IFC Corporate Governance Knowledge Publication Boardroom Disputes How to Manage the Good, Weather the Bad, and Prevent the Ugly Practical Guide for Directors © Copyright 2015. All rights reserved. International Finance Corporation 2121 Pennsylvania Avenue, NW, Washington, DC 20433 Centre for Effective Dispute resolution International Dispute Resolution Centre 70 Fleet Street London EC4Y 1EU The findings, interpretations, and conclusions expressed in this publication should not be attributed in any manner to the International Finance Corporation (IFC) and/or to the Centre for Effective Dispute resolution (CEDR) and their affiliated organizations, or to members of their boards of directors or the countries they represent. IFC and CEDR do not guarantee the accuracy of the data included in this publication and accept no responsibility for any consequence of their use. The material in this work is protected by copyright. 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For permission to photocopy or reprint, please send a request with complete information to: International Finance Corporation c/o the World Bank Permissions Desk Office of the Publisher 1818 H Street, NW Washington, DC, 20433 All queries on rights and licenses including subsidiary rights should be addressed to: International Finance Corporation c/o Office of the Publisher World Bank 1818 H Street, NW Washington DC, 20433 Or, fax (202) 522-2422 b Preventing and Managing Boardroom Disputes BOARDROOM DISPUTES How to Manage the Good, Weather the Bad, and Prevent the Ugly Contents INTRODUCTION.................................................................................................................................................................................................................................................................................................................... 3 OVERVIEW.................................................................................................................................................................................................................................................................................................................................. 4 Disputes Can Put the Company at Risk........................................................................................................................................................................................................................................ 4 Defining Corporate Governance Disputes................................................................................................................................................................................................................................. 6 CGDR Self-Assessment and Progression Matrix................................................................................................................................................................................................................... 6 1. CLARIFY THE ROLES OF MANAGEMENT AND THE BOARD......................................................................................................................................................................................... 8 2. ESTABLISH ORDERLY BOARD PROCESSES.................................................................................................................................................................................................................................... 10 3. ENSURE THE PROPER FLOW OF INFORMATION..................................................................................................................................................................................................................... 14 4. ENCOURAGE A BOARD CULTURE THAT ALLOWS FOR EFFECTIVE DISCUSSIONS, DEBATES, AND DELIBERATIONS................................ 16 5. STEP OUT OF THE BOARDROOM TO GAIN NEW PERSPECTIVES........................................................................................................................................................................ 19 Board Assessments.......................................................................................................................................................................................................................................................................................... 20 Board Retreats....................................................................................................................................................................................................................................................................................................... 20 6. APPLY DISPUTE RESOLUTION SKILLS AND TECHNIQUES............................................................................................................................................................................................. 22 Communicating Effectively..................................................................................................................................................................................................................................................................... 22 Respecting Cultural Sensitivities........................................................................................................................................................................................................................................................ 26 Building Consensus......................................................................................................................................................................................................................................................................................... 26 Managing Emotions....................................................................................................................................................................................................................................................................................... 27 Disagreeing Constructively...................................................................................................................................................................................................................................................................... 27 7. INCORPORATE ALTERNATIVE DISPUTE RESOLUTION INTO THE COMPANY’S CULTURE AND PRACTICES........................................................... 30 Benefits of ADR for Resolving Corporate Governance Disputes................................................................................................................................................................... 30 Who Should Manage the Dispute Resolution Process?.......................................................................................................................................................................................... 33 Helpful Documents.......................................................................................................................................................................................................................................................................................... 34 Preventing and Managing Boardroom Disputes 1 Boxes 0.1: Excerpts from CEDR-IFC Survey Responses............................................................................................................................................................................................................................... 5 1.1: Board Responsibilities........................................................................................................................................................................................................................................................................................ 9 2.1: Robert’s Rules—And Breaking Them............................................................................................................................................................................................................................................ 11 3.1: Briefing Papers....................................................................................................................................................................................................................................................................................................... 15 4.1: Factors to Consider for Director Nominations.................................................................................................................................................................................................................... 17 4.2: Role of the Chair................................................................................................................................................................................................................................................................................................. 18 6.1: Assessing the Board’s Interpersonal Skills........................................................................................................................................................................................................................................28 6.2: Techniques for Defusing Disputes in Boardrooms.......................................................................................................................................................................................................... 29 Figures 5.1: Board Retreats........................................................................................................................................................................................................................................................................................................ 