Encouraging Courage: Building Effective, Activism-Resistant Boards
Published in CorpGov, May 5, 2021
Board service is big business. The U.S. market for board seats, particularly public company board seats, is almost always a buyer’s market. Companies have access to countless organizations, networking groups and search firms to identify prospective director candidates, assuming the extensive networks of companies’ leadership teams turn up dry. For eager prospective board members, there are director education organizations, networking opportunities and certification programs. Ultimately, this extensive system of corporate leadership matchmaking will yield results for some, and those new directors will walk into a governing body with their experiences, skills, qualifications and perspectives, and begin the process of learning to navigate that governing body’s dynamics and idiosyncrasies.
Given our role supporting boards in times of calm and in times of crisis, we believe the best board preparation lies not in one-size-fits-all tutorials on board oversight, but in individual conversations that address the nuances of a company’s specific strategic and cultural challenges. Moreover, directors are best prepared not by the substantial accomplishments and accolades that they have accumulated, but in the challenges and hardships that they have had to overcome. Both in times of calm and in times of crisis, the one characteristic that distinguishes good directors from great directors is courage. But courage often needs to be cultivated. Here are five steps we believe companies can take to encourage courage in the boardroom:
- Clarify the role of directors. Calls for courage in the boardroom proliferate, and yet often internal pressure on directors demands that they conform with the status quo. Early board orientation and frequent board education should remind directors that the duty of care they owe to the company and its stakeholders can only practically be met when they are both curious and courageous – curious enough to continue asking questions until they are satisfied that their duty of oversight has been met, and courageous enough to challenge the status quo not only when red flags arise, but also when a director fundamentally disagrees with material aspects of the company’s strategy, operations, policies or practices. While the role of directors remains one of oversight, not one of management, it is appropriate, and often necessary, for board members to engage management in healthy deliberation and discussion.
- Acknowledge “essential personnel” risks. Boards and c-suites can have big personalities. The finicky founder. The charming CEO. The challenging chair. Big personalities can come with big risks, and if a company knows that it has essential personnel that are in a position to define the status quo, it is critical that those risks be identified and managed appropriately. Identifying the risks associated with powerful leaders can in and of itself feel very risky, making third party advisers an important piece of the process. External counsel or consults can provide needed cover for defining the risks associated with having essential personnel and for identifying ways to manage and mitigate the identified risks.
- Do the hard work of identifying and appointing true independents. Every governance lawyer knows that there are independent directors, and then there are independent directors. Directors that meet SEC and exchange independence requirements may still have personal and reputational ties to company insiders. Other directors may not have personal or reputational ties, but may be so ambitious to acquire board seats that they are not willing to be the only “no” – a critical test for any true independent. Finding directors who are willing to be the only “no” – not for their own benefit, but for the benefit of the organization – while still being collaborative, can be a difficult task. Ultimately, it behooves boards to utilize more than traditional approaches to identify and assess whether prospective directors fit the bill. In identifying potential candidates, boards should consider that directors with diverse experiences and backgrounds may have had more opportunities to hone the skill of balancing independence and collaboration, and in assessing potential candidates, boards should consider using behavioral consulting tools and leadership analysis.
- Practice dissent. Even if the prior three recommendations are implemented perfectly, directors, particularly directors who are new to board service, may still find it challenging to express dissent. For that reason, we recommend that boards practice debate and dissent in a healthy, and low risk, manner. Practice sessions should involve hypothetical calm and crisis scenarios, and third party negotiation and corporate governance experts should be on hand to provide feedback and recommendations. Boards also should be provided with case studies in how boardroom groupthink has harmed companies and shareholders and has in turn exposed directors to liability. In addition, board evaluations provide an opportunity for assessing not only the nuts and bolts of the board’s governance practices, but also the degree to which directors are able to challenge each other in a healthy and productive way. This means asking the tough questions, making provocative observations and not always taking things at face value. Are directors asked about each other’s bravery in the boardroom? Companies can consider involving counsel in their board evaluation process in order to take advantage of any attorney-client privilege that is available, given the specific situation.
- Cultivate an effective team mentality. At the end of the day, the board needs to act as a cohesive whole. This may seem at odds with the mandate for greater courage in the boardroom, but in fact, the ability to collaborate and the ability to be courageous are two halves of the same whole. Collaboration often requires the courage to contextualize our own perspectives, which can be particularly challenging when everyone in the room has decades of sophisticated business experience and success. Moreover, personality conflicts on the board cannot be avoided forever; what is tiptoed around during times of calm will take center stage during times of crisis. Instead of avoiding issues, meet them head-on. Board education provides an opportunity for directors to learn about effective team dynamics. In addition, an annual board retreat can provide directors with the opportunity to engage outside of the boardroom, building comradery and empathy for each other’s perspectives. Ultimately, directors who balance collaboration with the courage to challenge others in an informed and fair manner do their companies the significant service of helping to create a more effective and activism-resistant board.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.