Issue: June/August 09


Invisible dynamics

Some are good, some not so good. What can prevent and what can enhance sharper, better decision making.

Stewart...coalface observations

Stewart...coalface observations

It’s in the nature of things that, at any number of board meetings, a clash of views can be interpreted as a threat to board stability. So various board members incline to support the chairman’s view rather than express opinions of their own. As a result, many boards merely perpetuate lines of power.

The observation is disturbing because of who makes it in the context of retirement funds. After 20 years in institutional investment, Rhona Stewart is speaking from her more recent experience as a strategic advisor to retirement funds.

This follow-the-leader dynamic exists not only in many companies but also in retirement funds where, she finds, controversial issues are not discussed openly. Instead, they are decided in advance by cliques. “The development of these invisible lines occurs more frequently in boards where there is a low level of trust, resulting in the formation of subtle coalitions which go unchallenged in an environment of artificial harmony.”

Such board dynamics may be expedient for some, she suggests, but may not be optimal for all stakeholders. It’s not always the fault of the trustee, she’s observed. Honesty and openness may be hampered by structural factors that lead to conflict-ofinterest explosions.

For example, a problem might arise when those who nominate and appoint a trustee expect loyalty from the trustee by advancing their interests. The trustee then has a conflict of loyalties: between the fund and its members on the one hand; those who brought him to his position on the other.

Commercially-sponsored and occupational funds carry other problems inherent in their structures. The first disruption, according to Stewart, is in boards comprising people with varying levels of authority. It then becomes almost impossible to avoid an employer’s power play. This could result in a conflict where trustees support the employer rather than the member.

Frequently, fund sponsors need to control the decision-making processes because it is difficult otherwise to exclude commercial considerations. “Whether or not it’s admitted, issues at the sponsor level impact on board dynamics,” she says.

Another threat to board harmony is the absence of trust in report-backs to constituencies. If the rules for report-backs aren’t defined and applied, trustees may find themselves constrained by fear that elements of their discussion are conveyed out of context or in a way that distorts their good intentions.

For trustees to avoid these pitfalls, Stewart’s suggests:

  • Ensure that there is no exclusion of stakeholders at board level. Roles and responsibilities must be clear. Although trustees may be expected to leave their territorial loyalties at the door and focus exclusively on fund or member interests, in practice this seldom happens;
  • Appoint an independent chair and/or trustee with experience in the industry. It can counter incumbents’ myopia and duplication of the corporate hierarchy;
  • Ensure that the board is not structured for stalemate. A board that has a 50/50 split between employer and union representatives is likely to have a hard time reaching certain decisions. So consider a casting vote for the (preferably) independent chair or other structural methods to break a deadlock;
  • A formally-documented code of conduct is essential, but it needs a compulsion to comply or its usefulness is limited. Implementation of the code should be monitored by an independent party and there should be sanctions for breach;
  • Appoint a chair who has a track record for making efficient use of the strengths and competencies of board members, as well as the skill to balance available input and extract views from quiet corners of the room;
  • Ensure that there is an allocated time on the agenda during which no service providers are present. When mandating them, be wary of providing authority that allows unreasonable access to other service providers’ intellectual property. Keep a healthy professional distance from service providers.
  • Beware of ‘ornamental’ appointments. High-profile individuals who sit on a slew of boards seldom have the time for proper attention to fund matters;
  • Embrace a diversity of personalities on your board. Resist the temptation to make appointments in your own image;
  • Balance a high turnover of trustees against those who stick around. High turnover is disruptive and negates training benefits, while extended tenure should be conditional on the rotation of roles;
  • Keep a mental picture of the individual human beings impacted by your decisions.

Were it only that the right people for trusteeship can be found in sufficient numbers...