Individual board members must behave in the correct way towards each other and the executive management team. The board needs to set the right tone from the top by behaving in a wholly professional manner. It should be a model of ethical behaviour in articulating and exemplifying the organisation’s values. The board and executive management team need to treat each other with respect and value the distinct contribution that each makes.
At the heart of a board’s professional behaviour is the need to understand and manage the human aspects of leading the business. The crisis at many of the world’s leading companies has led many commentators to consider the role of key personalities.
For example, Financial Times columnist and private-equity executive Luke Johnson wrote in 2009: “I don’t believe there is a single field of capitalist endeavour that is free from mercurial characters and fairly constant conflict and over exuberance… Envy, megalomania, competitiveness and even madness can feature in the mix.
A Financial Times report that same year described the management style of Sir Fred Goodwin as chief executive of RBS (Royal Bank of Scotland). He exercised control through a daily 9.30am meeting where he would quiz managers about their divisions and openly question their competence. One morning he reduced a senior executive to tears. “It wasn’t a positive or healthy atmosphere,” a former RBS executive told the Financial Times. “You have to wonder about the decisions people make in that environment.”
In another newspaper report, the Sunday Times wrote about how, in between rounds of golf, RBS executives were divided into small groups and asked to identify problems within management. “Every group cited a ‘culture of fear’ as the bank’s biggest problem… The morning meetings… were invariably described by former executives as ‘unpleasant’ or ‘hostile’,” the article said.
Media reports of Lehman Brothers are further examples of the human aspects involving leadership culture and role played by key personalities.
“To say he [Dick Fuld, Lehman Brothers’ CEO] was surrounded with a cult of personality would be an understatement,” a 2008 article in the Sunday Times asserted. “He was the textbook example of the command and control CEO. Fuld inspired great loyalty and, on occasion, great fear. Those closest to him slaved like courtiers to a medieval monarch… insulating him from trouble – from almost anything he might not want to hear.
According to another Sunday Times report, “even when in a relatively upbeat mood he seemed to take pleasure in violent imagery… Fuld had used this aggression to consolidate his reputation as the most successful chief executive in the banking business and one of the most respected corporate leaders in America. However, the style also contained the seeds of disaster. This meant that nobody would or could challenge the boss if his judgment erred or if things started to go wrong.”
The prevalence of emotional factors in corporate success and failure means that they should be recognised as being at the heart of boardroom leadership and effectiveness. There may be a temptation to overlook such ‘soft’ factors or see human idiosyncrasies as ‘just the way things are’, about which nothing can be done. This is understandable: confronting aggressive and disturbed behaviour is often uncomfortable.
But lessons should be learnt from the corporate crisis, in which such behaviour has played a decisive role. The self-belief required to climb to the pinnacle of a multi-billion dollar business such as an investment bank may come at the price of a failure to listen to others – a particular weakness of the forceful or charismatic leader. This topic merits further study if corporate leadership standards are to be raised.
Culture of effective challenge
A recurrent theme in addressing the evident shortcomings in corporate leadership is the need for board directors to create a culture of effective challenge. Better decisions are reached when they have been thoroughly debated and subjected to proper scrutiny.
A board can fall into group think – the situation whereby all members think the same way. Members can become closed to new ideas and unable to incorporate a range of diverse factors into their thought processes. A fixed way of viewing things may not be so damaging once decisions are being implemented and total commitment to action is needed, but it can be disastrous at the decision making stages.
Jeffrey Sonnenfeld, senior associate dean at Yale School of Management, points out that many boards of failed companies had “fabulous individuals on them,” but “collectively something went wrong when boards did not ask the tough questions and did not have the stomach and the interest in working with the CEO to reinvent the business and challenge the status quo.”
In some cases, CEOs had such control over the workings of their boards and the flow of management information that meetings were stage-managed, making it hard for directors to ask awkward questions without the fear of looking stupid.
“Many HBOS directors had banking experience,” Financial Times associate editor Andrew Hill wrote of the UK insurance and banking company. “But it is hard to see even knowledgeable non-executives having sufficient time to assemble the critical detail necessary to challenge full time executives… Directors need to have experience and knowledge, yes, but above all they need the cast iron self confidence to confront bank bosses when they look like overstepping the mark.
Royal Bank of Scotland’s ill-fated acquisition of ABN Amro in 2007 attracted particularly heavy criticism, but the decision-making process was later defended by RBS’s chairman at the time of the takeover, Sir Tom McKillop. “The premise that we allowed [CEO] Sir Fred [Goodwin] to proceed implies that this was driven by Sir Fred, which is not the case,” he told a Treasury select committee in 2009.
“The board received a presentation from our strategy group and the executive team: an analysis of the ABN Amro businesses,” McKillop continued. “We looked at that in considerable detail... There was no proposition to buy ABN Amro at the first meeting; it was an analysis session. At every stage the whole board considered this and were unanimous in the steps we took.
The former chairman conceded that RBS “did in fact make a bad mistake in purchasing ABN Amro.” But he said that “at the time it did not look like that – it is easy in retrospect. I could give… many bits of evidence… that there was widespread support for it. Yes, there were some voices saying it was overpriced, but we received 94.5 per cent shareholder approval. We received regulatory approvals and there was a very good financial case.
We cannot judge the quality of the debate within the RBS board at the time. Did anybody play devil’s advocate and ask the awkward questions? Did the non-executive directors genuinely understand what was being proposed and know the searching questions that needed to be asked? Did they challenge the answers?
The Walker review
Still, many lessons can be drawn from the actions of the boards at RBS and other businesses. The review by Sir David Walker, who headed a government enquiry into corporate governance in UK banks and other financial entities, concluded, among others:
- Principal deficiencies in boards related much more to patterns of behaviour than to organisations. The right sequence in board discussion on major issues should be: 1) presentation by the executive; 2) a disciplined process of challenge, 3) a decision on the policy or strategy to be adopted; 4) and then full empowerment of the executive to implement.
- All this will call for a material change of culture in some cases so that disciplined, but rigorous, challenge on substantive issues comes to be seen as the norm and inability or insufficient strength of character to participate will throw into question the continued suitability of a particular board member... Appropriate balance will only be achieved where the executive expects to be challenged, but where the board debate surrounding such challenge is conducted in a way that leaves the executive team with a sense of having drawn benefit from it.
- Non-executive directors and the boards of which they are members need to find the right point on the spectrum, which ranges from relatively unquestioning support of the executive at one end to persistent and ultimately unconstructive challenge at the other.
- The greater the entrenchment of the chief executive, the greater the importance of challenge, especially if he or she is believed to face or tolerate little challenge from within the executive team and is unreceptive or inaccessible to critical input from any other source.
The chairman of the UK Financial Services Authority, Lord Turner, has stressed how important it is for banks to obtain an external challenge to assumptions based on conventional wisdom. Yet there needs to be a description of a ‘challenge culture’, within boards and beyond, and a map for how a company can create such a culture.
Recent guidance from the Institute of Chartered Secretaries and Administrators (ICSA) suggests that best practice boardroom behaviour includes:
- questioning of assumptions and established orthodoxy
- challenge that is constructive, confident, principled and proportionate
- rigorous debate
About the Author
Gillian Lees is an enterprise governance specialist within the knowledge unit in CIMA’s communications department. She was heavily involved in the IFAC/CIMA enterprise governance project as well as CIMA’s initiative to develop the CIMA Strategic ScorecardTM. Her particular interest is how boards can oversee strategy and risk effectively.