Three Signs of a Healthy Board Culture
Corporate culture can be defined as the beliefs and behaviors that inform how a company’s employees and management interact. These cultural norms may not be written down anywhere but are widely understood, and this knowingness reveals itself in the statement, “That’s not how we do things here.”
Board culture is essentially the same animal. It encompasses the beliefs and behaviors that guide how a board and management team interact.
The more I dig into corporate governance, the more convinced I am that culture is the defining characteristic of high performing boards.
There are three elements of board culture that I think are crucial, beginning with trust. Trust between directors and members of the management team, and between the directors themselves, is as vital to a healthy governance body as oxygen is to the human body. When boards and their management teams are aligned around the shared goal of running a high performing bank — even if they occasionally disagree about the details — they are far more likely to be successful than if there are competing or hidden agendas. The ability for all parties to reasonably assume the best intentions on everyone’s part is a sign of a healthy board culture.
A second element is a bright-line delineation between the roles of management and the board, with each party staying in their own lane. The management team runs the bank and executes the strategic plan. The board oversees management’s performance while exercising its authority over material decisions like CEO succession, an acquisition or the sale of the bank.
Recently I had a long conversation with a bank CEO whose board was clearly micromanaging the senior management team to the point that some of its members were thinking about leaving. The CEO was having those thoughts as well because he felt powerless to change that dynamic. The crux of the matter is that directors were weighing in on operational decisions that properly belonged to the bank’s executives, and it was having a negative impact on morale. A board that doesn’t trust management to run the bank either has the wrong team or doesn’t understand its role.
A third sign of a healthy board culture is a clear understanding of the concept of credible challenge. The board has a fiduciary responsibility to make sure the company is being run in the best interests of its owners, while also looking out for important stakeholders like employees, customers and communities. In discharging this responsibility, it is appropriate and necessary for directors to ask questions and react with skepticism to management initiatives that might put the bank at risk. Credible challenge isn’t meant to be inquisitional or confrontational, and a management team that treats it as such doesn’t understand the board’s role either.
There’s a phrase that came out of the Cold War and President Ronald Reagan’s nuclear disarmament talks with Mikhail Gorbachev: “Trust, but verify.” In a healthy board culture, the directors trust that management is telling them the truth, but still exercise their independent judgment to reach their own conclusions.
