THE CULTURES & BEHAVIORS BEHIND BOARD GOVERNANCE

Addressing director behaviors and how the role of culture comes into play, the psychological behaviors of boards require consideration. Despite all the challenges of regulation and roles and responsibilities, this area of fund governance presents unique challenges that seek to address differing personalities and character attributes while working towards a common goal of good governance and investor protection. It is present in every boardroom regardless of the jurisdiction, the nature of the business, the rules, or the regulations. It is not about percentages of independent vs. non-independent fund directors. It is just simply part of the human condition. Indeed, it is quite a juxtaposition.
 
During one of our CIFD* sessions in New York, those of us in attendance went around the room and vented about some of the frustrations we face as board directors. Some of the frustrations cited were cognitive biases, pushing one’s own agenda, biases, personality conflicts, egos, poor agenda management, issues with the timing and receipt of papers/documents before a meeting, passive board members making other board members look outspoken, conflict avoidance as there should be a constructive forum for constructive challenge, kissing up to the chairman or CEO, poorly written, non-substantive minutes, fellow board members that take things personally, not listening, defensiveness, etiquette issues and waste of time conversations.  These issues can create quite a set of challenges in the boardroom that work in opposition to good fund governance. Clearly board behaviors can be very disruptive.
 
The issue of biases is quite common and can come in many forms such as action-oriented biases, stability biases, biases relating to perceiving and judging alternatives, biases related to the framing of alternatives, pattern recognition biases. When these come into play it is good to ask questions such as, what if? what might? And by asking people to explain their biases in greater detail. Prior successes or assumptions should not be accepted for future considerations.
 
There are diversity issues which can include age, gender, race, personality, skills, experiences, culture, and values. All dimensions of diversity may have positive as well as negative effects on group performance. Board members must not be threatened by diversity. To be truly effective, a board should also consider the risks of culture, talent, and strategy. It is important to understand that the board is a working group in which directors have specific competencies. The effectiveness of a board requires that all members work as a cohesive team.
 
The effectiveness of the chairperson of the board is crucial and has his/her own challenges. The chairperson cannot be a puppet whose strings are pulled by the board of directors and must constantly ask the question, what am I trying to accomplish? It is critical that the chairperson maintain a neutral stance, keeps the content tight, communicates complex messages succinctly, focuses on key information and decisions and stomps out any bad behaviors. It is important that a culture of teamthink as opposed to groupthink is established. The chairperson must maintain the focus of the agenda for it to be effective.
 
Groupthink is defined as the practice of thinking or making decisions as a group in a way that discourages creativity or individual responsibility and occurs when a person’s thought process and decision making becomes heavily influenced by peer pressure. Teamthink is collaborative thinking that embraces the process of listening carefully, considering options, and making independent decisions for themselves and those they serve.
 
As independent non-executive directors (INEDs) have no direct link to outside service providers, the job of the INED is to bring the outside in and to recognize that it is not his/her job to know everything as if he/she worked in the day-to-day operations of the firm as objectivity would be lost. A lack of independence can have a negative impact on board effectiveness. Independent directors play a critical role as they are unencumbered by conflicts and can focus their objectives on protecting investor interests.
 
Board relationships are complex as they are a working group, are internally differentiated, there are many key relationships that need to be managed. Thinking professionally is required to build a highly optimized, well performing board. Pearl Zhu, author of Digitizing Boardroom, states that a strategic board has a view of looking ahead, an insight to look deeper, and competency to look beyond. I could not agree more.
 
It is helpful to have some understanding of basic psychology as this truly is at the heart of board behaviors. I am grateful that when I started out in college, I first majored in psychology. Although I changed my major to finance, the time I spent studying psychology was not lost and has served me well in the financial industry and on boards that I have served and in my overall dealing with people and managing and evaluating situations. Truly effective boards do not just happen, it is a choice to be or not to be.
 
 
*Certified Investment Fund Director Institute Established in June 2015, the CIFD Institute is a global not-for-profit community of investment fund directors. Through its specialist focus and membership, the CIFD Institute has the following key objectives: a) to raise professional standards in investment fund governance internationally and in doing so safeguard the interests of investors b) to develop and support investment fund directors in the execution of their roles as such c) to be thought leaders in the area of investment fund governance. Members of the CIFD Institute comprise professionals who have successfully completed the CIFD Programme and, thus, have been awarded the professional designation of Certified Investment Fund Director by the CIFD Institute. The CIFD Institute will seek to achieve its objectives: a) by managing and coordinating the delivery of the CIFD Programme in a number of key locations, by awarding the professional designation Certified Investment Fund Director and by the operation of the continuing professional development required to retain that designation; and b) by providing a community and a forum in which Certified Investment Fund Directors can network and leverage off each other’s experience, thereby developing in the execution of their roles. The CIFD Institute is a specialist institute within The Institute of Banking.