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2022 | Book

Where Was the Board? Read chapter Read first chapter

Disaster in the Boardroom

Six Dysfunctions Everyone Should Understand

Authors: Gerry Brown, Dr. Randall S. Peterson

Publisher: Springer International Publishing

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

Why when companies come crashing down, do we hear of boards who have failed in their fiduciary duties? Or that they have been ignorant, complacent or downright complicit in these scandals and downfalls?

Of course, corporate scandals are nothing new, nor are they limited to any one geography. They are a damning indictment of our systems of corporate governance around the world. And yet, despite this frequency, little or nothing changes. We shrug and move on, accepting they are an unavoidable part of the system that produces incredible wealth for economies and societies. But it should not be that way. Disaster in the Boardroom shows how boards can be better. Looking at why these scandals happen, authors Peterson and Brown present in-depth case studies of major global corporations – including recent contemporary scandals associated with companies such as BP, Facebook and Uber – using the optic of their unique, original and compelling ‘six dysfunctions of the board’ analysis to reveal their particularities but also how they can be overcome.

In this book, Brown and Peterson explore common attributes of scandals such as lack of independence from management, missing key voices, cultural amplification, diffusion of responsibility, rule-bound cultures and groupthink. They also identify ways to strengthen boards, improve their culture and competence, and give directors and others the power to take action and ultimately prevent disasters from happening.

Disaster in the Boardroom is essential reading for every executive in every boardroom, those aspiring to board positions as well as anyone interested in why boards fail. It has never been more important to pre-identify and eradicate these boardroom dysfunctions – not least so that their impacts upon society can better seen, understood, mitigated, and avoided.

Table of Contents

Frontmatter

Part I

Frontmatter
1. Where Was the Board?
Abstract
Where was the board? This is the cry that emerges each time a company disastrously collapses or becomes enmeshed in a scandal. The board of directors are, in principle, the guardians of the company, the people who ensure it is well-managed, financially secure and operates in the best interests of its shareholders and other stakeholders. Yet when companies come crashing to the ground, it emerges that the board has failed in its fiduciary duty to the organization to ensure it is managed responsibly and sustainably, and to all stakeholders including shareholders to ensure their interests are not harmed. This chapter argues why board failure should be getting greater attention than it has—including that it has been with us for 300 years, across the world, and that the causes of these failures are both predictable and preventable if all concerned paid greater attention to board and organizational culture.
Gerry Brown, Randall S. Peterson
2. The Faces of Disaster
Abstract
Board failure is not just a British or an American problem. Our research covers board failure in major corporate scandals over the past forty years involving companies from Japan, Sweden, Iran, Malaysia, China, Brazil, India, Nigeria, Angola and Australia. This is also a problem that cuts across sector barriers. From financial services to resource extraction, high-technology to catering, Silicon Valley start-ups to firms with a century and more of history behind them, no sector or type of company is exempt. National and sector cultures are not responsible for scandals and failures, or at least not solely. Board and organizational culture, however, play a defining role, and no place has a monopoly on dysfunctional company culture and scandals ranging from bribery, fraud, abuse of power and environmental disaster. In this chapter we show that corporate scandals and disasters take many forms, but the causes are depressingly similar and preventable.
Gerry Brown, Randall S. Peterson
3. Dealing with the Consequences
Abstract
When disasters occur and companies engage in corrupt practices or fail entirely, the consequences are felt far wider than company boundaries. These are not victimless incidents. The externalities—the costs of failure—must all be financed and regularly it is the taxpayer and society at large that picks up the bill. We argue that for reasons that are partly structural and partly cultural (remembering, of course, that culture influences structure, and vice versa) that boards sometimes make decisions with far-reaching consequences, without being aware of what those consequences will be. Most directors are well-intentioned and trying to do their best in a difficult world. But the road to hell is paved with good intentions. The unintended consequences for which other people pay the price take a number of forms. These exogenous costs range from job losses to environmental damage, health concerns, impaired communities and even death.
Gerry Brown, Randall S. Peterson
4. Causes of Dysfunctional Culture
Abstract
Understanding the cultural dynamics of boards is critical to understanding why crises emerge and how to make boards more effective at preventing them. Board culture, like any culture, is based on the beliefs and values that board members hold in common and manifests itself in how board members behave towards each other, how they communicate with each other and, perhaps most importantly, how they make decisions. This chapter identifies six different types of board dysfunction—lack of independence from management, missing key voices, cultural amplification, diffusion of responsibility, rule-bound cultures and groupthink—but also clearly identifies how each of these in turn manifests in a particular type of dysfunction in boardroom behaviours over and over again in the present (and also in the past).
Gerry Brown, Randall S. Peterson

