A break of trust between a company’s board and its executive is a seismic event in any organisation, often leading to the engagement of independent advisers untila new or restructured executive is in place.

Warren Buffet said: “trust is like the air we breathe, when it’s present, nobody really notices, when it’s absent, everybody notices”.

Such a lack of trust becomes pervasive and potentially all consuming for a board attempting to discharge their responsibilities and inherently they will move beyond their traditional role and become less separated from and more involved in the executive function.

This is an action not taken lightly but it does create complex management issues that will need to be closely watched and considered on an ongoing basis ie not just a board meetings.

Key drivers undermining the relationship between a board and the executive are concerns in relation to ability to execute strategy, uncertainty regarding information being reported and ongoing financial under performance which has not been able to be addressed.

Advisers are introduced as a “stop gap” measure to effect and support required change and provide the reporting and analysis that wasn’t previously available. However, having advisers “treading” through the company on behalf of boards is a process to be carefully managed to ensure both:

  • The board is able to obtain the information/comfort that it requires.
  • Day to day management continues (as best as possible) until a revised structure or new management team is in place.

Achieving these outcomes necessitates more continuous involvement from board members (most likely Chairman) ie not just through board meetings.

Advisers will be in a politically difficult position and in order to fulfill their function will need to:

  • Work closely and develop relationships with the senior executive who are potentially hostile, defensive and resistant to their work.
  • Be accountable and report to the board who are relying on them to be independent and impartial.

The best outcomes in these situations involve some or all of:

  • Decisive action being taken including the recruitment of new executives as soon as possible.
  • Continuous action/involvement from the board to ensure that their directions and instructions are being followed.
  • Ensuring that the involvement and role of advisers in the executive function is as brief as possible.
  • Maintaining clear lines of authority for day to day management and avoid decision making processes becoming blurred by the intervention of the board/advisers.
  • Engaging advisers with the correct temperament and experience to manage the political (and sometimes emotive) environments that exist around their work.
  • Avoid any split between the board and management becoming widely known in the company (see above re how to achieve this).

For a board (and the advisers), some good principles to assist with overcoming the politics and resistance to any engagement are:

  • Transparency with the senior executives about (just about) everything including roles, responsibilities, reporting etc.
  • Asking new advisers and executives to if possible reach a consensus about the “facts” of any situation (not necessarily what you do about it).
  • Clarity in relation to advisers reporting lines and process.

Circumstances dictate the scale of any problems that board intervention in the executive function creates. For instance a new CEO may be less concerned about a trading performance review than a long term CEO who would likely view it as an affront and basically a vote of no confidence.

At a time when boards are coming under more intense scrutiny and with a greater threat of personal liability, in part from the threat of class actions, the necessity for boards to take interventionist action to protect the interests of the company seems to be on the rise. A closely managed, succinct and defined intervention is the most likely to be successful.