Boardroom Basics: Building Relationships
- May 19, 2016
To build on our last post about effective communication in the boardroom, this post will take a closer look at how directors can build stronger working relationships with management and shareholders.
High-performing boards often exhibit a healthy tension between management and directors. Furthermore, research indicates that directors who form positive working relationships with their management counterparts are oftentimes more willing to share their advice in an advisory capacity, and tend to have a personal sense of ownership in the guidance they provide. This suggests that, within reason, board members and management should be allowed to form some dependency upon one another, fostering a shared sense of camaraderie and singularity of purpose. However, this should be approached deliberately, and should always be kept within the confines of sound fiduciary responsibility.
To reiterate a key point from our previous post, this is best achieved by setting appropriate expectations during director onboarding or management transitions. Management should clearly state what inputs they expect to receive from the board, and when, and should provide guidelines for when they would like to be included (or excluded) from conversations. Directors should equally state what information they require from management or outside sources, and should not be afraid to ask for clarity. The board should actively encourage directors to contribute to discussions involving their area(s) of expertise—and conversely discourage directors from joining dialogs where they may muddy communication due to a lack of context or knowledge.
Additionally, it is beneficial for board members to interact with external and internal parties throughout the year—whether regulators, general counsels or public relations teams—to get a more comprehensive view of the company and business environment. While this type of interaction, as well as communication between directors and investors, is becoming more common, directors should be aware of what topics are appropriate for discussion and how to knowledgeably address them. A majority of investors, for instance, may consider it suitable to discuss risk oversight and board composition with directors, while board members may not; directors and management should prepare for such situations.
Exploring a slightly different angle, a large percentage of directors surveyed expressed frustration communicating within larger boards. Many board members reported feeling drowned out when participating in large board discussions, and further research shows that instances of “free-riding” are typically higher. Conversely, there is a positive correlation between small boards and improved communication; directors on smaller boards expressed the feeling that more value is placed on their interactions. The right number of directors may vary at any given time, so boards should be open to expanding (or reducing) the number of board members as advisory needs change. This could also provide an additional opportunity to engage shareholders in valuable, ongoing dialogue.
To evaluate and improve the relationship between directors and management, boards should first consider the leadership styles within their board and the effectiveness of current communication practices. Initially understanding these areas can help provide clarity around certain communication breakdowns and pinpoint areas for continuous improvement.