Playing To Win
How to be a Good Board Member?
It is All About the Quality of the Dialogue
A client recently asked, “how to be a good board member?” I think it is an important question for which the standard advice isn’t very helpful. I have done previous pieces (here and here) on the role of Boards in the strategy process. And I have recently done two podcasts with Oliver Cummings of Nurole on the fundamental problems with board governance (here and here). But I have not addressed the client’s question directly. So, I have decided to dedicate this Playing to Win/Practitioner Insight (PTW/PI) to How to be a Good Board Member: It is All About the Quality of the Dialogue.
The Short Answer
As a board member, you will create the greatest possible level of value by becoming an intelligent and respectful dialogue partner of the CEO. I personalize it to the CEO because the CEO is the most important dialogue partner with the board, but everything that I say about the CEO applies to the members of the executive management team.
Wait a Minute…
I almost universally get massive pushback when I assert the short answer above. I get told — unequivocally — that the central purpose of the board is to protect the interests of the shareholders by keeping the CEO in check. That is typically followed by an explication of the principal-agent problem (from Mike Jensen’s Agency Theory) by which CEOs (and their executive leadership teams) are imperfect agents of the shareholders and have self-control problems that cause them to act (at least partially) in their own self-interest rather than fully in the interests of shareholders.
Sounds great — as theories often do. But there is a fundamental logical problem. Either a) the principal-agent problem does not exist; or b) it does. If it is the former, then it is stupid for a board to attempt to solve a problem that doesn’t exist. If it is the latter, then we have to recognize that with respect to the overwhelming majority of boards, the board members are distinct from the shareholders. The exception, of course, is a company for which the members of the board are the shareholders of the company — which is the case for some (though far from all) private companies. In this case, the board is the shareholder and there really isn’t a separate body with the task of solving the principal-agent problem. In this small fraction of cases, the task falls directly to the shareholders.
So, for the vast majority of boards, board members are — guess what — agents. Therefore, we can safely assert that the prevailing governance theory is that since shareholders have a principal-agent problem with respect to their managerial agents, they should solve it by appointing another set of agents, just with a different name — board members. And by some mysterious means, this second group of agents will behave differently than the target set of agents. That is logically insipid — though the dominant theory.
At risk of going further down the rabbit hole, the dominant theory continues with the proposition that you align the interests of board members and management with those of the shareholders by giving them stock-based compensation. That too is a fallacious theory — for another time. But if you want to read up on this, I wrote a whole book Fixing the Game on the subject, and numerous articles including these two Harvard Business Review pieces — here and here. And Agency Theory father Jensen describes the problems here.
While the logical basis for boards fixing the principal-agent problem by disciplining the CEO is non-existent, let’s explore the logic of board members attempting to exercise the kind of suasion over the CEO that governance theory assumes by assuming that even though the board members are agents with identical self-control problems as managers, they will dutifully attempt to eliminate any principal-agent problems exhibited by management.
The Information Asymmetry
The challenge for any board seized with the desire to exercise its principal-agent disciplining task is the fundamental information asymmetry it faces. The CEO is there 24–7 and has control over all information flows to the board. Board members are there occasionally and get only what the CEO wants them to see. Should the board have the temerity to attempt to discipline the agency-driven CEO (if the CEO is indeed imposing agency costs on the shareholders — and if not, this point is moot), the CEO has all the power necessary to neuter the board members.
The CEO’s quickest and easiest way is to simply keep board members in the dark by stifling the flow of information to them — as with Enron, WorldCom, Lehman Brothers, HealthSouth, Tyco, Volkswagen, Adelphia, AIG, Nortel, Wirecard, and so on and so on. The slower and harder way is for the CEO to influence the selection of directors and focus the criterion on passivity — so the CEO doesn’t have to neuter them; they come pre-neutered.
Fighting with the CEO is a losing game for any board. A board might as well fire the CEO the minute it decides it needs to attempt to rein in its CEO because the board has nearly zero capacity to wage and win that battle. But it is a pyrrhic victory because it just starts the same cycle with a new CEO.
Boards like to think they can and do win those battles — and get their CEO to behave as they wish. But sadly, they are simply delusional — and CEOs likely convince them that they are winning when they aren’t. I am sure that the Enron, WorldCom, etc. directors thought that they were in control until the proverbial feces hit the fan — at which point it was far too late to avert the damage.
