The Dysfunctional Board of Directors

It has been said that a good board will not make a company, but a bad one will inevitably kill it.   It has also been said that troubled boards outnumber functional boards by a wide margin.   As such, it would seem there is both a deep need and wide opportunity for those who can assist “Boards” to function better.  It is the thesis of this paper that “Dispute Resolution Professionals” are uniquely positioned to fulfill this role, and it is the focus of this paper to demonstrate how Dispute Resolution Professionals can do so. 

It is the author’s initial observation that the subject of dysfunctional Boards is not monolithic; rather, it is multifaceted and can profitably be organized into four broad categories of dysfunctional behavior, each having different causes and remedial steps.  Often these different types of dysfunctional behavior occur in combination, but it is nevertheless useful to discuss each type separately if for no other reason than for purposes of clarity of presentation. 

These different types of dysfunctional behavior are:

1) Poor managerial basics;

2) The individual director who is the proverbial “Bull-in-a-China-Shop”;

3) A Board’s inability to work through difficult conversations; and

4) Behavior that is not collaborative. 

A fifth type of dysfunctional behavior can be readily identified consisting of a director’s failure to comply with his or her legal duties owed to the organization.  Whereas a director’s legal duties will be touched upon in this paper, this type of dysfunctional behavior is not the focus of this paper and will not be addressed separately.

1. Poor Managerial Basics

Any organization that is not well managed is dysfunctional, and many organizations, especially small and/or volunteer organizations, are not well managed.  Good managerial basic include such things as: a clear understand on the part of all involved about the organization’s purpose and mission; a close relationship between an organization’s mission and its strategies; sound financial behavior, such as the preparation of timely budgets (especially challenging for small non-profits) and budgets tied to reasonable estimates for revenues (sometimes a challenge even for large organizations); and, very importantly, each director must know what is expected of him or her and be accountable for delivering on these expectations. 

Problems of managerial basics are not the sole province of the Dispute Resolution Professional, but the Dispute Resolution Professional must be able to assist an organization to identify and deal with such problems when and where they are present.

1. The Bull-in-a-China-Shop

One of the most obvious examples of dysfunctional behavior on the part of a director is a problem that most of us have experienced – the director who is disrespectful, hostile, aggressive, and combative.  This director’s questions sound accusatory rather than inquisitive, and in extreme cases, the director can become verbally abusive toward his or her fellow directors.   The caustic effect of such dysfunctional behavior is readily apparent to all who witness it, but the offending director often perceives her or his behavior as appropriate, reasonable, and necessary under the circumstances to achieve important objectives, including perhaps his or her legal duties. 

The conventional wisdom for dealing with this type of dysfunctional behavior consists of a several step process.  The first step is to speak privately to the offending director about her or his behavior, pointing out the negative consequences on the efficient operation of the Board as a whole, and asking (whether by way of a gentle suggestion or demand) that she or he correct her or his behavior.  If this does not work, then at least one author suggests that the next step might be to take the issue before the entire Board for further discussion.  Whether or not this particular move is attempted, if the director’s behavior does not improve significantly, then the Board has a choice.  The Board can either accept the dysfunctional behavior or attempt to remove the offending director from the Board by whatever means is easiest, whether by way of a direct request, a request made to the offending director’s friends, associates, or constituents, if any (such as the venture capital group that placed the person on the Board in the first place), or to engineer some form of “retirement” from the Board.  The responsibility for handling this type of problem typically rests with the CEO .

This conventional wisdom is not entirely wrong, but it does not include two valuable steps known to the Dispute Resolution Professional.  These two steps are, first, to provide the offending director with realistic alternatives to her or his dysfunctional behavior, and second, to provide assistance in the form of coaching for the implementation of such alternatives. 

The alternatives I am speaking about are well known to the Dispute Resolution Professional and consist of basic productive communication skills, tools and techniques. Such basic productive communication skills, tools and techniques include such things as the use of “I” statements, focusing on interests rather than positions , neutral and cooperative word selection (as opposed to inflammatory), being hard on the problem and soft on the people , acknowledgement and recognition of the thoughts and feelings of others , developing a principled “no” response , active listening , empathic responses , productively using the reciprocity principle , understanding the importance of liking , etc.  

It is important to note that it is not usually sufficient to educate a person about these skills, tools, and techniques.  In most instances with the Bull-in-a-China-Shop the problematic behavior is likely a long-standing habit on the part of the offending director, and as such some amount of coaching is likely to be required to teach the offending director how to implement and utilize these skills, tools, and techniques in actual practice. Also it is important to note that the goal here is not to make a better person, but simply to eliminate an impediment to efficient and effective Board performance. Further, a complete transformation of the offending director’s behavior is not necessary. A modest improvement is often sufficient to make a large difference in the context of the Board’s operation.