21 6.1: Important Interpersonal Skills............................................................................................................................................................................................................................................................... 24 7.1: Alternative Dispute Resolution............................................................................................................................................................................................................................................................ 31 Tables 0.1: CGDR Self-Assessment and Progression Matrix................................................................................................................................................................................................................... 7 6.1: Conflict Resolution Skills Ladder....................................................................................................................................................................................................................................................... 23 7.1: Comparing Mediation, Arbitration, and Litigation....................................................................................................................................................................................................... 32 7.2: Peacemaker Skills Mix................................................................................................................................................................................................................................................................................... 33 7.3: Documents that Support ADR Installation............................................................................................................................................................................................................................. 35 2 Preventing and Managing Boardroom Disputes INTRODUCTION A dynamic board seeks to stimulate the flow of ideas, identify key issues, consider alternatives, and make informed decisions. And for that you need deliberation and debate. But these positive processes can sometimes turn into boardroom disagreements that must be dealt with properly and promptly; otherwise, they can devolve into acrimonious disputes that undermine the board’s effectiveness and the company’s performance. This paper describes key steps that boards can take to mitigate the impact of disputes—and, even better, to minimize the risk of disputes arising in the first place. It is intended as companion and post-training material for a course called “Managing Disputes and Difficult Conversations on the Board.” This highly interactive course for board directors was created by the IFC Corporate Governance Group in partnership with the Center for Effective Dispute Resolution (CEDR). It is designed to help directors understand board conflict and conflict styles, and it covers difficult scenarios that directors often encounter. The course offers guidance and practical tips for how to have a difficult conversation; for handling avoidance, high emotions, and status issues; and for breaking through deadlock—and how to apply these skills specifically in a board context. This publication also can be used as stand-alone guidance for boards. While the training itself focuses heavily on individual development of interpersonal skills relevant in the board context, this publication also deals with the board as a collective body that needs to cultivate its ability to manage disputes effectively—starting by establishing good corporate governance policies and practices. The advice is geared toward a single-tier board, but the principles described in this publication can be easily adapted to different board structures. The paper builds on IFC’s “Resolving Corporate Governance Disputes”1 and its internal IFC “Board Toolkit.” In addition to numerous people who contributed to those publications, IFC and CEDR would like to thank the following peer reviewers and contributors: Amira El Saeed Agag (IFC), Phil Armstrong (IFC), Philip TN Koh (Mah-Kamariyah & Philip Koh), Mary Jo Larson (Independent Consultant), Maggie Rego (IFC), Alan Rudnick (Masters-Rudnick & Associates, LLC), and Olli V. Virtanen (Virtanen Associates Oy).   The IFC Corporate Governance Dispute Resolution program 2 aims to equip board directors with knowledge, skills, and tools to manage and resolve corporate governance disputes and difficult conversations on the board. Its dual purpose is to 1) reduce the negative impact of disputes on the company’s reputation and performance and 2) improve the quality and effectiveness of board deliberations. The program brings together corporate governance and alternative dispute resolution (ADR) specialists to develop knowledge and training products and guide their implementation. CEDRis a not-for-profit organization 3 that campaigns for better resolution of disputes and management of conflicts. Its innovative initiatives promote awareness of the need for more effective leadership in collaboration and dialogue and how to achieve it. CEDR is Europe’s largest independent ADR service and leading international negotiation and conflict management trainer. It also consults globally on civil justice reform and helps businesses develop conflict management systems. 1 Global Corporate Governance Forum, Toolkit 4: Resolving Corporate Governance Disputes (Washington, D.C.: IFC, 2011). http://tinyurl.com/ofrw5s3. 2 See www.ifc.org/corporategovernance. 3 See www.cedr.com. Preventing and Managing Boardroom Disputes 3 OVERVIEW Disagreements in the boardroom are unavoidable – especially when the board has independent-minded, skilled, and outspoken directors, each contributing expertise and talent that is relevant for the future of the company. A good board includes a diverse group of people, considers and debates a variety of issues, and aims for consensus decisions; no one person’s views prevail 100 percent of the time. A board that never argues or disagrees is most likely inactive, passive, or inattentive – in other words, an ineffective board that is neither fulfilling its oversight function nor carrying out its duty of care. Yet if boardroom disagreements are not dealt with properly, they can escalate quickly into public matters that can have severe, long-term consequences for the company and its key stakeholders. Disputes Can Put the Company at Risk In 2013, CEDR and the IFC Corporate Governance Group conducted a global survey of 191 directors and board members to learn about their experiences with and attitudes toward boardroom disputes.4 Our results show the significant effects that boardroom disputes can have on an organization, and the challenges that individual members of those boards find in attempting to resolve them. (See Box 0.1.) The following are some of the results of the survey: • A sizeable portion (29.6 percent) of respondents have experienced a boardroom dispute affecting the survival of an organization. • 42.8 percent of respondents report that conflict reduced the level of trust among board members. • The most common subject matter of disputes is “financial, structural, or procedural workings of the organization,” closely followed by the “personal behavior and attitudes of directors.” • Disputes are most commonly resolved through internal negotiation (61.2 percent) or internal mediation (25.2 percent). • A significant proportion of respondents (67.2 percent) report that they have encountered unresolved issues; 15.6 percent report that conflicts are not resolved “frequently,” and another 11.0 percent report that the issues are resolved “frequently” by “avoiding the conflict and letting it pass.” • Respondents say that the most frequent complicating factor in resolving disputes are “issues regarding handling the emotions of those involved,” and this was the second-most difficult factor to deal with after issues over “competing factions on the board.” • Respondents are extremely eager for training in dealing with personal factors, with 74.8 percent describing training in the “ability to deal with different personalities” as very useful. • A gender difference emerged regarding which skills respondents desired: women are far more interested in receiving training in negotiation skills, while men are more keen to receive training in how to deal with different personalities. 4 IFC Corporate Governance Knowledge Publication, Conflicts in the Boardroom Survey—Results and Analysis (Washington, D.C.: IFC and CEDR, 2014). http://tinyurl.com/lrkqvkp. 