I will never forget my lesson in attempting any sort of disciplining of a CEO as a board member of an NYSE-traded company — in fact as chair of the audit committee. The CEO had written a self-congratulatory email to the board in which he interpreted new investor data as positive. In my view the data were in fact negative, which I wrote to him about in a private email. His response was — literally — that if I sent him any sort of email like this in the future, he would exclude me from board emails. I pointed out that he wasn’t allowed to withhold information from his chair of the audit committee. He responded that he both could and would.
In the next in camera session with the board, I brought copies of the email exchange and informed my fellow board members that I couldn’t serve as audit chair (or board member for that matter) if my CEO explicitly asserted his right to withhold information from me because he didn’t want my commentary on it if it wasn’t positive. I would need to resign if the board chair didn’t get the CEO to change his behavior. Not a soul on the board was willing to lift a finger, so I resigned.
I got my vindication a year later when the CEO was invited before the board with security services at the boardroom doors to be fired for withholding information from the board and was escorted out of the building without being allowed back to his office. So, the board disciplined the CEO — but only a year after his behavior was identified as utterly egregious.
Earning In
Boards hate to hear it, but they have to earn in with their CEOs. Boards need to provide the necessary encouragement to CEOs to share their most important questions and problems with them. What encouragement can they provide? It is by delivering intelligent and respectful advice. When CEOs feel that if they bring up an issue, they will receive intelligent and respectful advice, they will feel comfortable doing so — and will.
Both parts are important. If it isn’t intelligent, CEOs will just take a pass. They are busy and don’t waste their time discussing topics with people who can’t add value. If it isn’t respectful, CEOs will stop sharing because the experience is unpleasant. For example, if the advice is domineering, overly critical, or lacking empathy, CEOs will avoid it by not bringing up subjects that they think will generate disrespectful advice.
I hadn’t earned in with the CEO — my bad. He interpreted my email as disrespectful — not the intent but respect is in the eye of the beholder. Lesson learned!
Being a Good Board Member
Being a good board member entails developing an intelligent & respectful dialogue with the CEO, which involves a series of behaviors and practices:
1) Do Your Homework
It starts with doing your homework enough to be intelligent. You can’t give intelligent advice without understanding the business. If you aren’t willing to do the work to really understand the business, don’t even consider joining a board. One of the best ways to get smart on the business is to listen with rapt attention to your CEO and management team.
2) Tell Me More
If you don’t understand fully, use the three magic words: tell me more. Anybody to whom you request to ‘tell me more,’ will tell you more — and will respect you for asking and asking that way. It is magic.
3) Paraphrasing
Use paraphrasing to build shared understanding. Recap what you think you have heard from the CEO and then ask: to what extent do I have it right? This will help the CEO feel that you are interested, have understood at least reasonably well, and want to understand more fully still.
4) Questions Based on your Experience
Then, and only then, ask questions based on your experience — not questioning the CEO’s. If you just question the CEO’s logic and judgment, you will get tuned out. Instead, try this format: “In my business, I got unpleasantly surprised by this. To what extent is that something that could undermine what you are attempting to do?”
Keep repeating these four practices until such time as the CEO feels that coming forward proactively to talk about the most important issues in the business to benefit from an intelligent and respectful dialogue with the board. Will it always be a pleasant dialogue? No. But as long as it is received as intelligent and respectful, the CEO will keep coming back for all important issues.
Back to Governance
The dream of a group of a group of board members put in place by the shareholders who can discipline a CEO, overcoming the principal-agent problem, is mainly delusional. The board doesn’t have the upper hand — the CEO does. But there is a different way of achieving the desired goal and that is by way of the board creating an intelligent and respectful dialogue with the CEO.
Practitioner Insights
There are many theories in the world of business that don’t hold up to logical scrutiny. One is the idea that boards of widely held, publicly traded companies can overcome the principal-agent problem endemic to the company structure in the age of managerial capitalism, by disciplining the CEO. Because that is what they are taught, lots of board directors follow that playbook — and ignore their own agency self-control problems while doing so. CEOs roll their eyeballs and get to work making sure that directors are in no position to do any such thing.
But if directors want to actually play a useful governance role, whether because they are agents who just want to do the right thing or because they are major shareholders of company, the imperative is to focus their energy on creating an intelligent and respectful dialogue with the CEO (and executive team). While this might feel odd — after all who is in charge, anyway? But being higher on the organization chart does not always translate into higher power — and in this case it most certainly doesn’t.
In this case, information is power, and the CEO has a stranglehold on it. Hence, subtlety and deftness, not power, must be the tools of a good board member.
