As we continue to examine the ingredients of a successful board of directors, another ingredient, board culture is tantamount to a board’s success. Board culture affects decision-making and the directors’ relationship with management, impacting their ability to advise executive management and provide the necessary oversight. Because of this, a board needs to understand its culture, which includes how they make decisions, handle disagreements and share information. Is it collaborative and cohesive? Since they have different interests, are some board members working at cross purposes to others?
The more cooperative the board, the more likely they are to be aligned with each other and make pragmatic decisions that move them forward rather than dramatic decisions that pull them in all directions. Usually, it is necessary for the chairperson to set the board’s tone. He or she needs to encourage directors to communicate openly and set expectations for each individual, as well as the board as a whole. Such leadership usually results in a methodical, rational approach and a more productive relationship with executive management.
On the other hand, adversarial relationships foreshadow a loss of the trust and transparency that is essential in stewarding an organization well. When activist investors win seats in the boardroom, for example, they often weaken boardroom cultures. That is because some activists have specific interests on which they want to focus. Also, activist investors may believe they know more about the business than long-term board members and the executive management team. On the contrary, they are usually less informed and tend to focus on short-term financial gains rather than keeping their eyes on the horizon. By forcing a business to move away from long-term investments and initiatives, activist investors frequently hinder a company’s ability to be successful over the long term.
Highly effective boards are committed, focused on what matters most and have a collaborative culture that enables them to align fully with shareholders’ interests. Boards should consider whether they have fully optimized the above areas. In future posts, I will dig deeper into the varied dynamics of public, private and private equity boards.