4 Preventing and Managing Boardroom Disputes Box 0.1: Excerpts from CEDR-IFC Survey Responses “The CEO’s abrasive style with zero appetite for ‘changes’ has pushed the company to a stage wherein the company is under attack from the stakeholders, including the creditors.” “Factionalism [exists] on the board, and an unwillingness on the part of the chair to demand that members pull together—instead [there is] much manipulation and backroom dealing.” “Alpha members of the board [are] not listening to others or not ‘hearing’ them, especially women (or those perceived to be of no importance); [there is] lack of empathy or ability to appreciate motives of others.” “In my experience the avoidance of the dispute is the biggest problem, especially in a company with a dominant shareholder and two minority shareholders, where the minority shareholders are suffering most from results of avoidance but are hardly part of the conflict management, as the conflict is played outside the board/board meetings.” Preventing and Managing Boardroom Disputes 5 Defining Corporate Governance Disputes Corporate governance disputes involve the board’s powers and actions or its failure or refusal to act. These conflicts may arise between the board and its shareholders or between directors and executive management. They may also involve issues among the directors themselves or between the board and other stakeholders. The list of possible sources of conflict is endless and includes issues related to the business itself (what is being done— strategic priorities, related-party transactions, company control), board processes (how things are done—appointment of new directors, defining board agenda, succession planning), and personalities (who is doing things—behaviors and attitudes of directors). Regardless of its source or nature, a governance dispute implicates the board in one way or another as a party or as an active participant, and resolving the conflict requires the directors’ concurrence. In further defining corporate governance disputes, we should distinguish them from other types of disputes that may involve a company. For example, a dispute over a contract, a labor claim, or a commercial matter involves the company as an entity but does not pertain to its governance. Such disputes are typically part of doing business, and it is generally up to management to resolve them. It is important to note that this paper does not deal with any specific type of conflict, such as a shareholder dispute or a clash over related-party transactions; for help with specific situations, you should seek independent professional advice. Instead, we focus on policies, procedures, and directors’ skills that help resolve disagreements in a constructive way, prevent some conflicts altogether by removing common “irritants,” and create the circumstances for a productive board environment. CGDR Self-Assessment and Progression Matrix To keep disputes from being destructive, the first and most important responsibility of the board is to apply good corporate governance practices, including initiating steps to minimize the risk of having disputes arise in the first place. The second responsibility is to see to it that individual board members develop the skills needed to better manage disputes and heated negotiations. To achieve these goals, a board should consider adopting the following interlinked steps, tailoring them to the board’s particular circumstances: 1. Clarify the roles of management and the board. 2. Establish orderly board processes. 3. Ensure the proper flow of information. 4. Encourage a board culture that allows for effective discussions, debates, and deliberations. 5. Step out of the boardroom to gain new perspectives. 6. Apply dispute resolution skills and techniques. 7. Incorporate ADR into the company’s culture and practices. Table 0.1 presents the Corporate Governance Dispute Resolution Self-Assessment and Progression Matrix, which summarizes specific elements of those key steps. It is formatted to help boards conduct a basic self-evaluation of their readiness to prevent, manage, and mitigate the impact of corporate governance disputes. It shows boards where they might be in the matrix and what they need to do to build a roadmap to improve. These seven steps form the structure of this paper. Each section expands on one step, exploring it in greater depth. 6 Preventing and Managing Boardroom Disputes Table 0.1: CGDR Self-Assessment and Progression Matrix SEVEN DIMENSIONS IN PREVENTING AND MANAGING BOARDROOM DISPUTES LEVEL 1 LEVEL 2 LEVEL 3 Somewhat/ Internalized No Sometimes practice 1. Clarify the Role of Management versus the Board There is clear and detailed delineation of board and management authorities/roles/ responsibilities Each committee has a charter clearly delineating its functions The CEO has clear limits on expenditures not requiring board approval 2. Establish Orderly Board Processes There is a yearly calendar for board and committee meetings Board meetings protocol establishes procedural rules and behavior expectations, including how each director can add matters to the agenda Meeting agendas ensure an appropriate amount of time for each decision item to be discussed Meetings include “executive sessions” (sessions without management or CEO) Board minutes clearly present issues discussed, decisions made, and basis for decisions 3. Ensure Proper Flow of Information Key business performance indicators are established and regularly reported to the board Board is regularly updated on the implementation of previous decisions Board briefing papers are focused and allow for informed board decisions Board briefing papers are distributed no less than a week before the meetings 4. Encourage a Board Culture that Allows for Effective Discussions, Debates, and Deliberations Different points of view and debate are welcomed during board meetings Board deliberations are collegial and civil Consensus is the preferred way to make decisions Chair encourages frank and open discussion that each director can participate in 5. Step out of the Boardroom to Gain New Perspectives Regular informal settings give directors the opportunity to better know each other The chair or lead director meets at least once a year with all the other board members individually to know their points of view of the company and the board The CEO meets at least once a year with each director to hear his or her views about the company, management, and the CEO’s performance Board undergoes regular assessments/evaluations Board holds an annual retreat outside company premises 6. Apply Dispute Resolution Skills and Techniques Chair is adept at building consensus Directors have good interpersonal communication skills 7. Incorporate ADR into the Company’s Culture and Practices Board’s bylaws or governance principles or guidelines include a provision on how disputes will be resolved One or more directors on the board have mediation training and/or are trusted and able to play an internal mediation role, when needed The board has a code of ethics that directors sign during induction Preventing and Managing Boardroom Disputes 7 1 CLARIFY THE ROLES OF MANAGEMENT AND THE BOARD Clarifying the roles of the board and management is be dealing with. Also, gaps can develop in areas that the crucial to preventing disputes. Failure to understand and board believes are part of management’s responsibility but articulate these different roles invites disputes and impairs management assumes the board is handling. For example, the board’s effectiveness. The board also should establish the board establishes how much expenditure the CEO can committee charters that clearly define the committees’ authorize without requesting board approval, and it cannot jurisdictions and responsibilities. It is especially detrimental permit ambiguity in that area; doing so would create room for boards or board committees to extend their roles into for constant friction between the board and the CEO. management’s purview—for example, when the audit committee begins to redo the financial statements or The board’s role does not include running the company. The conduct its own audit. board hires people for day-to-day management, oversees and monitors management and corporate activities, Similarly, management must understand its role and that of reviews and approves (or disapproves) key strategies and the board; otherwise, board meetings can become consumed policies, and acts on significant matters after having fully by routine or irrelevant matters that management should informed itself. (See Box 1.1.) 8 Preventing and Managing Boardroom Disputes Box 1.1: Board Responsibilities The board’s role and responsibilities typically include the following, among others: • Approving a corporate philosophy and mission • Nominating directors for election to the board • Establishing an audit committee composed entirely or primarily of independent directors (depending on the jurisdiction) • Selecting, monitoring, advising, evaluating, setting compensation for, and—if necessary— replacing the CEO and other senior executives, while ensuring an orderly and proper management succession • Reviewing and approving: –– Management’s strategic and business plans –– The company’s enterprise risk management program and systems of internal control –– The company’s financial plans, objectives, and actions—including distributions to shareholders, significant capital allocations, expenditures, and other material financial obligations –– Material transactions not in the ordinary course of business, and making recommendations to shareholders when their approval of such transactions is necessary • Monitoring corporate performance against strategic business plans • Determining the limits of authority and expenditures and board delegations for the CEO and senior management. • Helping ensure ethical behavior and compliance with laws and regulations, accounting and auditing principles, and the company’s own governing documents • Assessing its own effectiveness in fulfilling board responsibilities Based on: The Conference Board, Corporate Governance Handbook (2007). Preventing and Managing Boardroom Disputes 9 2 ESTABLISH ORDERLY BOARD PROCESSES Orderly processes and procedures help create an Some boards will establish their own protocols that lay environment that not only permits but also encourages out the chair’s role, procedures for calling on those who discussion and debate. By contrast, disorganized, chaotic wish to speak, debate procedures (rebuttal and counter- meetings not only impede the substantive aspects of the rebuttal), and clear rules for how to ask directors to end board meeting but also create numerous irritants. Two their remarks if they do not abide by the board’s rules. things happen quickly: For boards that don’t want to develop their own • First, confusion will reign, and from that confusion rules for discussion, Robert’s Rules of Order is one will spring misunderstanding, frustrations and even solution. Published for the first time in 1876 by Henry anger. What is the business at today’s meeting? In what Martyn Robert, it is one of the most commonly used order do we consider things? Is there follow-up from the meeting protocols. last meeting? One caveat: The decision-making process under Robert’s • Second, time will run short, discussion and debate will Rules tends to favor the majority and does not factor in the be compromised, and some important matters will not instability that can result from having unhappy minorities. be considered. To prevent frustrations and, consequently, disputes from building, boards are increasingly using more consensus- Board meeting organization must include a clear protocol based processes for decision making, in which voting for how meetings will be conducted and how the discussion would be a last resort for decisions. (See Box 2.1.) will occur. Every director must have an opportunity to participate in discussions and debates. 