Trust, Respect, and Openness: Establishing an Effective Board Culture

Boards of directors govern as a collective body in an ever-more complex and challenging business environment. To do so effectively requires harnessing the direct expertise and viewpoints of individual directors in focused, informed, and open deliberations that efficiently move to conclusion. Board effectiveness is closely tied to the health of the group’s dynamics and the contributions of each director. The report of the NACD Commission on The Future of the American Board, “A Framework for Governing into the Future” (“Report”), acknowledges the considerable pressures brought about by technological and business model disruption, competition for talent and other scarce resources, activism threats, regulatory pressures, and rising geopolitical and political tensions. 

The Report also emphasizes that, to position a company to respond to competing pressures requires, among other things, a board culture that promotes the exploration of diverse voices in an informed and agile manner and reliance on the collective good behaviors of individual directors. Ongoing attentiveness to group dynamics and behavioral norms helps boards withstand stress in times of volatility and crisis. It helps set the tone for the board’s deliberations, resolution of disagreement, and ability to reach consensus, and for the board’s relationship with management. It can also reduce the likelihood of interpersonal discord and the potential for related misconduct. Given that the board is often constrained in its ability to take meaningful action against a director who strays from agreed policies and norms, attending to the health of the board’s culture by underscoring what is expected is an important preventive measure.

Collective Authority, Individual Duties and Group Dynamics

Directors are fiduciaries who have duties to act with care, loyalty, and good faith in participating in board activities and decisions. However, the board’s authority to act is as a collective body, and individual directors lack authority (unless specifically delegated by the board) to authorize action by the company, bind the company to agreements, issue directives to members of management or other employees, or speak on behalf of the board or company.

In monitoring performance and determining how to vote on a matter, directors are expected to review all relevant information reasonably available. In addition to considering information provided by management, experts, and advisors, as the board works toward developing a consensus about potential courses of action, directors also consider the perspectives and expertise of their fellow directors. Well-functioning boards are normally able to achieve a consensus that all directors can support, only rarely resorting to a majority position that a minority of directors oppose. However, reasonable directors may disagree on important matters from time to time.

Board culture — the shared values, beliefs, assumptions, and expectations that influence behavior in the boardroom — affects group dynamics.

Board culture — the shared values, beliefs, assumptions, and expectations that influence behavior in the boardroom — affects group dynamics, including the manner in which directors engage with one another and with management, the candor with which views are raised and deliberated, and the ease with which priorities are agreed upon and consensus is reached. A positive culture of trust, respect, and candor provides the foundation for a collaborative and constructive dynamic, whether in discussions of strategy, risk, succession or crisis management.

Appropriate Dissenting Behavior vs Behavior Problems

In establishing a board culture that values expression of differing opinions, it is important to distinguish appropriate dissenting behavior from problematic behavior. Directors should freely share their viewpoints in board and committee meetings and seek to persuade other directors through deliberations. After thorough discussion, it is relatively common for a director who voiced a different view to come to support the emerging position of the board majority and vote in favor of the emerging majority position out of respect for and reliance on the informed judgment of the other directors.

A positive culture of trust, respect, and candor provides the foundation for a collaborative and constructive dynamic.

A director who disagrees with a board position should reconsider their own assumptions and biases to identify the source of the disagreement. If the director has articulated her view clearly, concisely, and without animus or emotion, yet has failed to persuade fellow directors, it is likely that the other directors understand the matter but have drawn a different conclusion about the best course of action. The director also should consider whether the board’s decision-making process is appropriately robust, including whether any conflicts have been disclosed and handled appropriately, and whether directors have the relevant information to be able to assess strategic options and come to an informed decision. If the disagreement remains unresolved, the director has a range of possible responses, depending on the level of and reasons for the disagreement, including:

• Persist in trying to convince the majority to agree with their point of view before the vote.
• Seek to have the decision-making process reformed to remedy possible procedural flaws, for example, by removing the influence of conflicted directors or tabling the discussion until additional information or advice that the director believes would be helpful can be obtained and reviewed
• Vote against the proposal and either

1. respect the will of the majority; or
2. request that the dissent be recorded in the meeting minutes to express significant disapproval of the decision (this also protects the director from fiduciary liability for the particular decision at issue).

