Hanging by a thread
We’ve just come back from a month interstate jam-packed with meetings with some fantastic charities, social enterprises and start-ups and its really interesting - two different CEO’s indicated that their board chairpersons have “light” & “dark” sides which require them to spend more time managing upwards during a typical reporting cycle. What does this translate to in practice? Frictious, inconsistent communications and dominant personalities giving rise to a range of governance challenges at a board level, such as reduced psychological safety, inhibited candour and gratuitous concurrence. Sound familiar? If so, that might be because we spoke about communication breakdowns and what negative impacts they might cause for boards in our very first Insights article, which can be found here. If you’re sitting on a board and feeling like you might be in the midsts of a communication breakdown, or if something in your board decision-making dynamic doesn’t feel quite right, it might be an opportune time to make an inquiry with our Specialist Advisor, Psychology & Performance to explore these concerns in more detail.
For those new to governance, the topic of performance evaluation for directors tends to be cast as a priority of larger, public companies thanks in no small part to the value of ASX-listed firms being required to publish corporate governance statements detailing the extent of their compliance with the ASX Corporate Governance Principles, but the truth is performance evaluation for boards plays a critical transparency, governance troubleshooting and value generation role for companies of all sizes, including not-for-profit entities. In this article, we will discuss the significance of board skills and performance evaluations and their contribution to a dynamic and effective boardroom. If you’re a little more seasoned in this area though, a more advanced exposition of independent evaluation best practice can be found in our latest Whitepaper: Adding value through independent board evaluations, which can be accessed via this link.
Evaluating the board of a start-up/scale-up
Years ago, long before Steady Advisory was a thing, I had a conversation with the CEO of an up-and-coming social enterprise that was beginning to enjoy increased traction in the market, with dividends beginning to be paid in return for their hard work. At the time, they asked how they can get their governance foundations right early to set the foundations for ongoing success, and we indicated that both board and CEO KPI’s as a crucially important outworking of their strategic plan were indispensible to not only maintaining momentum, but also keeping everyone accountable for responsible decision-making while the enterprise grew. Being a relatively new business with a board of first-time directors in need of some hand-holding and a fairly dominant personality in their founder, the CEO bristled at the suggestion that performance evaluation was warranted - after all, their start-up had begun to take off, why did their performance need to be questioned?
This frosty attitude, which is not uncommon with more zealous founders, comes from a place of naivety. As a new business emerges from a mere idea on a page, takes shape as a start-up and if it enjoys early success, scales in turn, so too must the skills and expertise required to meet the challenges and opportunities it faces. By logical extension, their board must grow and evolve too if it is going to perform its stewardship role effectively. Directors need to possess a diverse range of competencies, including (but in no way limited to) industry knowledge, financial acumen, technological literacy, legal expertise, and strategic thinking, and these may not all be available within foundational boards which are in most cases initially comprised of “coalitions of the willing”, some having no commercial expertise and/or experience at all. Meanwhile, as the market begins to feverishly advocate for embracing diversity, whether it be gender, ethnic, or professional diversity, we are of the view that diversity of experience and thought are vital to enriching board perspectives and decision-making for start-ups and established businesses alike.
For all of the founders and start-up teams out there wondering how this impacts them, we ask: without regularly and crticially evaluating your board’s make-up and performance, how can you be sure that you have this mix right? Similarly, anticipating the potential for turnover at a board and senior management level, how would you begin to plan for the future? And finally, does your organisation have the skills, experience and tools available in-house to undertake these evaluative exercises?
Lessons from the Sword of Damocles
For those who aren’t familiar, the Sword of Damocles is a metaphorical story made famous by the Roman philosopher Cicero that originates in ancient Greek mythology. It revolves around the character of Damocles, who was an advisor to Dionysius II of Syracuse. (Fun fact: this particular fable is also where the expression “hanging by a thread” comes from). Briefly, Damocles was envious of Dionysius' wealth, power, and luxurious lifestyle, lusting after it. To show him a lesson, Dionysius invited Damocles to a royal banquet and sat him on a throne, while his court showered him with gifts, oils and fine food. Unbeknownst to Damocles, Dionysius had arranged for a sword to be suspended above his head, held only by a single horsehair. Damocles initially enjoyed the lavish treatment, but suddenly noticed the sword dangling precariously above him. The sight of the sharp blade hanging by a fragile thread terrified him, and he immediately lost all desire to be in Dionysius' position of power.
