Three dramatic board failures to learn from
Board failures are a reality of corporate and business life. But they shouldn’t happen as often as they do. At the Corporate Governance Institute, we train the next generation of directors to ensure that board members and future corporate leaders understand the importance of good governance and effective leadership.
We do this by helping people understand what it takes to become a successful board member, how to ask the right questions and what it means to be an effective director.
What happens when board governance goes wrong? What happens when board members don’t do their job? When a business strategy isn’t adhered to? What happens when a focus on economics drowns out that of providing effective leadership or a real business strategy?
In these instances, you can have a massive scandal, a company’s failure, and shattered hopes and dreams across an organisation.
Good board governance can help mitigate these issues — and that’s where you come in.
Here’s a look at some of the most significant board failures in modern history and how a better business strategy could have provided more effective leadership.
Board failures often occur when the board doesn’t do the basics right. Sports Direct is a massive sporting goods provider. It operates a slew of brick-and-mortar and online stores that sell many different types of sporting goods. The company employs nearly 27,000 people in various areas, including running its massive warehousing and logistics facilities. And that is where the problems started.
In 2015, a shocking exposé showed horrifying working conditions for the company’s warehouse-based workforce, highlighting dangerous issues, management failures, pay violations, and more. The result was the company’s CEO, Mike Ashley, being forced to testify in front of parliament, a hit to the company’s bottom line, and a series of legal issues.
The board of directors’ failure was apparent. The board had failed in its fiduciary duty to properly oversee and ensure adequate working conditions for its workers — particularly vulnerable workers who could be easily abused. This meant that a “profit first” culture took control of the company, mainly led by the CEO, Mike Ashley.
After the publication of the massive scandal, the board of directors and others stepped in, creating policies and amending their business strategy to support workers. This allowed employees to make complaints anonymously and ensured that there were additional inspections of the company’s facilities.
The board made fundamental changes, and the improvements helped, but problems remain. Again, this can be seen as a reflection of the board’s success and failure, as much work must still be done.
Board failures often occur at the very top of the corporate world. There is perhaps no more significant corporate scandal than Enron, whose business strategy straight-up incorporated serious crime.
The high-flying American company was involved in energy production and sale. With the help of their accounting firm, Arthur Anderson, Enron began to engage in a series of actions motivated by greed and a desire to mislead the public and their shareholders. In short, Enron cheated and cheated big.
The scandal has been the subject of many books, but the crux is this: Enron cooked the books, hid its debt, and used a unique accounting method known as “mark-to-market” to make up a profit. Eventually, investigators found out what was happening, and the gig was up: The company went bankrupt and erased $74 billion in shareholder value. As a result, tens of thousands of employees lost their jobs and retirement savings, and many went to jail.
The corporate failure is apparent: A lack of oversight on behalf of the board of directors and a total lack of director training for board meetings. Your job as a board member isn’t to be pliable, smile, nod, and attend da cocktail hour. It’s to investigate and provide oversight. Many warning signs showed that the company was cooking the books, but board members refused to head them. This resulted in one of the most massive and shocking corporate scandals.
A more engaged and independent-minded board may have seen these issues and stopped them before hitting this astonishing point.
Director training may have helped as well, but the board meetings must have been interested in providing this director training to make this work.
The former worldwide leader in video rentals found themselves on the wrong side of public opinion thanks to a failure to innovate.
Blockbuster was once known throughout the world as a leader in home movie and video game rentals. Before the digital age, their products were the Netflix of the day. The problem? They refused to innovate. Sensing changes in the market — including by a start-up known as Netflix — Blockbuster began to push for a more in-demand market, creating programmes that allowed people to get videos delivered directly to their homes. However, it wasn’t enough: The company failed to properly prepare for the rise of the digital age and never created a product like that of Netflix that streamed movies directly to people’s internet devices.
Their most egregious failure? A lack of imagination and a failure of business strategy. The company was offered the chance to purchase Netflix — but said no.
Blockbuster did not have a corporate culture that embraced innovation, effective leadership or thinking outside of the box. Board members were given no director training to help them be better at their job. This led to a failure to see where the market was going and new ideas that challenged their previous assumptions. As a board member, your job is to stay plugged into the functions of the real world, making sure that you are up-to-date on the latest market trends and working to ensure that the company is positioning itself where it needs to be. Unfortunately, this never happened with Blockbuster. And it cost the company everything.
If you want to become a board member and provide effective leadership at board meetings, your intent is clear: You want to avoid being on a board that’s part of this list. Thankfully, we can help.