How board dynamics and behaviours impact governance

How board dynamics and behaviours impact governance: lessons learned from internal audit

Can behaviours and board dynamics really be the key to good corporate governance? 

When we talk about corporate governance, it’s common for our minds to jump to codes, regulations and processes. Increasingly, though, we’re starting to think about boardroom dynamics, culture and behaviours as crucial factors. 

Various corporate governance failures over the years have shone a light on organisational culture and behaviours as a root cause. As a result, regulators have tried to get boards to engage with this topic, but somehow, it’s often still the pink elephant in the room.

If you’re an internal auditor like me, you may have had the chance to review essential governance structures, or at least observe one or more board meetings in specific cases.  You’ll likely have seen that culture, as a topic, is still not a separate board agenda point. Behavioural risk may be included in the context of wider enterprise risk management, but even then, the conversation will likely be limited to codes of conduct. 

A deeper dive into aspects like board dynamics or leadership behaviours is never usually openly discussed by the boards. But should they be? Are these “soft skill” topics so important that boards, in their limited time, should now dedicate more time to them?

Put simply, behaviour risk encompasses all the human factors that might interfere with effective decision-making. 

In a corporate governance context, behaviour risk means the possibility of undesirable outcomes or corporate failures caused by any poor workforce conduct, unethical actions, cultural factors, or bias that might impact how decisions are made. Practically, it shifts the focus of risk management from structural controls and finances to the human elements of an organisation.

Historically, in business, human issues were for human resources. However, following various corporate governance scandals in which culture emerged as a root cause, regulators and other stakeholders are giving increased mandates to closely supervise culture as much as boards might supervise revenue. 

On foot of that, it’s obvious that a corporate governance assessment includes, at the bare minimum, an assessment of the dynamics both within the board and between the board and management. 

The bottom line is that culture is shaped by the tone at the top. This is abundantly clear to those of us involved in audits. Even the best and most impressive governance frameworks could be made completely redundant if cultural red flags surface. Because of that, it’s important to bring the spotlight on the impact of behaviour on effectiveness.

It’s often difficult to start that process; critics will always say it’s “not evidence-based enough” to merit further study, but the thing is: we do have evidence in the form of warning signs that could lead to far bigger problems if left unaddressed:

• Not everyone’s voice is heard during a board meeting
• Some board members talk so much that they need to be cut off
• Others might have hardly any time to speak
• Speaking time begins to reflect dominant egos more than it reflects relevant ideas
• There’s a power imbalance between the executive and non-executives, sometimes enough to make board meetings feel like jury trials
• Boards use repetitive words or processes repeatedly, slowly creating a disliked atmosphere. 

All of the above are crucial factors separating trusted and distrusted atmospheres. The latter will always create environments where key personnel don’t feel safe in doing their jobs properly. 

As internal auditors, we find it difficult to report on anything less than “hard facts”, but these “softer elements” of culture and behaviours have a heavy impact on the board’s decision-making process.

I once worked with a CEO who directly told his board, especially his independent directors, that he needed to be challenged, but that he also needed a space where he felt safe to come and deliver bad news. These are the two essential elements of a good culture from which other aspects are built.

You might read that and think it’s a bit much; after all, the board isn’t there to make the CEO’s life easy, but building a safe space for dialogue is not a sign that the board is giving someone a free pass. In fact, boards can only be effective when they achieve this kind of safety. 

Don’t forget: decision-making is never down to a single person; it’s an ecosystem, based on alignment between multiple groups of people. It takes a lot of work to put together, but if that alignment isn’t there, grounded in support and respect, the decisions taken might fall short of supporting the organisation in achieving its long-term goals. As a board member, it’s your job to spot dangers like this and take steps to mitigate them.

Often, this will be between the board, the CEO and the leadership team. It’s an essential part of good corporate governance, because it lets the board truly fulfil its oversight role. 

Achieving this means going beyond formal, periodic communications. Informal avenues need to be established as well – periodic touch points for anyone to address any issues. 

Obviously, the chair has a huge role in creating this trusted, safe environment. They do this through active listening, asking open questions, and ensuring that no one has reservations about voicing concerns during board meetings, professionally and meaningfully. 

Tip: While it’s normal to have CEOs and Chairs involved with any kind of board-level meeting, meetings that are exclusively for non-execs rarely take place. However, if you are a Chair, you might want to consider this. Often, boards that do this report better connections and trust in each other, which leads to working better together.

Clearly identify and communicate the type of behaviours a board wants to encourage and, crucially, flag behaviours which are considered off-limits (like cutting off a member while talking or taking too much time to make a point). 

Tip: As part of board effectiveness or board health check annual review, discuss what behaviours are working and not working in the drive for more effectiveness. Communicate them. Put them into action. Make them part of the board culture.

Boards hire highly capable professionals, often experts in their field. However, bringing all these highly qualified and high achievers together doesn’t automatically make the board high-performing as a whole. In fact, it can be a recipe for serious dysfunction if not managed properly.  

Developing a working collective intelligence is about directing all experts towards their shared purpose, connecting the dots between their expertise to enable better decision-making. This allows different elements of governance to play their role in the bigger organisational ecosystem

Tip: “A team and an organisation exist because there is a purpose for them to exist” (Peter Hawkins, professor in Leadership).

Boards often need to take a step back when trying to turn that quote into a reality. They should align their actions and desired behaviours towards the delivery of the shared purpose. Under no circumstances should that effort stop at simple compliance; it should follow on into sustainable impact.

The list above is certainly not exhaustive, and if you have your own thoughts about how to achieve a better boardroom culture,  I invite you to share!

Let’s get back to the initial question: “Can behaviours and board dynamics really be the key to good corporate governance? “

There is enough evidence out there to convince us that board dynamics and boardroom behaviours have a significant impact on the corporate governance effectiveness and the quality of the board’s decision-making. We need to move this topic from being the pink elephant in the room to being openly acknowledged, discussed, and acted upon adequately when/if needed.