Board Engagement Risk and Director Composition: Participants, Passengers, Protesters, and Prisoners?

There is a continued emphasis on board diversity; however, few ever speak about board refreshment and board engagement risk. Some argue a correlation between lengthy board tenures and diminished board independence from management or a lack of engagement. Using a board skills matrix can aid in the discussions around refreshment and help to guarantee that the composition of the board is in accordance with the organization's evolving business landscape and strategic objectives. It increases board effectiveness and decision-making by ensuring diversity and representation of essential skills. The matrix additionally provides enhanced transparency to investors and stakeholders regarding the capabilities of the board, but I have never seen a board matrix that addresses engagement risk. After all, if you are not engaged, it doesn't matter what skills you have, right?

The Harvard Business Review and the Harvard Law School Forum on Corporate Governance emphasize the significance of a diverse board. Such a board is more inclined to comprehend the fundamental interests of the organization's stakeholders and to adeptly address fluctuations in the market and evolving consumer demands. The National Association of Corporate Directors (NACD) provides a multiyear board succession planning matrix to assist in determining the necessary balance of director skills and experience, disclosing board skills and experience to investors, and planning for board succession.

When implementing a Board Skills Matrix, best practices include reviewing the strategic plan of the organization, contemplating current and future scenarios and issues, prioritizing requirements and determining the necessary skills, evaluating individual directors, striking a balance between soft and hard skills, and conducting routine reviews and updates. By adhering to these procedures, the board skills matrix will continue to be an all-encompassing and valuable instrument for forming and sustaining a board that provides substantial benefits to the organization, or will it?

Harvard's View

The Harvard Business Review and Harvard Law School Forum on Corporate Governance emphasize the importance of diversity of thought and experience in the boardroom. They suggest that a diverse board is more likely to understand the organization's key constituencies and respond effectively to market shifts and changes in consumer expectations. They also highlight that certain skills, such as risk management and corporate social responsibility, are increasingly important in the boardroom.

NACD's View

The National Association of Corporate Directors (NACD) provides a multiyear board succession planning matrix to help plan for board succession, determine the mix of director skills and experience needed, and disclose board skills and experience to investors. NACD emphasizes that the board skills matrix is a practical tool that can be leveraged to achieve long-term strategy. They also offer board assessment services to identify strengths, uncover risks, and discover opportunities through tailored engagements.

Both institutions agree on the importance of a board skills matrix in ensuring effective governance and strategic alignment. They also stress the need for diversity and the inclusion of non-traditional skills in the boardroom.

What's Missing?

I have spoken with many board members and attended many meetings. I am amazed at how many members are not engaged, which reminded me that one of the traits of an effective leader, or pilot, is being a good team builder and maximizing engagement. But how can you build a good team if you don’t understand the players? I’m not speaking about understanding their marketing, financing, or other skills, as I imply above. I am talking about the "human element" and their level of engagement—that amorphous concept most ignore and an element that should be considered when evaluating and refreshing a board.

Human Element

For those that know me, I have been speaking about the human element going back to circa 1996, when I really started analyzing fraud and governance matters.

If adhering to effective guidelines for good governance does not result in the formation of competent boards, then what factors contribute to their success? The key does not pertain to the structure but rather to social and, in some instances, human aspects. Boards that are highly engaged, conscientious, and contribute significant value may or may not adhere to all the recommendations outlined in best practices for good governance; however, they are characterized by their strong and efficient social structures.

Board members' active engagement is crucial for attaining organizational success. An uninvolved board member has the capacity to cultivate a harmful, or worse, toxic, environment, leading to below-average performance and reduced efficacy. Their lack of participation can hinder productivity and decision-making processes. All board members must actively participate and make a constructive contribution towards the organization's objectives. In order to tackle the problem of a board member who is not actively participating, it is crucial to determine their underlying motivation and develop tactics to reignite their engagement or plan their departure.