• Seek to have the board reconsider or modify the decision.
• Consider resigning, in a case of serious and continuing disagreement, where the director believes that their point of view is disregarded on a regular basis and therefore the director feels they cannot be effective in influencing board decisions.
• Seek legal advice about options if the director believes that significant issues of compliance or risk are not being addressed after raising the issues with the board. There are circumstances in which the courts look with disfavor on directors who resign rather than seek to address significant issues.

Note that for a public company, a disagreement concerning the company’s operations, policies, or practices that results in a director’s resignation or refusal to stand for re-election, if known about by an executive officer of the company, triggers a Form 8-K disclosure obligation (Item 5.02(a), Form 8-K). In this Form 8-K, the company must disclose a description of the disagreement that it believes caused the director to resign or refuse to stand for re-election, and any correspondence the director has sent to the company regarding their resignation or refusal to stand for re-election must be filed as an exhibit. The company must provide the director with a copy of the disclosure on or before the day the Form 8-K is filed, and offer the director the opportunity to state in writing whether they agree with the company’s description and, if not, indicate how they disagree. The company must amend the Form 8-K to include any written statement provided by the director within two days after receipt.

Boards have very limited options to curb problematic director behaviors, which come in a variety of forms, including:

• Acting in an abrasive, abusive, or disrespectful manner.
•  Monopolizing discussions.
• Unduly interfering in management operations.
•  Overstepping one’s authority.
• Failing to respect and abide by company protocols and policies.
• Leaking confidential information.
• Failing to disclose a conflict, acting on a conflicted basis, or both.
• Taking any action that breaches a fiduciary duty or violates a law or regulation.

Possible board responses range from re-education efforts to rethinking whether to renominate the director to the board. In many cases, simply pointing out the errant behavior to the director may be sufficient. If the behavior reflects a lack of understanding of policies or obligations, education may be appropriate and helpful. Coaching may assist a director in modifying a problematic personal style. Individual director evaluations can help focus feedback about more generalized problematic behaviors. In certain circumstances, a board may decide to formally (but privately) reprimand the director. For example, in a public company, if the director’s actions constituted a breach of the company’s code of conduct and ethics, a reprimand for their actions avoids the need for public disclosure that the board waived the code.

When re-education and/or reprimand is insufficient, the board may decide (absent a specific contractual arrangement) not to re-nominate the director. If change is needed mid-term, the board may request that the director resign, but typically lacks the power of removal. A board’s ability to “remove” a director is usually limited to a decision not to re-nominate the director for re-election by the shareholders at the end of the director’s term. Many states allow director removal only by a vote of shareholders. In some jurisdictions, a court may be petitioned to remove a director for fraudulent or dishonest acts, gross abuse of authority, or a breach of duty. Judicial removal of directors is a public process, which could cause reputational harm to the company.

If a director refuses to resign, the board may take action to protect the integrity of board decisions from conflicts of interest, confidentiality breaches, and other harm by forming a Special Committee. Forming a board committee and delegating certain decisions to it may prevent these decisions from being influenced by the director’s behavior. The board should seek the advice of counsel if considering this approach. The board may also remove the director from committees on which the director serves.

Generally, directors are expected to show respect for one another and for executives and employees, listen actively with an open mind, and be constructive in questions directed to management or other directors. They are also expected to value and promote discussion and debate, including through the exercise of self-control in the use of discussion time, respecting the interests of other directors to also participate, and strive to reach consensus after an informed and deliberative process. It is also important to support, and not undermine, decisions reached by the board, protect board confidentiality, and avoid acting or speaking on behalf of the company or board without authorization. Directors are expected to identify and disclose conflicts of interest and recuse themselves from discussion of and voting on these matters.