The CEO is not ordinarily equipped to function in these roles of teacher and coach.  These roles are the province of the Dispute Resolution Professional who deals with these issues on a daily basis in the course of his or her work.

1.  Difficult Conversations

Boards are by definition deliberative bodies, which presupposes some amount of friction among directors as the Board goes about its work.  On the one hand directors and CEOs are generally skilled in conducting deliberative discussions.  Setting aside the problem of the Bull-in-the-China Shop, people who have achieved this status in life generally treat each other with respect and welcome differing points of view.  Sometimes, though, a rough patch is encountered in a discussion. When this happens, the discussion leader can employ several commonly known techniques to smooth things other.  For example, he or she can call a break, employ appropriate humor, or invoke Robert’s Rules of Order to keep matters moving forward.  Occasionally, however, a rough patch can persist or deepen into serious, debilitating conflict within the Board or with the CEO.  Sometimes such conflicts can threaten the existence of the organization. 

Conventional wisdom seems to have little to say about how to handle a difficult conversation that deteriorates into an open conflict, other than to continue with such commonly knows techniques.  However, if this does not work, the result can be a stalemate or a breakdown of the Board, which can in turn result in organizational inaction, multiple resignations from the Board, removal of the CEO, and other damaging consequences. 

Fortunately, the Dispute Resolution Professional knows about an approach that is specifically designed for constructively conducting difficult conversations.  This approach is called by one author “extreme facilitation.”   The goal of this approach is to allow for difficult conversations in ways that are positive and productive rather than negative and damaging.  Of course, this approach is no guarantee that a consensus outcome will always be achieved or that deep controversy will always be avoided, but its use is far more likely to result in a positive outcome than otherwise. 

The basic framework for this extreme facilitation approach includes four stages, which are:

1. Opening and setting the tone;

2. Building understanding;

3. Achieving the task, and

4. Closing. 

The first stage, opening and setting the tone, is perhaps less important in the context of a Board because a Board is a standing deliberative body with significant pre-existing relationships and “superordinate goals” consisting of at least the individual director’s legal duties, which necessarily include certain subordinate shared goals such as, in the case of a for-profit company, maximization of shareholder value, etc.  Nevertheless, the opening stage of the extreme facilitation process can be used as an opportunity for the directors to refocus on and clarify their superordinate goals, and thereby foster a sense of shared purpose.  In situations in which people outside of the Board are to participate in a difficult conversation, as perhaps might be the case with an issue being discussed by a not-for-profit or a governmental Board, then this initial stage would have its full significance.  In such situations, it would be important to set an optimistic tone with respect to ultimate success of the project and also create a sense of inclusion for the “outside” participants. 

The second stage focuses on understanding.  Even among intelligent and motivated people, the necessary level of understanding is unlikely to be present at the outset; if it were, the conversation would not likely be difficult.  In order to develop the necessary level of understanding, it is important for the parties to have access to all of the relevant information. The parties must understand the initial points of view of all participants to the conversation.  It is important that the parties understand the broader context in which the problem to be solved resides.  And, it is important that the parties have a clear concept of the definition of the problem to be solved.  This level of understanding typically requires considerable effort to develop, and it certainly ought not to be assumed at the outset, even with a group who know each other well.

The third stage, achieving the task, consists of several sub-stages. The first sub-stage consists of identifying options for solving the problem under consideration.  For this sub-stage the tool of “brainstorming” is ordinarily required.  The second sub-stage consists of establishing criteria against which potential options can be evaluated and then narrowing the available options through such an evaluative process.  The third sub-stage consists of overcoming deadlocks.  This sub-stage requires that the parties dig deeply into their respective needs, concerns, interest, and underlying initial viewpoints and that the parties work diligently to find common ground and understand the essence of their differences.  The fourth and final sub-stage consists of refining outcomes, which includes negotiating final details, developing action plans for implementation, anticipating obstacle’s to implementation, and advanced planning about how to overcome such foreseeable obstacles.

In the fourth stage, closing, the parties to the conversation identify next steps, evaluate the process for future reference, and often include a closing ritual.  This last point may seem irrelevant for Boards consisting of highly-accomplished businesspeople, but people are people, whether in business setting or any other context, and people respond powerfully to well designed and well conducted ritual. 

As is stated above, this is the basic framework for extreme facilitation of difficult conversations.  As can be readily seen, the specific details of the process in any given situation are likely to be as varied as the situations themselves, and the Dispute Resolution Professional must expend considerable effort and time accomplishing the necessary customization. 

1. Behavior that is not Collaborative

The classic approach to the Board’s purpose can best be described as a resource for the CEO .  Directors are expected to provide valuable input to the CEO as well as bring valuable contacts and potential business opportunities to the organization.  Directors are not expected to challenge the CEO too directly, and in any case, directors are unlikely to do so as most directors owe their positions to the CEO.