10 Preventing and Managing Boardroom Disputes Box 2.1: Robert’s Rules—And Breaking Them Ten Basic Principles of Robert’s Breaking Robert’s Rules Rules of Order In the book Breaking Robert’s Rules, Robert’s Rules of Order is used by parliaments, authors Lawrence Susskind and Jeffrey boards, and many other decision-making Cruikshank explain that deciding on matters bodies to establish a procedure for discussing is not as simple as voting. They offer the and making decisions. following five steps to improve decision making so that agreements can be reached • All members have equal rights, privileges, and implemented more effectively. Boards and obligations; rules must be administered may want to consider these steps when impartially. developing their organizational processes: • The minority has rights, which must be protected. • Convening: Agreeing to a particular • Full and free discussion of all motions, decision-making process. reports, and other items of business is a • Assigning roles and responsibilities: right of all members. Clarifying who is in charge. Specifying • In doing business, the simplest and most ground rules. Defining the role of the direct procedure should be used. facilitator/chair. • Logical precedence governs the introduction • Facilitating group problem solving: and disposition of motions. Generating mutually advantageous proposals and confronting disagreement • Only one question can be considered at in a respectful way. Ensuring that a range a time. of solutions (including the ones no one • Members may not make a motion or speak thought of) are considered to address the in debate until they have risen and been concerns of all participants/members. recognized by the chair and thus have • Reaching agreement : Coming as close as obtained the floor. possible to meeting the most important • No one may speak more than twice on the interests of everyone concerned, and same question on the same day without documenting how and why an agreement permission of the assembly. No member may was reached. speak a second time on the same question, • Holding people to their commitments: if anyone who has not spoken on that Having participants/members do what question wishes to do so. they are supposed to/agreed to do. • Members must not attack or question Keeping participants/members in touch the motives of other members. Customarily, with each other so that unexpected all remarks are addressed to the presiding problems can be addressed together. officer. • In voting, members have the right to know at all times what motion is before the assembly and what affirmative and negative votes mean. Source: California State University, Chico. Available at Source: Lawrence Susskind and Jeffrey Cruikshank, http://www.csuchico.edu/sac/studentOrganizations/ Breaking Robert’s Rules (New York: Oxford University parliamentaryProcedures.shtml. Press, 2006). Preventing and Managing Boardroom Disputes 11 At a minimum, good board organization should include • Board meeting duration.The length of meetings should routines for information flow both to and within the board, be tailored to the issues requiring board consideration. preparation of materials in advance of meetings, and an Ideally, board meetings should last no more than four orderly environment in which the board can conduct hours and conclude with lunch or dinner, so members its business. The following are some good practices for can continue more informal conversations. preparing board meetings: Note: It is common for boards to have lengthy strategy • The agenda and its content.A carefully constructed discussions, which are often held as separate, dedicated agenda determines the issues under discussion and meetings. (See “5. Step out of the Boardroom to Gain ensures a basic order to meetings. The agenda is New Perspectives,” on page 19.) generally put together by the chair and the corporate secretary, with input from the CEO. Any director can • Minutes.Minutes record what actually happened at a request that the chair include a matter on the agenda. meeting in the order in which it happened, regardless of whether the meeting followed the written agenda. A problem for many boards is having directors Minutes also serve as important reminders of action to overwhelmed with mundane and administrative issues, be taken between meetings. Aim to keep them short which leaves too little time for substantive discussions and to the point, usually not more than four pages. on matters of strategic importance. This imbalance breeds resentment among directors, who feel that they At a minimum, the minutes must contain 1) meeting cannot fully perform their duties and participate in location and date, 2) names of attendees and absentees, critical decision making. 3) principal points arising during discussion, and 4) board decisions. Include dissenting members’ views in Agendas should strike a balance between reviews of board meeting minutes to show that all positions have past performance and forward-looking issues. Strategic been heard and that the board values open discussions. issues require ample time for debate, so the agenda should allocate sufficient discussion time. • Meetings of non-executives.Many companies with unitary boards have developed the practice of regularly The agenda should show the amount of time allocated scheduling so-called “executive meetings” of the non- for each item, and it should limit the number of items, so executive directors.5 The purpose is to provide non- the board will have sufficient time for deliberations on executive directors a chance to voice any suggestions each one. A study of 1,400 companies by 3i Group plc, a or concerns about the functioning of the board—or large venture capital company in the United Kingdom, discuss any other board matters—without the presence showed that 59 percent of boards have 8 to 10 items on and possible influence of other directors. the agenda. Only 1 percent have more than 13 items. These sessions typically are held on the same days as • The agenda annual calendar.To keep the “peaks” the regularly scheduled board meetings. The senior and “troughs” of a board’s business within reasonable independent director or the lead external director limits, many boards develop an agenda annual calendar. usually presides at these sessions. The following are This allows sufficient time for specific issues during some likely areas of focus for discussions held solely meetings throughout the year. Certain items will need among non-executive directors: to be fixed according to the financial reporting cycle, –– Annual meeting with the auditor but less time-specific topics can be included on the board agendas when there are fewer items to discuss. –– Evaluation of the executive directors (and sometimes senior management), and establishing the executive • Board meeting frequency.Typically, 6 to 10 board directors’ salary meetings per year will be sufficient, particularly when committees meet between board sessions. 5 Certain regulatory restrictions may apply regarding when and how executive sessions can be set up. 12 Preventing and Managing Boardroom Disputes –– Conflicts between two board members, or serious The meeting’s minutes should indicate that the board met criticism of one board member by another in an executive session and should identify the discussion topic, although the specifics may remain confidential. –– Investigation into concerns about an executive director Furthermore, one director attending the executive session should be designated to let the CEO know the results of An effective way to avoid the feeling that “an executive the executive session and any issues arising. This can be session means bad news” is for the board chair to routinely a highly sensitive process and is one that can generate a put executive sessions on every agenda, or on four agendas great deal of tension unless there is strong trust between per year. the board, in particular the chair, and the CEO. Preventing and Managing Boardroom Disputes 13 3 ENSURE THE PROPER FLOW OF INFORMATION Directors have a fiduciary duty to make decisions after business is doing and the outlook for the short, considering all material information that is reasonably medium, and long terms; available. A board’s well-constructed information –– Determine frequency of reports with performance system supports a healthy bond between the board and and risk indicators and their publication format; and management. It helps ensure that the board has the basic facts necessary for a healthy discussion and debate. –– Determine other informational materials (such as press releases, certain regulatory filings or reports Typically, boards need two kinds of information: by investment analysts on the industry or company itself) that the board may want to receive regularly. • Ongoing informationcontributes to the board’s oversight and monitoring of the company and its business. For ongoing information flows, boards and —for proposals and actions— • Specific information helps directors understand and evaluate proposals management should: for board action so they can make knowledgeable –– Agree on certain performance indicators that give decisions. (See Box 3.1.) management and the board a snapshot of how the 14 Preventing and Managing Boardroom Disputes Box 3.1: Briefing Papers Board materials should be summarized and formatted to allow board members to readily grasp and focus