The problem of emotion in the boardroom.

AuthorLevensohn, Pascal N.
PositionCorporate governance

Left unchecked, the force of emotion may act to compromise influential directors' abilities to promote the best interests of shareholders when the menu of options facing the board renders the status quo untenable.

When a company's evolution reaches a crossroads requiring strategic action outside of the scope of normal business activity, directors are invariably called upon to make difficult decisions with far-reaching implications. These decisions often require extraordinary corporate actions, ranging from the removal of the CEO to the sale or financial restructuring of the company. Lawyers and investment bankers, the masters of the corporate reorganization playbook, will swiftly appear on the scene to guide the board through the maze of options and consequences that must be considered. Nonetheless, directors retain ultimate control over both the tactics and strategic direction of the company. They therefore wield great power in charting corporate strategy. It is impossible to deny that emotion plays a role in director deliberations, if only because we are all human. Recognizing this fact, it is important to channel emotion into positive results when possible and to minimize its negative effects through proactive planning when unavoidable.

Emotional boardroom behavior manifests itself in wide-ranging forms, including ego games designed to impress friends, actions taken or not taken to save face, self-interested actions, and personal vendettas. Left unchecked, the force of emotion may act to compromise influential directors' abilities to promote the best interests of shareholders when the menu of options facing the board renders the status quo untenable and change is unwelcome.

Several patterns evident in the structure of certain corporate boards make it more difficult for dispassionate decisions to rule over emotion in determining corporate strategy. Proactive structural steps may be taken in advance by corporate boards to minimize the potential for these outcomes. This article compares the constructive and destructive force of emotion in the closely held family company, the private venture, and the public corporation, noting differences particular to each governance structure but focusing on the common role that emotion plays in the boards of all of these companies. These observations are based on my direct experience as an activist shareholder in mature public companies facing demands for fundamental change, as a venture investor and director of private companies experiencing the challenges of rapid growth, and as an independent adviser to closely held private operating companies and family investing organizations.

Establishing common ground

Whether a company is young or old, large or small, healthy or troubled, the personal dynamics that develop in the boardroom between directors are similar. Over time, emotional bonds are created, individual loyalties established, and the locus of power within the board becomes defined. The culture of the board may become a mirror of the culture of the company as a whole, or it may develop in such a manner as to have no relation to the company at all. While this may be a virtue in some companies (such as management paragon General Electric), it may enshrine dysfunction in others (such as Morrison Knudsen, where personal relationships protected CEO William Agee to an extreme). The composition of the board and the strength of its ties to the history of a company may come to represent a problem when change - whether internally promoted or the result of outside forces - comes to dominate the corporate governance agenda.

The closely held business: Emotion at full sail

The governance structure that invites paralysis and the greatest emotional discord in the face of problems demanding action resides in the family board consisting exclusively of family members or including one or two passive outsiders. The thorniest such issue is that of generation succession.

One causal factor having a great impact on succession is the structure of the board, particularly when the board and the family are indistinguishable. Emotion lies at the root of this problem. This negative potential is only magnified when the board members cross different generations for example, parents, children, grandchildren, relatives by marriage, and cousins who are not close.

By their very nature, families are closed systems and are therefore insular and exclusionary. Long-term patterns of behavior rooted in childhood relationships tend to be replayed in the boardroom. Disagreements over substantive business issues are re-enacted outside of the business setting or they come out of old family dynamics. As a result, they often lead to intractable, emotionally rooted business positions that create deadlocks with disastrous consequences for competitive success in a dynamic business environment.

When they do look outside the family for advice, families often retain advisers with a view toward preserving congeniality on the family business agenda or maintaining a convenient scapegoat at their side. Families thus have a tendency to let advisers go on and on instead of holding them accountable for their action or inaction. This extends to the failure of even defining the scope for measuring advisers' accountability.

Consequently, strong advisers who can play the important leadership role are not only absent from many family business governance structures, but their development is discouraged by family inertia and the ever present fear of open family confrontation or disagreement. Jay Hughes, in his recently published book Family Wealth: Keeping It in the Family, refers to this negative tendency as a trend toward "entropy" in the family organization and concludes that "it is apathy or outright indifference by individual family members to the excellence of the representatives selected and to participation in their selection that leads first to government stagnation and ultimately to failure of governance."

Absent the enlightened patriarch or matriarch (a credible, authorized family leader) who can skillfully engineer the delicate path of succession in a family-only environment, the most successful family boards defuse the family's emotional agenda through the presence of one or a number of trusted outside advisers as their elected...

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