This “Resource” paradigm was the dominant paradigm until recently.  In the 1980s and 1990s a counter-movement began with the idea that the Board should be more active and provide more than mere assistance when asked.  This counter-movement was given significant impetus by the corporate scandals of the late 1990s and early 2000s, which cast a spotlight on the limitations of the Resource paradigm.  The Board of Enron was populated by directors of the highest caliber, and yet the CEO perpetrated massive accounting fraud over several years.  Where were the directors when these bad acts occurred, and why did the Board not stop the CEO before harm was done?  The Board of Tyco also consisted of highly respected individual directors, and yet the CEO treated himself shockingly well at the expense of the company.  Again, why did the Board not discover these bad acts and stop them? 

From these problems arose a new paradigm for the purpose of the Board – that of a “Watchdog” on the CEO.  This new paradigm is embodied in the Sarbanes-Oxley Act, the Dodd-Frank legislation, and new exchange listing rules and requirements.  Some examples of the changes associated with this paradigm are: the CEO no longer selects directors (and thereby conferring the attendant pay and perks); independent directors control the audit and compensation committees; and independent directors often meet in executive session outside the presence of the CEO.  

Under this Watchdog paradigm dysfunctional behavior on the part of the Board consists of a failure to move away from the Resource paradigm.  Most Boards have made significant progress in this regard, although the process is ongoing and continues to be challenging for all concerned.

Acknowledging the improvements embodied in the Watchdog paradigm over the Resource paradigm, the Watchdog paradigm presents its own difficulties, primarily with respect to the adversarial atmosphere that can result.  The CEO and the Board are on the same team and have the same ultimate goal – the success of the organization.  An adversarial relationship can cause any number of problems.  For example, directors can attempt to reach around the CEO to obtain information or give directions within the organization , which can undermine the CEO within the organization.  As another example, without a trusting relationship between a CEO and a Board, the Board can be too quick to remove the CEO, resulting in unnecessarily inconsistent leadership.

As a result of these problems a third paradigm is emerging.  This third paradigm is of the Board as a high-performance team .  The central feature of this “Team” paradigm is collaboration on the part of the directors among themselves and with the CEO. 

“Collaboration” is a term much in vogue today, but the common understanding is different from the understanding held by the Dispute Resolution Professional.  Commonly the word is understood as a synonym for the word “cooperation”.   For the Dispute Resolution Professional the word has a deeper and richer meaning.  First, the word relates to an individual’s approach to others in the midst of conflict such that the word presupposes and only has meaning in the context of interpersonal conflict.  Second, and in the context of conflict, “collaboration” is one of five approaches a person can adopt toward another party in a conflict.   The other four approaches are:

Avoiding;

Accommodating;

Competing; and

Compromising.

These five approaches differ with respect to two aspects.  The first aspect is, as is the common understanding, the degree of “cooperativeness” one party demonstrates toward the other.  “Accommodating” and “Collaborating” are cooperative, and “Avoiding” and “Competing” are uncooperative.  “Compromising” is mid-range on the cooperativeness scale.  The other aspect, and this aspect is not part of the common understanding, is “assertiveness.”  “Avoiding” and “Accommodating” are low on the assertiveness scale.  “Competing” and “Collaborating” are high on the assertiveness scale.  Again, “Compromising” is mid-range. 

As such, imbedded within the concept of “collaboration” is the juxtaposition of cooperation and assertiveness, both being strong at the same time such that each acts as a check on the other.  The importance and utility of this juxtaposition is perhaps best seen when viewing the situation from the other way around.  Unchecked competition can and often does lead to adversarial behavior, which can be the central negative feature of the Watchdog paradigm, and unchecked cooperation can lead to accommodation, which can be the central negative feature of the Resource paradigm. 

The Dispute Resolution Professional can be both teacher and coach for both a Board and a CEO as they move forward together into the Team paradigm.  The Dispute Resolution Professional can educate both about the importance of collaborative behavior and what this means in real-life terms.  For example, the Dispute Resolution Professional can normalize and encourage both cooperation and competition for those directors who might view either as negative behavior, while explaining how each acts as a governor on the other.  The Dispute Resolution Professional can thereafter be a coach for the Board and the CEO as they learn how to apply this new understanding to actual discussions, deliberations, and decisions. 

1. In Conclusion

The Dispute Resolution Professional is the expert to call when it comes to a dysfunctional Board.  The Dispute Resolution Professional understands the different types of dysfunctional behavior that can affect a Board and has the training, experience, skills, tools, and techniques to take effective corrective steps.

                       

Kendall Reed

Kendall Reed is a mediator and arbitrator working in the Los Angeles area.  He has 25 years experience as a lawyer with expertise in the areas of intellectual property, UCC Article 2 in the manufacturing arena, employment, insurance coverage, B2B disputes, and personal injury. He has 10 years experience as a… MORE >