on the most significant issues in preparation for the board meeting. Papers relating to specific agenda items should be clearly structured, with headings such as “purpose,” “background,” “risks,” “issues,” “impact,” and “recommendations.” Briefing papers should be: • Short, concise, and material. Board papers associated with a particular agenda item need not be more than four to six pages, with any further detail provided in annexes. Many directors privately complain that their board papers are often twice as long as they should be. • Timely. Information should be distributed, preferably in the hands of directors, at least five business days in advance. This allows board members—particularly non-executive directors, who are not as familiar with the business as executive directors are—to fully consider the issues before the meeting. • Focused and action-oriented. The papers should present the issue for discussion, evaluate the risks of each identified alternative, offer solutions for how to effectively address the issue, and provide management’s view on which action to take. It should be clear what is required from the directors. Is this a matter for decision, for information only or to be noted (if exercised within existing CEO/management authority)? If a proposal is more complex or requires additional explanation, the board should consider delegating the matter to a board committee or arranging one-on-one briefings of each director by the proposal’s promoter. Preventing and Managing Boardroom Disputes 15 4 ENCOURAGE A BOARD CULTURE THAT ALLOWS FOR EFFECTIVE DISCUSSIONS, DEBATES, AND DELIBERATIONS Sometimes impediments to discussion involve structural Civility complements collegiality. Civility involves and organizational issues. Constructive inquiry, discussion, adherence to certain manners and practices for interaction debate, and decision making require a conscious effort. among individuals. A civil environment does not preclude When the board environment is comfortable and the tone animated debate, deeply held beliefs, emotional speech and encourages creative problem solving, people will challenge action, or passionate convictions. But it does mean that assumptions, ask probing questions, and make suggestions the board will not tolerate personal attacks or behavior that contribute to innovation and informed decision designed to embarrass another person. A lack of civility making. To support the kind of environment that prevents can too easily trigger antipathy and anger, thus inhibiting disputes and promotes effective deliberations, boards free discussion and debate. Lack of civility also can lead to must develop a boardroom culture based on collegiality destructive interpersonal relationships and, in the process, and civility. create an additional layer of emotional content that will have to be addressed if disputes are to be resolved. Collegiality promotes respect for one another and for each member’s ability to express views, regardless of whether Civility is especially important as boards become more anyone else embraces those views. It permits participants diverse. Diversity facilitates creative problem solving and to be more open to new ideas, rather than being defensive provides exposure to a wide range of perspectives, yet of their own conclusions. In reality, a board is a group of diversity without civility can produce misunderstandings people—each with an equal vote in the decision-making and disagreements based on cultural and other differences. process. A democratic environment should prevail; no one person should rule. The environment should foster However, heavy preoccupation with civility can create its flexibility and collaborative thinking, and it should own problems. When people become overly concerned encourage directors to hear different views, argue the about avoiding confrontation or embarrassment, thinking merits, and ultimately arrive at a consensus. they are being civil, they sometimes do not address matters directly, or they avoid discussing certain issues. 16 Preventing and Managing Boardroom Disputes Directors’ personalities also can affect the board culture • Peer pressure in ways that may stifle debate. Obviously, a domineering director needs to be reined in, but it is also important to • “Groupthink”—where people conform their views to establish a culture that draws out directors who are shy what they believe is the group’s consensus rather than about speaking up. The following are some examples of engaging in debate on the problems or issues that must personal inhibitions that may keep people from openly be confronted expressing their ideas: A director who, for any reason, feels inhibited about • Discomfort about appearing to be the sole objector speaking up will become frustrated. Frustration easily festers and becomes anger, creating dissonance and • Concerns about appearing to be noncollegial, or not dysfunction among directors. being a team player • Reluctance to challenge the CEO or another dominant The composition of the board can directly affect its personality on the board collegiality and civility. This makes the nomination of directors a critical factor in establishing the culture of the • Tendency to avoid issues that are emotionally sensitive board. (See Box 4.1.) Also, an effective board chair can do much to establish and maintain a healthy balance in • Fear of appearing ignorant or uninformed director participation. (See Box 4.2.) Box 4.1: Factors to Consider for Director Nominations To promote a collegial environment that facilitates the board’s work, a board—and especially its nomination committee—should: • Encourage directors to meet with potential directors before they are nominated, and to weigh in on the nomination process. For example, the non-executive directors (NED) would individually meet with the proposed new NED and the entire board will have an audience with a proposed executive director; • Perform thorough background investigations of potential directors, and obtain as much information as possible on how the potential directors have functioned in group decision- making settings; • Avoid nominating people who are reputed to argue for argument’s sake; • Avoid nominating people who, because they are fearful of making decisions, prolong debate and resist developing collaborative solutions; and • Make sure the board has at least some people with skills and training in conflict resolution, consensus building, negotiation, and mediation. Preventing and Managing Boardroom Disputes 17 Box 4.2: Role of the Chair For managing the board’s business and acting as its facilitator and guide, an effective board chair is absolutely essential. While conducting the meetings, the chair should: • Maintain control of the proceedings without dominating discussion, treating all directors equally. Unfortunately, it is not uncommon for a chair to make his or her opinion known before allowing all the directors express their views, thus preventing an honest exchange of ideas. • Facilitate decision making by stimulating focused debate, drawing on all contributions, encouraging constructive discussion, and ensuring that genuine disagreements are aired and resolved. Skillful questioning helps clarify issues and encourages the full participation of the directors. • Steer the board toward consensus. A good chair will always aim for a consensus decision, not just one based on majority vote. (For more information, see Building Consensus, on page 26.) In some jurisdictions, company bylaws allow the chair to exercise the “casting vote” to break a voting tie on the board. Even if allowed to do so, the chair should avoid exercising this right, as it exacerbates tensions on the board. • Ensure that the decisions that are made are properly understood and recorded. 18 Preventing and Managing Boardroom Disputes 5 STEP OUT OF THE BOARDROOM TO GAIN NEW PERSPECTIVES Governing a company is a demanding exercise, and board • The non-executive chair (or the lead director, if the chair meetings can become consumed by urgent issues of the is a member of management) should meet over a meal at day. An effective way to put it all into perspective is to step least once annually with each director individually—to out of the confines of the boardroom. Doing so provides hear the director’s views about the company and board. opportunities for directors to accomplish important This interaction also can bring to the surface any issues objectives, such as the following: about which there is tension or irritation. • Get to know each other in less formal settings. • The CEO should meet over a meal at least once annually with each director—to hear thoughts and ideas that the • Evaluate board performance and needs. director has about the company, management, and the • Focus on strategic development of the company. CEO’s performance. The NED chair, if there is one, needs to be closely associated with this so that CEO • Build consensus and resolve emerging disagreements is not misinterpreted to be lobbying against the chair before they can become problems. where there might be some residing tensions or issues. Effective debates and deliberations require a certain level of familiarity and trust among board directors. Boards need Board assessments and retreats provide excellent to ensure that opportunities exist for directors to know one platforms for identifying interests, surfacing issues, another in informal, comfortable surroundings. Here are promoting discussion, and facilitating collaborative some suggestions: decision making. In many companies, these processes have become standard practice and thus fit neatly • Arrange a dinner for all directors before each board into the board calendar of activities and also offer the meeting. Consider assigning places for each director to opportunity for the board to meet with not just the sit at dinners, and change the seating arrangement to executive directors but other senior management. ensure that each director has an opportunity to sit