day course designed for experienced directors. It combines an immersive board simulation with other experienced directors; Real-world challenges led by expert facilitators; Personal analysis and debriefs from an organisational psychologist; and 360° feedback to challenge your thinking and behaviour in high-pressure conditions. For more detailed information, please visit Boardroom Mastery.

    Related article

    Read a previous article on board culture here. Dealing with toxic behaviour in the boardroom

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