What directors learn after their first board failure

Directors can learn as much from navigating treacherous straits as they can from smooth sailing – perhaps more. Two experienced NEDs share how they’ve turned tricky times and encounters with dysfunctional boards into enduring insights. 

When a threat looms for a board, there are usually clear red flags, which should trigger the spidey sense of all alert directors. Even false alarms need to be investigated.

“I’ve been fortunate to work for organisations with capable management teams, but looking back, I recall one situation where there was a warning sign in relation to a supplier,” says Virginia Malley FAICD, who,  prior to her NED career, held senior risk-management roles in investment, superannuation and insurance. 

“My background means I’m very alert to the sentinel indicators around risk management.”

Malley says the supplier could not provide audited accounts in the due diligence process – a fundamental requirement. Various reasons were given for the delay., Malley now views it as a risk-assessment fail that should have been a deal breaker. 

“They were provided supplementary resources and diligently supervised, but they never developed the necessary capabilities because they had a limited skillset,” she recalls. “The lesson learned was that the organisation should have never entered into that venture.” 

Malley left the board soon after the arrangement with the service provider commenced, and says she heard it “really ended terribly”. The experience solidified her stance on the “risk of association”, where the failures of a third party can damage the credibility of the company and the board. 

“It’s not worth relaxing your standards,” she says.

Peer through the management filter

Michael Fingland, CEO of business consultancy Vantage Performance and an experienced NED and advisory board member, has seen similar patterns in the distressed arena. His firm specialises in corporate turnarounds and restructures to restore stability for underperforming companies.

A recurring theme for both directors is the need to look past the information curated by the CEO. Fingland notes that “the bigger the business, the bigger the filter” placed on information reaching the board.   

For him, the most dangerous assumption a director can make is that the finance team is entirely across their brief. “You often get board packs late and assume everything is correct so you can make informed decisions,” he says. 

Fingland warns that even in large businesses, directors can be blindsided by unpaid taxes or underpaid employee entitlements because they didn’t scrutinise the next level down. To combat this, he now insists on direct exposure to the senior leadership team (SLT).  

“Without stepping over protocol, you have to work out ways to form your own view. The full board should get to know the SLT, at least on a quarterly basis where you’re hearing from different members.” 

This exposure allows directors to form their own assessments of key personnel, rather than relying solely on the CEO’s report. This is critical because a CEO may be reluctant to confront performance issues in a team they hired. “Unless you get exposed to that next level, it’s hard to identify if someone is fantastic at winning work, but toxic in terms of culture,” says Fingland.

Malley has developed her own method for ensuring she isn’t caught off guard by “showstopper” issues. She spends significant time preparing and curating questions in advance, often calling the chair before a board meeting to sense check her concerns. 

“I’ll discuss it with them and get their expertise before I raise it at the board,” she says. “Often, that means I’ve been comforted before the meeting, or we agree it’s an issue we need to talk about.”