15 danger signals for a board of directors

This article was contributed by Kerryn Downey, a professional board director, chair of Alexander PR, and member of the Institutes of Directors New Zealand and life member of the Chartered Professional Accountants of Ontario, Canada.

Over three decades in business advisory and corporate restructuring in Canada and New Zealand Kerryn has worked closely with major corporates, boards, government and regulatory authorities, legal practitioners, and stakeholder groups.

Notable projects include his leadership of the receivership of South Canterbury Finance Limited, the largest receivership in New Zealand, and the wind-up of the New Zealand HIH Group of insurance companies – both prominent examples of weak governance and ineffective boards of directors.

Kerryn Downey is pictured here with a light blue blazer and blue-and-white striped shirt. He is looking at the camera with a smile.

Pictured here: Kerryn Downey

As a professional director with experience in business advisory and corporate restructuring, Kerryn has seen it all when it comes to boards. Here he shares 15 danger signals directors should be alert to for the avoidance of issues and crises:

  1. A dominant chairman and weak board members.

A dominant chairman can stifle debate and prevent other board members from expressing their opinions or challenging the status quo. This can lead to poor decision-making. A prominent example of this in New Zealand business history is the case of South Canterbury Finance, where the principal owner of the business was also the board chair and exerted too much influence at both a governance and an operational level. The business ultimately collapsed, leaving the Government to pay out NZ$1.6 billion to 35,000 investors under the Retail Deposit Guarantee Scheme.

  1. Local board influenced by overseas parent.

When a local board is overly influenced by directions from an overseas parent, this can seriously weaken the financial stability of the local subsidiary. A prominent example of this is the Volkswagen emissions scandal in 2015. Following revelations that VW had installed software that allowed cheating in emissions testing of millions of cars, it was reported that the board of VW’s US subsidiary was heavily influenced by the board of VW in Germany, to the point where decisions were made by the US directors that contributed to the scandal, including to prioritise cost-cutting measures over compliance with emissions regulations. The company had to pay out billions in fines and compensation and suffered serious financial and reputational damage.

  1. Too many directors on the board.

Just as too many cooks in the kitchen spoil the broth, having too many directors on a board might not ruin a company but can hinder quick and efficient decision-making. It can also cause a lack of focus and direction, making it harder to achieve the organisation’s goals.  Five to seven directors is an ideal number to strike a balance between diversity of experience and perspectives, and the ability to make decisions efficiently.

  1. A lack of independent directors.

Speaking of perspective, having independent directors on a board can bring a valuable external view and help ensure decisions are made in the best interests of the business and its shareholders. Boards without independent members may become insular and fall short in challenging the status quo – potentially leading to a decreased ability to adapt when needed.

  1. Selecting directors based on a “buddy system”.

Keeping the Old Boys’ Club alive and choosing directors based on personal connections or familiarity can be tempting. But while there could be cases when a personal connection brings the right expertise, qualifications, and experience for the role, the effectiveness of the board may be compromised.

  1. Confusion/ignorance in understanding the different roles of the board versus management.

To avoid conflicts and ensure effective governance, it’s essential that all board members understand the different roles and responsibilities of the board and senior management. A director should not become involved in micromanaging the business. All members of the board should understand their role as a director.

  1. No separation between the CEO and board.

It’s essential to maintain clear, professional lines of responsibility and accountability between the CEO and the board to avoid conflicts of interest and ensure objective decision-making and advice. Ideally the roles of the board and of management should be separated; in practice difficult to achieve for many private companies.

  1. Directors lacking industry or specialised knowledge.

As with managing the risk of cronyism, it’s important to have a mix of skill sets and expertise on any board. This means appointing directors with specialist knowledge and broad industry experience. Diversity of thought and experience is important to any effective board, as is seeking out individuals who can provide unique perspectives on the industry in which they operate.

  1. Incompetent or dishonest directors.

Competence and honesty are key pillars for success in a governance role. Conversely, incompetent or dishonest directors can create significant problems for any business. Conducting thorough due diligence on potential board members is critical to ensure their integrity and suitability for the role.

  1. Poorly controlled board meetings.

Agendas, time limits, and clear engagement rules for discussions are essential tools to avoid disorganised, time-wasting board meetings. Effective boards will have a strong and competent chairperson.

  1. Pre-meeting briefing information that is too detailed.

While directors should be given all relevant information before each board meeting, it’s also essential to strike a balance between providing enough background to make informed decisions and overwhelming board members with unnecessary detail or data. To keep discussions and meetings focused, board reports should be kept concise and relevant to the issues at hand.

  1. Failure to have a policy of annual independent review of board performance.

Just as an individual employee’s performance is usually reviewed on an annual basis, so should the board’s performance be assessed. This process helps identify areas for improvement and ensures the board continues to function effectively.

  1. Failure to rotate board members.

A common theme: fresh perspective and ideas come from diversity of thought, which means rotating board members at regular intervals. This doesn’t have to mean playing musical chairs annually, though, and it is a good idea to have a policy for a structured process.

  1. Directors failing to understand liability issues, e.g. insolvency risk, health and safety risk, climate change, and inequitable labour practices.

Directors have a legal responsibility to understand and mitigate the risks faced by the company. Failure to do so can result in significant legal and personal liability for directors.

  1. Failure to seek expert advice on specific matters.

No matter how competent their members, not all boards may have the expertise needed to make informed decisions on certain topics or issues. Seeking expert advice when necessary helps make more informed and effective decisions and can help protect the organisation from any potential issues that could arise by not asking for an expert opinion when it is needed.

If you are a business leader wanting to prepare for issues and crises, you might also be interested in our new white paper, which discusses some of the key bad habits in the boardroom and presents solutions for leaders ready to act.

You can download your complimentary copy here: https://companycrisis.co.nz/white-paper-2023-bad-habits-in-the-boardroom/

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