Part II

Frontmatter
5. The Subordinated Board: Facebook
Abstract
A subordinated board is one that is incapable of acting independently of the executive. This subordination sometimes happens when the organization has a dominant CEO with a strong character, but sometimes it happens because of the way power within the organization is structured, for example if the chief executive is also a dominant shareholder and/or has the power to control appointments to the board. When this happens, it becomes hard—if not impossible—for the board to exert proper scrutiny and call the CEO to account. We explore Facebook as an example of a company where the board has consistently struggled to make any impact or rein in the senior executive team. It is corporate governance in name only. As founder, CEO and chairman of Facebook, Mark Zuckerberg wields immense control over the company’s governance, despite its publicly owned status.
Gerry Brown, Randall S. Peterson
6. The Imbalanced Board: Google
Abstract
The phenomenon of missing key voices on boards is widespread and links directly to a lack of diversity, not just of ethnicity, gender and so on, but also background and lived experience. The inability of boards to listen to voices from outside the boardroom and the corporate-suite means that boards often overlook evidence of everything from widespread fraud to sexual harassment and abuse going on almost under their noses. The sexual misconduct scandals at Google are a case in point. Starting in 2017, the US Department of Labor, as part of an ongoing investigation, asserted that tech giant Google was engaged in ‘systematic compensation disparities against women pretty much across the entire workforce.’ This escalated in early 2018 to a class action discrimination action was brought against Google by women engineers, managers, salespeople and early childhood educators.
Gerry Brown, Randall S. Peterson
7. The Distended Board: Uber
Abstract
Looking at the history of most successful organizations, we can see how ambitious leaders with a strong vision played a key role in getting the venture off the ground. The problem comes when the vision begins to fade, and ambition and aggression take over and become, not a means to an end, but the end themselves. This is what we mean by amplification of culture: the distortion of the original healthy, vibrant culture into something much darker and malign. From its inception in 2009, Uber was an assertive, ambitious organization, keen on dominating the newly evolving ride-sharing industry, but Uber pushed the boundaries to breaking point and then beyond. The company’s aggressive tendencies led Uber to break moral and ethical limits. That same cultural amplification permeated the culture of the board as well, with aggressive figures like Kalanick and his supporters dominating the boardroom and denying other stakeholders a voice.
Gerry Brown, Randall S. Peterson
8. The Bystander Board: BP and Deepwater Horizon
Abstract
The key aspect of bystander boards is where the board fails to work together and no one steps up to take responsibility at a critical time. This diffusion of responsibility manifests itself in the lack of challenge, enquiry and scrutiny especially by the independent directors. This can be especially dangerous when the company is faced with a major disaster such as BP and the explosion on one of its contracted oil rigs in the Gulf of Mexico. As a consequence the company was faced with a stream of civil and criminal lawsuits including corporate manslaughter and had to pay over $65 billion in fines. The board did not initially respond to the crisis since they had contracted but did not own the rig. This was compounded by having a newly appointed chair with no experience of the sector and there were directors with little experience overseeing a large complex business.
Gerry Brown, Randall S. Peterson
9. The Bureaucratic Board: The Big Four
Abstract
Boards can become prisoners of their own culture, for example bureaucratic boards where an overly controlled rules-based philosophy dominates, with inflexibility of thinking and an insistence that board processes are what counts. This is very dangerous as it leads to a lack of challenge and independent scrutiny by board members. The consequences have been repeated failures by the Big Four accounting firms to spot financial weaknesses during audits which have jeopardized businesses across the globe risking investor funds, pension plans and even the existence of firms themselves as was seen in the collapse of Arthur Andersen. They have failed to deal with conflicts of interest and too often put revenue generation ahead of sound audit for their customers. Controlling over 95 per cent of the audits of FTSE 350 companies, regulators are preparing plans to reform the sector and in the meantime the Big Four are receiving fines.
Gerry Brown, Randall S. Peterson
10. The Conforming Board: Royal Bank of Scotland
Abstract
The demise of the Royal Bank of Scotland (RBS) is an example of groupthink that saw several board dysfunctions coming together as a result of the drive for consensus in the boardroom, such as lack of independence, amplification of culture and missing key voices. Groupthink involves a shared Illusion of unanimity where silence is taken as agreement and an element of self-censorship where every board member avoids rocking the boat. All of this was evident at RBS and resulted in a lack of rigorous challenge, scrutiny and questioning, especially by the independent directors. The result was a charismatic CEO was given free rein to wield his considerable power, culminating in the acquisition of ABN AMRO. The board seems to have had a lack of prudent and effective risk management, resulting in insufficient due diligence in acquiring a complex business.
Gerry Brown, Randall S. Peterson