Behavioral Norms

While diversity in director viewpoints should be highly valued and encouraged, and a range of director styles is to be expected, effective boards set clear expectations, implicitly or explicitly, about the behaviors that are valued in board and committee discussions and in company-related interactions outside the boardroom. The governance committee and the board should periodically revisit these expectations, which can be reflected in the code of conduct for directors, corporate governance guidelines, or both. Behavioral norms should be premised on a clear understanding of the roles of the board and management. The board should agree on behavioral norms that respect the limits of individual director authority and also respect the delegated day-to-day operations of management. 

The board leader plays a key role in ensuring the board has policies and practices that facilitate a healthy board culture.

To that end, the board and management should agree on behavioral norms that support a clear delineation of board and management authority, while recognizing that this line is difficult to draw and shifts based on the context. Similarly, the CEO and independent board chair (or lead independent director) should agree on their respective roles and responsibilities, given the importance of mutual trust, respect, and candor between them. The board leader plays a key role in ensuring the board has policies and practices that facilitate a healthy board culture. Practices that may strengthen board culture include:

• Scheduling frequent executive sessions;
• Ensuring the board has sufficient in-person interactions;
• Encouraging all directors to participate and express differing views in meetings; and
• Developing norms around director communications outside the boardroom (between directors and between directors and management).

Behavioral norms related to the flow of information and communications can help foster a culture where management is candid and shares negative news promptly, and directors are constructive and deliberative. For example, management and the board should develop a shared expectation about the circumstances that call for prompt and substantive board notification and engagement. Directors should be alerted to significant matters in a timely manner, including matters that implicate board responsibilities or may receive negative publicity. To that end:

• Directors should respect the impact that their requests may have on other work priorities, and the interest that all directors have in access to the same base of information. The board should establish procedures for directors to suggest board meeting agenda items and identify information to be provided by management that would be helpful to both their understanding of the business generally and their consideration of specific matters.
• The board may wish to develop clear policies in consultation with management on how to coordinate meetings and other contacts with key employees to ensure that priorities are established and that directors have equal access to information.
• Given the highly confidential nature of information provided to directors and of the proceedings and deliberations of the board and its committees, directors should periodically be reminded not to share information outside the boardroom unless specifically authorized by the board (for example, by a director who represents a significant shareholder).
• Behavioral norms should reflect the limited time available for board and committee meetings and the interest that all directors have in actively participating. Care should be taken to promote interaction and equal opportunity for participation.
• In communicating with one another outside board and committee meetings, directors should be mindful that the work of the board and its committees be undertaken through discussions in duly convened meetings. Email and text messaging among directors about substantive matters raise confidentiality and litigation risks, given their susceptibility to a security breach and their quick, informal tone, and because they form an incomplete record. Substantive communication should take place in the security of a duly convened meeting in which all directors share the same base of information.

The following additional actions help to create a positive board culture and support appropriate director behaviors:

• Discussing board culture and expectations about director conduct and reviewing related board policies periodically.
• Addressing behavioral norms in corporate governance guidelines or other appropriate board policies.
• Reminding directors of confidentiality requirements and other key policies periodically.
• Assessing board culture in the annual board evaluation.
• Underscoring expectations about director conduct in individual director evaluations.
• Considering a director’s behavior in making re-nomination decisions, including:

1. how they have handled board disagreements in the past;
2.  whether they abide by company and board policies;
3. whether they uphold their fiduciary duties; and
4. their commitment to confidentiality.

• Discussing periodically in governance committee meetings and with counsel the avenues for addressing problematic behaviors.
• Addressing problematic behaviors when they arise.

The board is responsible for developing an internal culture of trust, respect, and openness.

The board is responsible for developing an internal culture of trust, respect, and openness, and that culture is in large measure a product of accepted behaviors among directors. Periodic consideration of the behaviors expected of directors, the behaviors that are unacceptable, and the mechanisms for handling disagreements helps shape a positive board culture. Boards are increasingly expected to oversee management’s ability to establish and maintain a workplace culture that produces desired performance outcomes for stakeholders and which proactively identifies and mitigates culture and conduct related risks to the organization. Establishing an effective board culture is a necessary first step in that direction.