11 November 2019 by Dr Jeremy Cross
It has been said that much of psychology is systematised common sense. Whilst that may be true, to what extent are its findings also common practice?
Although the discipline of boardroom dynamics, which I have defined in the recently published The Chartered Governance Institute textbook of the same name as “the theory and application of the behavioural aspects of board functioning”, is becoming increasing recognised as fundamental to good governance, to what extent are governance professionals actually applying its lessons in their practice?
In order to provide an overview of the topic, this article will dip a toe into why an understanding of boardroom dynamics is becoming increasingly important, what its component parts actually are and how one might begin to positively influence it.
There are perhaps four main reasons why boardroom dynamics has gained recognition in recent years. Firstly, of course, there have been (and unfortunately continue to be) multiple governance failures even though board compliance boxes are ticked on paper. The headlines across sectors and cultures of the Royal Bank of Scotland, Kids Company, Enron, Parmalat, One Tel and Volkswagen are all classic cases of externally lauded but internally flawed boardrooms highlighting that whilst code compliance is necessary it is not, on its own, sufficient.
In RBS’s case, for example, the Financial Services Authority (FSA) reported in 2011 that their pre-crisis enforcement work into the effectiveness of the RBS Board “did not identify a failure on the part of the Board” as “the box-ticking affirmation…and evidence base suggests that the RBS Board’s composition and formal processes met acceptable standards”. This is even though the FSA’s own Review Team as far back as 2005 had brought up the issue of increased risk due to CEO dominance and was consistently unable to interview non-executive directors one-to-one in order to understand the extent of appropriate boardroom challenge to test this potential risk.
As one board expert mentioned in my research on board evaluation in 2013, “Any Chairman who is described as charismatic immediately rings alarm bells for me. Charisma is very close to narcissism so the psychological need to be the centre of attention comes into play”. And, more broadly, as researchers Van den Berghe and Levrau concluded in their 2004 study of boards in Belgium, “as recent corporate failures have shown, living up to the ‘formal’ standards is not enough. More attention should be paid to correct governance attitude and behaviour of directors and management”.
A second driver of boardroom dynamics recognition is how behavioural aspects have been increasingly included in the latest versions of country governance codes. Only ten years ago, in 2009, this was certainly not the case. The Walker Review of that year, set up to recommend measures for improving the governance of UK banks and supported by research from the Institute gathered from FTSE350 company secretaries, concluded that “…it is remarkable that there is practically no guidance in the Code on the main drivers of, and factors affecting, boardroom behaviours...Encouraging best practice boardroom behaviours, are critical aspects of corporate governance, but seem currently to be a neglected area”.
In the four iterations of the Combined Code since then there have been a number of revisions to rectify this. For example, as one broad indicator, the word ‘culture’ is used seven times in the latest code compared to just once in the 2010 Code. This one mention is tucked away in a Supporting Principle in section A.3 on page ten. This compares against the latest edition which mentions culture on page one in the Introduction and also twice more within the headline five principles in section.
Similarly, following the Boardroom Behaviours report recommendations from the Institute, the Financial Reporting Council published a 16-page paper giving ‘Guidance on Board Effectiveness’ in 2011. Their 2018 version of this Guidance now weighs in at 47 pages and is significantly expanded providing more rigorous and practical advice on culture (37 mentions), behaviours (26 mentions) and even dynamics (two mentions). Further, in section 91 of their ‘Guidance on Board Effectiveness’, (amongst some 11 sections of other detailed guidance) the report points out that the role of the Nomination Committee is to select directors with diversity of personal attributes and, “will want to ensure the board is comprised of individuals who display a range of softer skills, such as… sources of intellect, critical assessment and judgement, courage, openness, honesty, tact, ability to listen, ability to forge relationships, ability to develop trust, (and) strength of character”. This is one example of how codes are ensuring that boards now be more cognisant of and report on the more behavioural elements of their practice.
Thirdly, there is a widening gap between governance theory and leading research/practice. As Bob Tricker, the father figure of modern corporate governance, has written, “both agency and stewardship studies typically do not reflect the dynamics of governance – the interplay of power, conflict and ideology”.
And finally, there is an increasing organisational interest in human factors such as talent management, company, culture, stakeholder voice, employee engagement, resilience and well-being. Using this year’s Annual Conference as a case in point, over a third of the sessions were related to these more behavioural boardroom topics.
Taken together, these four factors show why boardroom dynamics has become such an important issue for governance professionals to understand that there is now a module on the topic in the Chartered Secretary Qualifying Programme. They also highlight that governance professionals must acknowledge more than the traditional technical and individual aspects, those represented by the ‘Board structures’ and ‘Board demographics’ quadrants of my 11 Cs model of corporate governance below, and attend also to the individual ‘Board attributes’ as well as the team ‘Board dynamics’.
Although we have provided a noun definition of the topic, what is the phenomenon or adjective definition of boardroom dynamics? Most broadly, boardroom dynamics opens the black box of the boardroom behaviour to see how things actually play out, rather than what is supposed to happen on paper. They are about how boards behave, and indeed about how they misbehave, rather than about what tasks they perform. It is about how they discuss issues rather than what issues they discuss. More formally I define ‘board dynamics’ as “the interactions between board members individually and collectively and how these influence, and are influenced by, their wider stakeholder system”.
In essence, a board needs to learn how to function as a high performing team. After all, a compelling recent US study of 182 directors representing companies with an average revenue of $2.2 billion, found that the impact of a board functioning as a team is an eight times greater predictor of corporate performance than individual director demographics. To do this board members will need to develop a paradoxical culture that balances both cohesion and challenge. There will be an atmosphere of trusting psychological safety such that the power of appropriately articulated diverse viewpoints can be harnessed to minimise group think and decision-making bias whilst maximising individual expertise and cultural diversity. Not easy, but incredibly potent.
The definition of board dynamics, however, also encompasses both the boardroom meeting behaviours themselves (what people most think of when they consider boards in the first instance), but also the more systemic influences at play beyond the boardroom itself. There are perhaps six lenses of board dynamics to consider when interpreting any board behaviour (adapted from Leary-Joyce and Lines, 2018). These include:
1 the individual director
2 the inter-personal director relationships
3 the board team relationships
4 the board team tasks
5 the board’s stakeholder interfaces
6 the board’s wider systemic context.
For example, is conflict in the boardroom emerging because one dominant director is just having an off day due to poor sleep or jetlag, or because they have a clashing communication style compared to a particular fellow director, or because they are used to different cultural norms compared to most of the other directors, or because they disagree with the board’s current strategic focus, or because they are frustratedly aware of a stakeholder need no-one else is, or because they can see a wider organisational threat that is a fundamental industry blind spot? Or, indeed, some combination of these? As you can see, an individual behaviour may have multiple causes and may not be as straight-forward as one’s initial diagnosis might seem.
Through engaging with their emerging roles as a strategic leader, talent manager, board consultant, cultural diplomat, team coach and, in order to maintain all these, a resilient corporate athlete, the twenty-first century governance professional can exert a significant positive influence on any board they work with. Some key evidence-based summarising principles of how to develop high performing boardroom dynamics are captured above in my ABCDE of actions to focus on and those to avoid.
The Boardroom Dynamics text provides further details on exactly how some of these concepts come to life. Chapters 1-3 delve further into ‘why’ boardroom dynamics, chapters 4-10 illuminate all aspects of ‘what’ boardroom dynamics are and then chapters 11-15 expand on how to influence the dynamics through the five modern governance professional roles. My hope, as one of your ‘resident’ board psychologists, is that not only will the content come across to you as common sense, but more importantly, that it will support you to make it part of your common practice.