Part III

Frontmatter
11. Changing Board Culture
Abstract
Reforming board culture is essential if we are to see improvements in corporate governance and board performance. There are high-quality codes of conduct that have been really developed in the last thirty years, but insufficient attention paid to boardroom culture. We define culture as the unwritten rules that influence director interactions and decisions. We outline the different strategies for changing board culture and how to practically manage the change and achieve a truly effective boardroom culture. Part of this is how to spot problems before they occur and some of the questions which boards of directors need to ask themselves. Another critical issue is the role of the independent directors in making the right contributions to promote positive boardroom behaviour.
Gerry Brown, Randall S. Peterson
12. Stakeholder Engagement
Abstract
We argue that effective stakeholder engagement can play a very important role in reducing or preventing the six board dysfunctions. The distinction is drawn between stakeholder engagement and governance, the latter usually involving direct board representation by employees, customers and so on. We explain the practical barriers to engagement including that some stakeholders lack the necessary knowledge and experience to contribute effectively to making difficult board decisions and the very real practical difficulty of balancing the different interests of the various stakeholders. We highlight research evidence demonstrating that effective stakeholder engagement can help to increase the performance of companies and contribute to increased shareholder value. The recent growing interest by investors in Environmental, Social and Corporate Governance (ESG) and the board performances by companies in that respect is particularly noteworthy.
Gerry Brown, Randall S. Peterson
13. Improving Board Effectiveness: Practical Steps
Abstract
We summarize the causes of dysfunctional boards including lack of independence, ineffective board leadership, lack of diversity, structural board problems, conformity and other behavioural problems. The solutions to these problems lie very much in the hands of the boards of directors of companies. Proposals for practical improvement include (1) improving board leadership by selecting the chairs who are able to both listen and lead, (2) improving the functioning of boards including its committees, (3) selecting highly effective independent directors and (4) strengthening board culture. We also discuss the role and importance of board evaluation. We end by addressing the collective responsibility of all boardroom stakeholders, especially the role of regulators and investors.
Gerry Brown, Randall S. Peterson
Backmatter
Metadata
Title
Disaster in the Boardroom
Authors
Gerry Brown
Dr. Randall S. Peterson
Copyright Year
2022
Electronic ISBN
978-3-030-91658-9
Print ISBN
978-3-030-91657-2
DOI
https://doi.org/10.1007/978-3-030-91658-9