Strong communication and a critical focus on a company’s long-term future can help a board withstand pressures.
Anyone who’s experienced life inside of one can tell you that the myth of the corporate boardroom — a group of men (yes, unfortunately in both myth and reality women are still grossly underrepresented in the boardroom) cut from the same cloth arriving at quick decisions after discussing financial and strategic matters in terse, measured and confident tones with a wise shogun-like chairman sitting at one end running it all — is just that, a myth.
We asked Steve Odland, the former CEO and chairman at Office Depot and AutoZone and the current president and CEO of the Committee for Economic Development, to give us his point of view on managing boardroom dynamics. Odland’s core message? Life in the boardroom is just like it is in any other meeting in any other office. Board members are colleagues. They are friends. And almost all of the time, they are operating with the same goal in mind. And, just like in any other group, communication skills are critical to having functional dynamics.
Yet if it is all a matter of simple communication then why do the business headlines from this year make it seem like boards all over the world are hotbeds of squabbles and competitive intrigue?
- After a weeklong very public disagreement with fellow board members, hedge fund billionaire Bill Ackman’s multi-year campaign to transform department store J.C. Penney came to an abrupt end on August 13 with his “decision” to step down from the board.
- George Zimmer the former CEO and very public face of Men’s Warehouse was booted in June from the board of the company he founded after publicly complaining about the direction the board was taking the company then taking steps to put himself back into the position of sole decision maker.
- A management shift at struggling bookseller Barnes and Noble in July put founder Leonard Riggio back in charge as executive chairman of a company without a CEO. Riggio has previously said he would be interested in buying the rest of the chain if its Nook division was separated from the parent company.
- Michael Dell struggled for most of the year with a leveraged buy out of Dell Computers. Even though it had made $2.3 billion in the first three quarters of its 2013 fiscal year, Dell still wanted to take the company he started in his college dorm room private. Board members pushed back, and the two sides continued to struggle throughout the summer.
When dissidence enters the board room
Odland asserts that boardroom dissidence is actually more infrequent than we are led to believe by the headlines, and that most dissidence is more a product of shareholders who attempt to shape direction to meet their agenda.
Differences with shareholders are usually a matter of time frame, Odland says. It’s a matter of looking at the short-term future of the company versus its long-term future. It is critical that the board and management of the company remember that they are running the organization for the longest term — forever. They have an obligation and the duty of care for not only today and tomorrow but for the shareholder of the future. And sometimes honoring that duty takes tremendous fortitude.
Lone shareholders — at times with significant ownership — will come in with different motivations and, because of their ownership, demand board seats to represent their interests. These shareholders may have bought into the company six months earlier and have a plan to sell three months, six months, or a year later. Their motivation is in conflict with the board that has the duty to drive value over a long period of time.
Often these shareholders want to dismantle a company, come in and split off those pieces that may not be making much money now but have potential for innovation and growth. Take those pieces and separate them from those others that are cash cows.
“You come in and say lets split it off and get rid of all this unprofitable stuff,” Odland says, “usually what you end up with is no growth. And then how does that position the company for the future? These are the judgments that the board and management teams need to make. And sometimes that’s at odds with people who want to make a quick profit.”
Obviously, to keep a critical focus on the long term and not get swayed by the sirens call of short term profits, you need a board that’s a cohesive unit — one that can withstand disagreements and differences of opinion, because those are going to happen.
“If you’ve got really smart people and you’ve got differences of opinion, usually it’s because they are working from a different set of facts or information,” Odland says. “And so whenever you have that, whether it’s in a board room or a family situation, the best bet is to take a step back, take a breath and say let’s go through this again and make sure we have all the facts on the table and that we’re all looking at the same thing. Because reasonable people looking at the same thing rarely come to radically different conclusions which would split the board.”
Companies and boards and management teams with a history of producing results, being willing to try things, adjusting, being reasonable and being transparent are going to naturally have more trust, Odland says. But if there’s poor governance, the company is opaque, or there is a history of not being committed to the external shareholders, that tends to drive dissidence in. And effective business relationships have always depended on trust.
It may seem that trust is antithetical to the concept of the independent board member, but it’s not. Board members don’t have to trust that they will strive to think the same things and be in lock-step with one another. They must trust that other board members will act in the best interest of the company, with the long-term future always at the front of their minds.
Business Roundtable’s 2012 Principles of Corporate Governance notes that “effective directors maintain an attitude of constructive skepticism; they ask incisive, probing questions and require accurate, honest answers.”
In Enhancing Board Oversight: Avoiding Judgment Traps and Biases, a March 2012 publication produced by the Committee of Sponsoring Organizations (a coalition formed to elevate boardroom ethics) authors Steven M. Glover and Douglas F. Prawitt propose the following model to build independence and trust for boardroom discussions:
- Define the problem and identify fundamental objectives.
- Consider alternatives.
- Gather and evaluate information.
- Reach a conclusion.
- Articulate and document the rationale.
It comes down to …
Really, Odland says, the key to a well-functioning board is the same thing that’s key to so much else in life. Communication.
“People need to sit down and talk, engage, compare, make sure they’ve got all the facts, and try to align objectives,” Odland says. “But at the end of the day the board needs to oversee the company and the strategy for the benefit of the long–term shareholder.”
Companies aren’t monoliths. They are made up of a board, executive teams, shareholders — all groups of people. It’s something that board members need to remember, because it can, at times, get lost in the discussion of strategy and revenue and profit margin.
“Like every sports team, government agency, company, family, if you’re missing that trust and open communication, you’ll have a dysfunctional situation, and winning teams are not formed from dysfunctional situations.”
Five Ingredients for Effective Board Dynamics
Boards of Directors are no different than any other group in the animal kingdom, Steve Odland says. They are no different than families. They are no different than sports teams. In order to run well there needs to be:
- Open communication
- Mutual respect
The end of the CEO as chairman?
Steve Odland says don’t be surprised if, in the coming years, the role of “CEO and Chairman” disappears.
It’s the natural evolution of things, and the switch may already be starting.
“There’s a movement out there that says let’s split the chairman and CEO roles so somebody who is a lead director or nonexecutive chairman has the chairman role,” Odland says. “That may happen. It won’t change anything as long as there isn’t any confusion.”
Lack of confusion is the key. It’s the reason companies tied the chairman and CEO roles in the first place. When one person holds both titles then it’s clear who is running the company. Over the last dozen years, though, that seems to be shifting.
“Most boards and most CEOs say lead director is a very clear title. You are the lead independent director. You are going to lead the sessions. You are going to be the key person that the board can go to or management can go to, but you’re not going to run the company. I’m not hearing a lot of people saying ‘We’re going to drop the title of chairman,’ but that’s what I would do.”