Common Sense Principles In Action: Board Composition and Internal Governance

Warren Buffett

Warren Buffet

Recently some of the world’s biggest names in corporate governance and business put together a set of Commonsense Corporate Governance Principles. These eight principles cover just about every aspect of governance and board life so I wanted to take some time to explain how to best implement these principles by using emotional connection.

Because there are so many principles and there is so much to say on each topic, I am going to dedicate one article to each principle. The first principle is Boards of Directors Composition and Internal Governance.

This principle clearly states that board member’s loyalty must be to the company and the shareholders rather than to the CEO.

They must be strong, independent, and constructively challenging. So how do you get your board members on board with the company and in the right head space to avoid divisive or self-serving arguments?

Give them something to rally around. Every company has a mission, vision, and values – this is your basic connector for board members. Everyone on the board believes in the company or they wouldn’t be on the board. Ignite that belief and their passion for the company by taking time to discuss the mission and  vision of your company. When you are thinking about decisions from a higher level, you will gravitate towards the company’s interests rather than the CEOs.

This principle also states that collaboration and collegiality are critical to a healthy board.

By developing an environment where emotional connection is regularly addressed, board members are encouraged to have a dialogue which allows them to develop relationships and makes collaboration natural. This will attract and retain the strongest directors (which is another element of the composition and internal governance principle). At this year’s Board Dynamics Session, Susan Swenson, Director at Wells Fargo, encouraged dialogue in her board because conversation builds relationships. The more connected board members feel, the easier it is for them to share opinions and have healthy debates which obviously leads to better decision-making.

To address emotional connection in an effective way, board members must be aware of their emotions and their impact on others. In my experience, board members have no idea of the physiological  impact they have on their fellow board members. Emotions are contagious. When one director is stressed out, others can feel that stress.  Unspoken concerns put your board members at risk of complaining, criticizing and becoming angry which will lead everyone into a negative cycle. To avoid this, the board should focus on creating a safe place for directors and the CEO to share their concerns. This will improve collaboration, brainstorming, and board decisions.

The final aspect of the composition and internal governance that I want to address is the concept of board effectiveness.

The principle states that boards should have a robust process to evaluate themselves on a regular basis. This should include traditional performance measures such as ROI and profits, and I suggest to also include a measure for board dynamics. Most poor decisions can be tracked back to a breakdown in communication in trust. Here is an example: one director has a concern about a small time competitor that is manufacturing out of China. He brings it up to the board, but his fellow directors scoff at him because the competitor is so small that there is no way they could make a difference in the market over the next quarter. That small competitor gets funding and is able to grow exponentially which ends up being a real problem for the original company. If the board had positive board dynamics, they would have taken time to address the director’s concern and seen an opportunity to potentially acquire the competitor or look into better means of manufacturing.

Board assessments should include a section on how connected board members are.

Do they feel safe and supported? Are they confident that they are being heard? Is everyone regularly engaged? When they argue, is it personal or are they sharing of ideas of the subject matter? These are just a few questions boards should be asking themselves during self-assessments. It is important to gauge if everyone is in general agreement about the state of the board. These aren’t black and white numbers, so more time should be spent analyzing the answers and developing mechanisms to improve overall dynamics.

So there you have it – the first principle in the Common Sense Series. Developing a strong board of directors takes time and commitment, but it’s worth it to retain the best board members and improve overall performance. If you would like to learn more about increasing board dynamics, please contact us at info@levelfiveeexecutive.com.

2017-07-09T15:54:48+00:00 May 27th, 2017|Board/Team Dynamics, Leadership|

One Comment

  1. […] on the Commonsense Principles of Corporate Governance. In the past few weeks we’ve talked about board composition, internal governance, director responsibilities, shareholder rights, and public reporting. More importantly, we’ve […]

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