next to—and therefore to talk with—every other director over the space of a year. Preventing and Managing Boardroom Disputes 19 Board Assessments Board Retreats Board assessments are not evaluation scorecards or Board assessments are not self-executing. Once the grading sheets. There is no magic formula for a board assessment surfaces and identifies issues of concern, it’s (or committee) assessment. The objective is to elicit time for the board retreat. The retreat becomes a venue for each board member’s candid views about how the board group discussion of the assessment results and formulation operates and its effectiveness as a group. The assessments/ of action plans by which disagreement and disputes can evaluations vary greatly in scope and purpose. They can be resolved. focus on anything from board practices and processes to the performance of each director.6 Board retreats focus on important matters in a setting that does not have the time pressures or other distractions Typically, the assessment involves either a written survey involved in regular board meetings with their typically or a confidential interview of each board member, often lengthy agendas. Generally, participants identify common conducted by the chair, lead director, or an external advisor. concerns early in the process. With a clear focus on the Regardless of the format, the key to a successful evaluation corporate vision and mission, they analyze options, is to create an environment in which respondents will be prioritize interests, and formulate strategies. The outcomes candid. They must be assured that their responses cannot include agreements on future priorities and increased focus be attributed to them and that they will not be personally within the board. (See Figure 5.1.) embarrassed in front of the whole board by what anyone else in the group may say about them. Some boards prefer to have the chair or a trusted member of management to conduct the retreat. The problem with this The evaluation must be followed by a report to the full approach, of course, is that the facilitator’s preferences are board and, when appropriate, to individual directors. known to members of the board, discouraging innovation If something is revealed that could be personally and candor. embarrassing, only the person who is the object of such a comment should be shown the comment. To help make board retreats more effective, the board can call on an external expert or facilitator. This neutral People have a natural inclination to resist evaluation. or impartial third party brings objectivity to the process, One technique for reducing this resistance is to recast giving all participants assurances that the proceedings are assessments as performance improvement plans. These plans not skewed for or against one position or another. This emphasize that the objective of the exercise is to improve can be a welcome change from regular board meetings. performance rather than to criticize performance or For example, if one or two strong personalities are allowed behavior. Treating reviews as a forward-looking planning to dominate on the board, a good facilitator may ensure process, rather than a backward-looking critique, may that dissenting opinions are at least fully heard during invite a more goal-oriented and positive attitude toward assessments and retreats. the process. A skillful facilitator can identify, with the full group’s affirmation, issues in dispute and issues that have been resolved. This process permits a collaborative resolution to matters in dispute. As points are resolved, a written record memorializes the consensus derived. 6 See Elise Walton, “Leveraging Board Assessment for Sustained Performance,” Private Sector Opinion Series (Washington, D.C.: IFC Corporate Governance Group, 2014). http://tinyurl.com/otrh6yu. 20 Preventing and Managing Boardroom Disputes Figure 5.1: Board Retreats Retreats provide regular venues for problem solving and strategic planning. The board’s strategic planning process typically includes the five phases shown below. Envisioning a Future State Strengths and Evaluation Gaps Analysis Operational Strategy Implementation Formulation Source: Adapted from Global Corporate Governance Forum, Corporate Governance Board Leadership Training Resources, Part 3, Module 1. “Strategic Leadership” (Washington, D.C.: IFC, 2008). Preventing and Managing Boardroom Disputes 21 6 APPLY DISPUTE RESOLUTION SKILLS AND TECHNIQUES Dispute resolution techniques, borrowed from negotiation Even strong boards may encounter disputes from time to and mediation, can help create the desired collegial time. Throughout a dispute cycle, certain interpersonal environment—to encourage discussion, debate, and the skills and expertise can help board directors engage each free flow of ideas. They also can help boards develop other constructively and manage tensions. Chief among an orderly process for decision making and consensus these skills are effective communication, respect for formation on specific issues the board has to contend cultural sensitivities, consensus building, managing with, which in turn improves the board’s all-around emotions, and constructive disagreement. The rest of performance. this section examines each of those skills. Typically, the chair (or lead director)—being particularly attuned to board relations—is expected to mediate between Communicating Effectively disputing directors. But sometimes other directors who have a collaborative conflict-management style may draw One of the biggest communication mistakes—on boards on mediation techniques (perhaps without being aware of and in general—is to assume that we know how others doing so) to find common ground. Such peacemakers will receive what we are trying to communicate. People exposed ask questions, listen attentively, and encourage parties to to the same information can end up with completely resolve differences. different impressions and ideas. This is why the process of perception—how people receive, organize, interpret, Ultimately, however, the board is collectively responsible and retain information transmitted to them from another for managing disputes in a timely, constructive manner. person—can be a key obstacle, especially in multicultural So all directors should be able to strengthen the board’s environments, which modern boards increasingly are. corporate governance through dispute resolution practices. Table 6.1 contrasts the behaviors of people with or without Communication also suffers when the hearers (or readers) skills in conflict resolution. And Figure 6.1 provides a tend to fill in any information gaps with something quick look at some of the interpersonal skills that help they already know. This process of closure, or aversion directors strengthen a board. to ambiguity, fills the void with familiar concepts or information, even if that information is neither relevant 22 Preventing and Managing Boardroom Disputes Table 6.1: Conflict Resolution Skills Ladder UNSKILLED INDIVIDUAL CONFLICT SKILLED INDIVIDUAL • Inflexible CAN NEGOTIATE A • Flexible • Personal needs dominate WIN-WIN SOLUTION • Open-minded 6 • Tries to use power to dominate • Assertive to look after personal (through aggression) or to withdraw interests to engage sympathy • Limited to “fight or flight” options CAN GENERATE • Generates a variety of options • Focuses exclusively on own interests VARIOUS SOLUTIONS • Finds options that include both 5 • Argues for a position (which can be parties’ interests disguised as interests) • Unaware of others’ feelings CAN EMPATHIZE/ • Accurately reads others’ • Cannot read feelings accurately TAKE PERSPECTIVE emotions 4 • Cannot “hear” the other person’s • Responds sensitively and interests appropriately • Sees the other as “bad guy” • Listens to others’ interests • Believes empathy means • Knows the difference between agreement/weakness empathy and agreement • Only expresses own position CAN IDENTIFY AND • Knows the difference between (advocated solution) EXPRESS OWN INTERESTS positions and interests 3 • Expresses own interests regarding wants/needs/fears/ concerns • Cannot verbalize own thoughts and CAN VERBALLY EXPRESS OWN • Has a large feelings vocabulary feelings THOUGHTS AND FEELINGS • Can identify own thoughts and 2 • Unaware of own thoughts and feelings feelings (blames others) • Can experience emotion without losing control • Cannot contain/manage emotion CAN CONTAIN/MANAGE • Can experience emotion • Yells, screams, fights, dissolves into STRONG EMOTIONS without losing control 1 tears, withdraws Source: Adapted from: M. Trinder and E. Wertheim, “Training Teachers in Building Empathy and Compassion in Young People” in M. Kostanski (Ed.) Proceedings of the Victorian Branch Australian Psychological Society Annual Conference (2005). Available at: http://www.latrobe.edu.au/psy/research/eris/. Preventing and Managing Boardroom Disputes 23 Figure 6.1: Important Interpersonal Skills INTERPERSONAL SKILLS LEADERSHIP NETWORKING Monitoring Self Confidence Decision-making Network Building Delegation Effective Motivating Others Communication TEAMWORK Monitoring Groupwork Decision Making Delegation Collaboration Source: University of Sydney. Available at: http://www.sydney.edu.au nor correct. This is why effective communication skills minimal verbal prompts, reflection of feelings, paraphrasing involve more than just imparting information. and summarizing, and careful use of questions. Communicating well starts with “active listening.” Good These skills might sound easy, but in reality their communicators are good listeners. Being attentive and appropriate application requires careful observation, good receptive to others’ views helps ensure collaborative, judgment, and excellent timing. Mastering these skills two-way communication. The process of active listening requires extensive training and practice—they constitute requires a range of skills: observing and understanding the core of the joint IFC-CEDR training program for others’ nonverbal communication, awareness and use of directors on managing disputes and difficult conversations your own nonverbal signals, appropriate use of silence and on the board. However, directors can start practicing some 24 Preventing and Managing Boardroom Disputes elements of those skills—such as paraphrasing, reframing, be rejected on principle, but an expression of regret summarizing, and questioning—on their own. may be acceptable. • Paraphrasing is briefly stating in your own words Here are some examples of reframing: the essence of what you think someone has just said. Here are some examples of phrases that introduce a Speaker: He’s a liar and a cheat. paraphrase: Listener: So you feel misled, and it’s hard for you to trust him. So what you’re saying is. . . Speaker: I assess that I have a 75 percent chance of What happened was. . . losing. Listener:  So you have a 25 percent chance of winning? You are telling me that. . . Speaker: They write very poor reports. A paraphrase should be nonjudgmental and should not Listener: So you want the reports done differently in introduce interpretations or your own thoughts. Nor the future? should it just repeat verbatim what the person said. Here are some uses of paraphrasing: • Summarizing draws together the main threads of what a person has said. For example, a summary is –– To check to be sure you have accurately understood what was said. This helps prevent (or correct) useful for clarifying a lengthy or elaborate explanation, miscommunication and false assumptions. checking progress before moving on, or identifying an underlying theme that may provide new insights. The –– To show that you recognize, acknowledge, and accept summary should not be the listener’s interpretation of the thoughts of the other person without making a what has been said, but rather it should draw on the judgment about what you think you have heard. other person’s own words and be recognizable to the –– To help defuse anger and cool down a crisis. speaker as an accurate account. When summarizing, it is important to allow the other party to correct or add –– To help you remember what has been said. to the summary. –– To provide an opportunity for the other person to hear his or her own message more clearly. This The following are some of the benefits of summarizing: can lead to further exploration and, often, the –– A summary shows that you have been listening development of a fresh appreciation of the issue. attentively and want to understand what the other person thinks and feels about the situation. • Reframingchanges the words used or the way ideas are presented—to cast them in a different light. It offers a –– It allows you to check your perception of the new and more positive view of the situation. Reframing situation and clarify what you think you have heard. can take several forms: –– It may connect confused and fragmented thoughts and feelings and bring some order to them and avert –– Taking the sting out of language—detoxifying or depersonalizing it; any ambiguity. –– Interpreting actions from a different perspective— –– It gives feedback to all parties about what they have for example, focusing on what is needed for the said, and it can alert them to an interpretation of future rather than what has not worked in the past; conflicting or contradictory thoughts, feelings, and ideas. –– Presenting claims or proposals in a different way— to make them more palatable; or –– Summarizing is a way to focus on particular issues and can help the parties begin making decisions –– Rewording demands made by one party of about priorities, what needs to be tackled first, or what another—for example, the idea of apologizing may concessions or proposals they are prepared to make. Preventing and Managing Boardroom Disputes 25 Summarizing is an especially useful skill for the board affiliations, such as religion, ethnicity, class, and voluntary chair. Being able to summarize the discussion, and and professional organizations. decision agreed if applicable, helps move it forward. A board that includes talented directors with varied • Use of questionsis a tool that must be applied sensitively. technical, ethnic, social, and cultural backgrounds is Different forms of questions will be appropriate at more likely to question assumptions and to weigh various different times. For instance, open-ended questions consequences, leading ultimately to more far-sighted (“What do you think about. . .” “Tell me more about. decisions. However, although diversity on the board is . .”) encourage a meaningful, extended response. On an asset, it can also lead to more frequent disagreements, the other hand, closed-ended questions (requiring or which may be deepened by cultural differences. allowing for a one-word or yes-or-no reply) may have the effect of limiting or “leading” the discussion. Cultural skills are heavily dependent on keen observation and sensitivity to colleagues’ perceptions of respect. Careful framing of a question is important, for During board meetings, for example, some directors may questions can: be time-conscious, efficient, and task-oriented; for them, time management is an element of professionalism. Other –– encourage a party to talk, directors may place higher value on board hospitality and –– show empathy and support. relationships; for them, strong emphasis on board tasks and efficiency is uncultured and disrespectful. But questions can also: The most difficult cultural differences to overcome are not –– indicate partiality, judgment, criticism, about behaviors, such as whether to shake hands, but rather –– seem prying or irrelevant, about issues related to shared and enduring values and –– become an interrogation. beliefs associated with a particular group or community. Board directors, and especially chairs and lead directors, Timing and context are also important in the use should be cognizant that cultural differences may become of questions. In deciding when and how to ask obstacles to agreement. They should be alert to any signs questions, you need to take into account the listener’s of one group imposing its values or beliefs on the board— level of trust. For example, questions that are probing as well as any hint of cultural superiority or disrespect, and challenging would not be appropriate right away, especially toward minority groups. before a party is ready to trust you with that level of information or exposure. Open-ended questions are particularly useful in the exploration phase. Closed- Building Consensus ended questions are more appropriate when checking and summarizing and in the later stages. Hypothetical For a company to function properly, the board needs questions can be used at any stage for trying out to be effective in resolving issues and making decisions. ideas. Chairs and lead directors must ensure that the board performs these actions well. More and more boards are reaching decisions through consensus, a voluntary Respecting Cultural Sensitivities agreement following the deliberation and synthesis of different propositions. Generally, consensual decisions Culture can be defined as a set of learned beliefs and are less divisive than voting, which requires directors to behaviors that shape the ways individuals and groups take opposing yes-or-no positions. However, the consensus view and experience the world. All people—including process tends to take more time than voting. directors—bring to their social encounters unique worldviews, local perspectives, and behaviors shaped by Consensus building should not be confused with groupthink, the culture of their origin. These views and behaviors where directors follow the general trend of thought without are learned in childhood and evolve through various questioning decisions. Consensus building is about working 26 Preventing and Managing Boardroom Disputes with directors who hold opposing positions at the outset—and fiduciary responsibility to act in the best interests of the helping them come to a mutually beneficial and sometimes company and its shareholders. Here are five tips for positively innovative agreement. As the poet Ralph Waldo Emerson influencing the emotional climate during a conflict:7 once wrote: “Do not go where the path may lead; go instead where there is no path and leave a trail.” • Show appreciation for all parties.Demonstrate an understanding for others’ positions and recognize the Of course, consensus building requires the good value of what they think, feel, or do. This does not communication skills described above. It also requires mean that we have to agree with their position. the following: • Create a bond. Share information about common • Bringing issues to the surface; interests and ask others about personal aspects of their • Analyzing and finding patterns for organizing the work or life. information; • Respect the parties’ autonomy. People like to make • Generating alternative solutions; independent decisions. Give others the space to express their views. Talking too much, for example, can • Prioritizing options, using a cost/benefit assessment; and threaten the autonomy of others. • Reaching agreements that include contingencies—and results that can be monitored. • Acknowledge the other party’s status. Status helps clarify a person’s position relative to the others. Consensus building can occur outside the confines of board meetings—in retreats, executive sessions, and • Highlight the other party’s role. Board directors each other less structured settings. The chair (or lead director play an important role. Each role must have substance, or board member who acts as a peacemaker) may need to and the directors must be respected for their roles. work behind the scenes and organize private meetings to find common ground on contentious issues. This requires time and commitment. Disagreeing Constructively At times, a board director has a serious concern about a Managing Emotions board decision or the standards on which the decision was made. Constructive