Making space, to grow some more

I have been watching the leaves on a potted plant go a little yellow in recent days. Something is not right; the plant has been suffering, clearly—but why? Had I been over- or under-watering it? Or have I applied the wrong amount of fertiliser? After checking with sources more knowledgeable than me (a book in my library, but also Google), the penny dropped. The plant had become root-bound, a victim of its own success. Simply, the pot had become a constraint. The resolution? A bigger pot, to provide space for the plant to thrive once more. Now, we wait.

Boards and companies are analogous to the pot and plant in this illustration. The pot holds the plant and provides space for it to thrive and grow. Sometimes, a new pot is the change needed if the plant is to thrive. And so it is with companies: sometimes changes are needed at the board table to reinvigorate decision-making, steerage and guidance.

Whereas plants tend to droop, go yellow or otherwise signal poor health, tell-tale signals that it might to be time to make adjustments in a boardroom tend to be visible too. Examples include:

• Directors no longer ask probing questions—or any questions—indicating they may not have prepared adequately or simply lost interest.
• Director expertise no longer matches that required to properly assess performance, hold management to account, or consider investment proposals.
• The company ‘out-grows’ the director, especially in relation to complexity and required expertise.
• One or more directors start behaving erratically, including non-attendance.
• Relationships amongst directors or with management become fractured.
• An action or behaviour leads to a loss of trust.
• Emergence of conflict amongst directors.
• Directors starting to 'die on the vine' (long tenure).
• Strained relations with powerful shareholders (especially relevant in closely-held private companies, family businesses and PE-owned firms).

While this list is far from exhaustive, it is indicative. Notice many of the signals (that a director is out of their depth or no longer fit to serve) tend to be behavioural. But how might any shareholder or supernumerary know the real situation given boards tend to meet and operate behind closed doors? Something might seem to be amiss, but what, and who?

A governance assessment (note, not a board evaluation) can be a useful tool to assess the effectiveness of the board and the governance 'system', and to diagnose any underlying problems. These should be conducted annually, by a credible independent assessor. Recommendations emerging from such an assessment need to be taken seriously. Boards that dismiss evidence-based recommendations out of hand, or make cursory adjustments only (the "sweep it under the carpet and hope for the best" tactic), should take a good look in the mirror. The response is itself  a clue—defensiveness tends to confirm that all is not well. 

When something doesn't quite seem right, check it out. Directors serve at the pleasure of shareholders, and replacement is always an option. Often, it is a very good option; sometimes, it is the best option. Normally, a simple majority is all that is required to both appoint and remove a director. To give the director the benefit of the doubt is rarely the best option. Finally, if a decision is taken to remove a director, act on the evidence quickly, but do so quietly.