Those reading at this point might be wondering what precariously suspended metaphorical swords have to do with modern boards and their performance evaluations. As a matter of general experience, in highly visible, prestigious institutions (and especially well-trusted charities) the position of board chairperson may be highly coveted and those seeking it out will usually have one or more self-interested or altruistic motivations for doing so. Nothing inherently controversial there. However the position of chairperson brings with it a range of challenges, such as an increased workload across coordinative/managerial and governance domains, greater exposure to public scrutiny and for some chairs, also taking on the role of diplomat when engaging with different stakeholder groups such as donors and politicians. Considering many non-executive directors of charitable enterprises also maintain full-time jobs and/or caring responsibilities, there is little wonder why chairs are especially busy people and that some leave these highly-prized positions completely burnt out.
Naturally, there will be some board chairs who discharge their responsibilities well and, comparatively unscathed, simply elect to step down. In either case, the decision to resign as chair (whether at their own initiative or arising from a constitutional mandate) brings with it the responsibility to prepare a successor ahead of time to avoid a potential leadership vacuum. But as chair, or otherwise as a board, how do you go about that process? If you have a potential candidate in mind, how can you be sure they both want and are suitable for the role? The answer, we suggest, is a comprehensive, strategic approach to planning and performance evaluation that (a) prepares your board for succession years in advance, in a manner that (b) is also cognisant of other critical governance factors such as CEO rotation, directors’ ongoing professional development needs, the leadership aspirations of your board colleagues, macroenvironmental changes and in particular, evolving legal/regulatory landscapes. Spare a thought for those undergoing this exercise who do not have the luxury of time, whether by reason of their own failings, for those beyond their control, or even a combination of both. In any event, the board should be closely assisted in this exercise by your company secretary (or where you don’t have one/are not required to have one, an independent governance consultant). These review processes can be conducted internally and run by the chairperson or even a board committee, however significant questions have arisen in recent years as to whether these are sufficiently objective and rigorous to be of any real value to the subject board. Again, if these issues are of interest, check out our independent board evaluation whitepaper.
Setting foundations for sustained, superior performance
So far, we’ve looked at performance evaluation and succession planning as a process centering around the chairperson and the importance of selecting a capable leader for the board. While these are critical exercises, board performance evaluation and renewal planning extend far beyond leadership and extends into factors like skills, qualities, and experiential breath and depth as well. While there is a contemporary push for greater diversity and lived experience representation on boards in the disability services space, one must not forget that the most critical ingredient in a board’s success as an organisational steward is its capacity to (a) act cohesively and decisively, (b) create a continuous environment of transparency and candour which nurtures and supports effective, responsible board decision-making consistent with directors’ legal and fiduciary obligations, and (c) foster an internal culture of high performance which is ultimately directed towards the pursuit of the organisation’s strategy. If the board is comprised of people who are not experienced, skilled or committed enough to achieve these outcomes, then their stewardship capacity is hindered.
When boards find themselves concerned about whether the organisations they oversee are performing well, it is generally recommended to begin by closely evaluating themselves as governance and compliance malaise usually begins at the top with lax attitudes towards reporting standards, or ignorance in the face of red flags. This initial, self-exploratory exercise does not have to be in-depth: it can be as simple as going back over previous board packs and minutes (as well as any personal notes you may have taken) and querying whether they indicate one or more trends are forming. For example, if audit & risk reports are showing red flags on critical areas of compliance, what action is your audit & risk committee taking to ensure those red flags are actively and appropriately treated at the root cause, downgraded to an amber or green flag with actions closed off and over time; this progress towards completion reported back to the whole board so that all directors are aware of that variation in risk exposure? This is only one example but it is one where an erosion in board focus and attention, whether that be a result of a significant distracting event, a skew in board priorities, or a fall in board performance more generally could lead to disastrous results.
If you sense that this degradation may be happening, take the time to convene as a board and explore the reasons for it. Alternatively, to avoid the potential for cognitive bias, you may also wish to consider engaging an independent consultant to undertake a detailed governance audit, which can pinpoint areas of potential concern and provide the board with detached, objective recommendations for improvement. Either way, if the board comes away from these exercises with some new focal points or a shared understanding of potential governance blind spots, this may catalyse a governance standards uplift or provide the foundations for new director or committee member appointments in the future - all key steps towards a new, sustainable, superior performance paradigm.
If you’re a board director or company secretary, when did you last participate in a board performance evaluation? Do you run your own evaluations or do you rely on external consultants and if so, what methods have you employed? Do you come away from these exercises with actionable recommendations for improvement (where appropriate), tracked implementation and follow-up/progress reports? Share your thoughts and experiences in the comments section below.