Psychology in the Boardroom: Part 2

By: Paul C. Winum

This is the second of a three-part series examining the topic of how social-psychological forces impact the performance of boards and CEOs. The topic was addressed at the June 2017 Stanford University Directors’ College in a panel titled “CEO and Board Psychology.”

The Stanford Directors’ College once again proved to be a very stimulating forum attended by more than 250 directors and governance specialists. With keynote speakers that included highly accomplished CEOs and board directors (e.g., Marissa Mayer of Yahoo, John Thompson of Microsoft, Brian Cornell and Roxanne Austin of Target, Condoleezza Rice, Robert Rubin, and Aida Alvarez), the content covered a range of current governance trends. The plenary panel that I participated on addressed the issue of dynamics in the boardroom and the relationship between the board and CEO. Facilitated by Sy Lorne, the other panelists were Maggie Wilderotter, Larry Sonsini, and Majken Schultz with collective experience serving on and advising more than 100 boards. Here are a few of the highlights from our panel:

What are the factors that contribute to an effective board? The panel talked about five Cs: composition (having the right skills), collegiality (mutual respect among directors), collaboration (working together on a common agenda), constructive conflict (the ability to challenge each other and management to deliver value in decision making), and courage (the willingness to take potentially unpopular or contrary positions in the face of conformity pressures).

What kind of relationship is most productive between a board and CEO? The consensus is that a partnership between board and CEO that encourages transparent communication and challenging conversations yields the best value. It was also recognized that when directors are invited to serve on boards by the CEO, particularly a founder/CEO, loyalty to that CEO can be a deterrent to fully candid dialogue. As part of the recruitment and onboarding process, a new director and CEO should discuss their mutual expectations and role relationship with each other to ensure the proper partnership.

How to deal with the threat of activist investors? An interesting suggestion was discussed whereby boards conduct an annual exercise to look at the company they are directing as if they were activists. By proactively identifying a variety of scenarios to maximize the value of the company, a board can be much better prepared when an activist might come knocking at the door.

How does a board ensure it is adding value? There was a strong consensus that every board conduct an annual self-evaluation including providing feedback to individual directors about their contributions and ways they could increase their value. It was recommended that an independent evaluator be used to ensure objectivity and candor. Input from the management team about the benefits they receive from the board was cited as an important element to a good evaluation.

The old adage, “It’s the storm not the calm that makes the sailor” certainly applies in the boardroom. When a company is performing well, with a high functioning CEO, board service is relatively easy. It’s when a company is facing serious competitive threats, underperformance, the need to replace a CEO, or an activist at the gate that the board’s culture and value is really put to the test. Preparing for those possibilities is a best practice in governance and helps a board navigate those situations should they arise. Implementing the recommendations of this panel will help a board avoid some of the social-psychological pitfalls of social conformity and groupthink that can cause an otherwise highly capable set of directors on a board to be less than the sum of the parts.

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