It is important to note that a board that actively participates is more resilient to obstacles, more effective, and more capable of making excellent judgments for the organization.

Before we get into a methodology for determining board engagement, let's discuss the board's role.

Board’s Role - Overview

First, let’s review the role of the board.? As the organization’s ultimate decision-making body, the board of directors plays two critical roles: overseeing management on behalf of shareholders and other constituencies; and advising management, including the strategic direction , albeit with limited involvement in everyday operations - eyes open, nose in, hands-off!? The board should not attempt to run the operations of the organization; it should oversee how management runs the organization.

Boards that routinely infringe upon management duties and responsibilities risk upsetting a structure that is intended to help both of them.

In contrast, members of management are full-time employees whose main responsibility is to operate the organization.? So, what should board members be doing at a minimum?

Devote the time necessary to do the job.??

Being asked to serve as a director is, of course, an honor, but unlike awards for good citizenship, it requires a continuing commitment of time.? No one should undertake a directorship unless he or she is confident of having sufficient time to do the best job possible.? Thus, directors should do their best to attend all board and committee meetings.

Directors should also fully prepare for board or committee meetings.??

Adequate preparation involves the study, reflection, and formulation of any questions concerning the reports, proposals, or other documents to be considered at the meeting.? Conscientious directors must also be prepared for unanticipated demands on their time and be willing to set aside other pursuits to deal with emergency situations if and as they arise.? If a director has a poor attendance record at board and/or committee meetings, the same will be reported.

Honor the office

Directors must always be conscious of the fact that they have been chosen for a position of special trust and confidence.? Serving on a board of directors is a cooperative, collegial endeavor in which the ultimate goal is to advance the collective interest.? Individual ego and interests must, therefore, be subordinated to the interests of the board, the shareholders, and, ultimately, the interests of all stakeholders in the corporation.? Accordingly, while responsible directors should approach all matters with an open mind and be receptive to the opinions and ideas of others, in the end, they must rely on their own sense of what is fair, equitable, and in the best interests of the corporation.

On-going training

Board member training is often overlooked - board members simply don’t know what they don’t know!? Training helps ensure, at a minimum, that members are current on leading board practices and understand emerging issues, which could enhance overall board member decision-making by helping calibrate a board member’s degree of skepticism when?evaluating the reasonableness of the answers received to the questions we ask.

Applying the right amount of skepticism

Serving as a director requires professionalism, which includes applying the right amount of skepticism - trust can and often is a professional hazard, so verify.

Always?insist that you receive complete, accurate, and timely information.? Understand at a minimum who prepared it, who reviewed it, what data was used and why, and when was it prepared.?

Be an active participant.?

Each director should actively participate in the board’s work and resolve all relevant questions before voting on an issue.? Questions should generally be asked as they occur to directors rather than postponed until the meeting.? By resolving as many matters as possible beforehand, directors can avoid clogging the flow of the meeting and allow their colleagues to concentrate on matters of greatest importance.? On the other hand, if directors genuinely feel that an issue has not been resolved to their satisfaction, they should not hesitate to press the point with their colleagues and insist on a satisfactory answer.

Board Engagement

So what is the best composition of a board? I’m not that smart to answer; however, I do believe that knowing your board is essential to govern effectively. I also believe their is risk when aboard is not engaged! Below is a tool (list of categories) that I hope you find useful in determining your level of board engagement?as you work towards building an exemplary board.

Categories

Participant (High)

This board member is sometimes called “Engaged” and devotes the necessary time to do the job.? He or she wants to learn about the business, the space they operate, senior leadership, their shareholders, and stakeholders, always comes prepared, is enthusiastic,?cooperative, collegial, and fully engaged with the process and offers their opinion on strategy, risk, and other topics with the ultimate goal of being?advancing the collective interest.

Positive Passenger (Medium-High)

This board member might be new and lack?the confidence to immerse themselves in the process; (s)he has a tendency to sit back and listen; wants to chime in, but doesn’t always.? Positive Passengers, in my experience, do often become Participants.

Passenger (Medium)

This board member is physically present, but that’s all.? They are just along for the ride.? They have no intention of disrupting any meetings, but neither will they engage or play an active role in governing.

Negative Passenger (Medium-Low)

This board member is capable of delivering, however, is either too busy to engage, doesn’t believe in the overall strategy, or has other issues that are not readily apparent or that are being addressed.

Protester or Disruptor (Low)

These board members don’t want to be there for a variety of reasons and will let everyone know about it!? They often disagree with everything and generally go out of their way to make the experience as unpleasant as possible for everyone.? Chances are, they think they know everything and can do it better when in actuality, they don’t and can’t.??When it comes to Prisoners (below), you could classify them as having high, medium, or low engagement.

Prisoner

Similar to the Passenger, these board members resigned to being there but are tired or, like the Protester, feel trapped and are just waiting for their term to expire or want to escape.? Unlike the Protesters, however, they are not confrontational.? These board members can be high-risk when it comes to making decisions that require good or sound judgment because they might just not care.

Positive Prisoner

These board?members feel trapped but aware and prepared to exit once they think they have fulfilled their obligations.? They are motivated at times, somewhat focused, and do display confidence - in essence, they are partially engaged but may not care about the long-term strategy because they know they know they won’t be there.

Negative Prisoner

These board members feel trapped and have gotten themselves in a place where they don’t want to be but lack the motivation to exit.? You don’t get much from them as they are usually not engaged, but they are generally not disruptive.? You’re stuck with them!

Issues

As the Pilot, you should also be cognizant of some issues that might negatively impact or disrupt board dynamics.? Here are the more pervasive ones I have experienced.

• Directors that overstep the boundaries of their oversight role - again, eyes open, nose in, hands off;
• Directors that don’t challenge senior leadership enough or appropriately; and
• The Director's skills have deteriorated for some reason or another.

Excellent Boards

Excellent boards are defined by the high level of engagement and self-awareness of their members. They operate on what I call the “RTC Factor,” a beneficial cycle of respect, trust, and candor. This factor is crucial for the chairperson to be an effective leader. For instance, understanding the dynamics of respect and trust among board members can help the chairperson facilitate more productive discussions.

An effective board is a blend of engaged individuals, active contributors, and reluctant members, creating a unique synergy. This synergy is part of a virtuous cycle where each positive attribute, such as respect or trust, reinforces the others. For example, mutual respect among team members cultivates trust, which then enables open and candid communication. This openness allows them to effectively challenge each other’s conclusions and adapt their interpretations based on insightful questions.

However, any disruption, such as a CEO not trusting the board enough to share information, can compromise this positive feedback loop. It’s important to note that respect and trust don’t imply constant friendliness or absence of disagreement. Rather, they signify robust connections between board members that can withstand differing views and tough questions.

Conclusions

As a Pilot or leader, you must not only know the skills of your board members; you must also know their level of engagement, respect, trust, and candor. As a leader, you need to work towards keeping engagement high to try to enhance the dynamic. As I mentioned, there are risks when a board is not properly engaged.

Sometimes board turnover or a refreshment is good. It brings new voices and new perspectives and hopefully increases the level of engagement. If you’re a board member and reading this, be honest with yourself and keep in mind the risks of not being engaged.

Skill matrices are a good tool, but really focus on the human element and increasing engagement to enhance your board's effectiveness!

I welcome your thoughts and opinions, and remember that?no subject is undiscussable!

Jonathan T. Marks

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Attribution and Trademarks:

NACD

HBR and?Jeffrey Sonnenfeld

SquareBox

Pilots, Participants, Passengers, and Prisoners or the 4 P Evaluation Method are Trademarks of Jonathan T. Marks and may not be used without express written permission.

Jonathan T. Marks - BoardandFraud

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