dissent is the ability to challenge the Emotions are intrinsic to conflict although not readily majority view in a useful way. This skill can help prevent apparent—especially in the boardroom. In conflict, or limit groupthink, which precludes dissent and sound emotions are frequently translated into something more decision making. The risk when someone challenges acceptable, such as making judgmental statements (“you groupthink is that the majority will be critical and try to are mistaken”), attributing intentions to others (“you silence or pressure the “outlier” to conform. refused to disclose this information to me”), or serving up solutions (“this is what needs to be done”). Directors need Disagreeing constructively requires courage and effective to be aware of any biases. Strong analytical skills and the assertion. Various methods are used to pressure someone ability to isolate emotional issues from substantive ones are into agreement, including discounting expertise or using essential in any business role, but are particularly critical in such statements as “be a team player.” Directors sometimes resolving disputes. compromise their values and professional standards to maintain friendly, cohesive relations within the dominant Yet in many cases the solution to a conflict will be difficult group. The easiest response to groupthink pressure is to fall without acknowledgement of the feelings in play. This doesn’t silent, hoping that another director will take a leadership mean that directors should be “emotional.” But solutions to role in addressing the issue. disputes require communicating feelings—in a professional manner—before refocusing the discussion on the directors’ 7 Roger Fisher and Daniel Shapiro, Beyond Reason: Using Emotions as You Negotiate (New York: Penguin Books, 2005). Preventing and Managing Boardroom Disputes 27 A clear understanding of corporate governance • Provide clear examples. responsibilities (and liabilities) will strengthen a director’s resolve in challenging the board’s majority opinion. The • Demonstrate active listening. corporate secretary’s documentation of dissent during board meetings provides procedural support for directors Respond with constructive feedback recognizing the valid who dissent, as there is a record of the topic, the risks contributions and views of others (but reaching a different identified, and the board’s responses. conclusion on the matter in question). Constructive dissent is most effective when proposed with Preparation may also include talking with the chair in careful preparation. A director is more likely to gain serious advance of the meeting to avoid surprises. If a director attention when presenting information with confidence raises a concern, complete with substantiating information using facts, examples, comparisons, and risk assessments. and evidence of risk, and the board does not respond, a The corporate secretary is a vital resource for guidance in director may ask for an expert’s assistance, seek a mediator, procedural matters, regulations, and precedents. Effective or, if warranted, resign from the board. approaches for challenging a majority view include the following: This section has looked at dispute resolution skills from several angles. Box 6.1 provides a brief review of the • Offer a concise statement of concern and interpersonal skills needed on the board. And Box 6.2 counter proposal. offers a summary of techniques for defusing disputes in • Offer factual support. the boardroom. Box 6.1: Assessing the Board’s Interpersonal Skills Board retreats provide opportunities to assess individual and collective interpersonal skills and expertise that improve governance practices and help manage disputes. The set of questions below can serve as a guideline to assess those skills: • Are the board directors effective communicators? • What are their strengths and weaknesses? • Are board discussions focused yet sufficiently open to encourage a broad range of viewpoints? • Are there opportunities for individual board members to make presentations and lead discussions, particularly the ones on issues relevant to their committee responsibilities and areas of expertise? • Does the chair balance the extroverts and introverts to ensure open participation in board deliberations? • Do board directors relate well to one another and to senior management? If not, what are the problems and their sources? • Are social, cultural, political, economic, or personal factors creating tensions among board members and senior management? • Have tensions among directors obstructed the board’s ability to function? If so, why? • What steps has the board taken to defuse personal animosities among board directors? • Does the process that the chair or lead director uses to consider issues provide opportunities for reflection, analysis, debate, and consensus building? 28 Preventing and Managing Boardroom Disputes Box 6.2: Techniques for Defusing Disputes in Boardrooms • Listen actively. As people communicate, pay close attention and demonstrate genuine interest by asking questions, summarizing key points, and linking relevant ideas and experiences. • Use open-ended questions. Ask questions that require more than yes-or-no answers. Open-ended questions encourage speakers to reveal their concerns and interests. Such questions usually begin with who, why, what, how, when, or where. • Clarify reasons. Encourage cooperation by clarifying shared goals and confirming objectives. Do this early in meeting discussions. • Be aware of body language. Show your interest and desire to communicate through friendly, open, and attentive facial expressions and posture. Notice others’ body language. • Speak on behalf of yourself. Use “I” statements, so listeners understand that you are not making universal statements but only expressing your own opinions, sharing personal observations, and offering alternatives. Others may have different experiences, perceptions, and ideas. Phrases that demonstrate respect for differences include I noticed, I suggest, or from my experience. • Recognize others’ positive ideas through constructive feedback, and explain why their proposals are useful. If more helpful contributions are needed, be specific in your requests. Ask for practical suggestions to improve specific situations. • Stay calm as you work professionally and diplomatically to defuse tension. At times, others will discount the value of your ideas, no matter how carefully you phrase your thoughts. People become defensive for many reasons, including circumstances beyond your control. When that happens, acknowledge and respect the different views. You have offered your perspective based on your experiences. Offer to meet at another time, when emotions have cooled, to continue the discussion. • Avoid misunderstanding. Paraphrase other board members’ statements to ensure proper understanding of their position. Allow them to acknowledge that your summary of their remarks is correct. • Allow others to “save face” by reframing their statements in less confrontational terms to unlock disputes. Saving face is especially important in some cultures; but generally speaking, no one likes to be publicly embarrassed—especially in the boardroom. To save face, directors may take a defensive position, although they actually don’t oppose a decision. Preventing and Managing Boardroom Disputes 29 7 INCORPORATE ALTERNATIVE DISPUTE RESOLUTION INTO THE COMPANY’S CULTURE AND PRACTICES Disputes will arise. Preparing in advance for dispute corporate governance arena, the question also breaks down resolution is an essential board responsibility, so it is an as to policies for internal versus external disputes. Can the important governance duty for the board to ask: Do we same policy apply to both? Although the board may be have an adequate mechanism in place to prevent and involved in both categories of disputes, it may determine resolve disputes? that, for business or tactical reasons, external disputes should be treated differently from internal ones. The parties to a business relationship, at the time they enter into that relationship, should always address the subject of Benefits of ADR for Resolving Corporate Governance how they are going to handle any problems or disputes that Disputes may arise between them. At this point, they have a unique opportunity to exercise rational control over any disagreements ADR is a framework of voluntary and amicable procedures that may arise, by specifying that any disagreements be for resolving corporate governance disputes more quickly processed in a way that is likely to avoid litigation, preferably and at less cost than by using traditional court litigation. It by agreeing on a dispute resolution “system” that will first may take several years for complaints to be resolved through seek to prevent problems and disputes, and, next, establish a litigation, and courts may lack expertise in corporate process for resolution of any disputes. governance or be overwhelmed with their caseloads.  – James Groton, Most importantly, there is overwhelming evidence, dispute resolution consultant including from the IFC-CEDR survey, that boards and arbitrator strongly dislike resorting to litigation to resolve their differences. Adversarial litigation can be highly damaging The board’s approach to disputes should reflect the to the company’s performance, reputation, and value. company’s culture as well as more tactical considerations By contrast, ADR allows for private and even amicable as to what works best in particular circumstances. In the proceedings. Disputants assume greater ownership of 30 Preventing and Managing Boardroom Disputes the way the dispute is considered and settled, since they an agreement by consensus, and the agreement may be actively drive the process. They also may stand a greater enforced as a contract. chance of continuing their business relations with one another after the ADR process is completed, because the • Arbitration is a proceeding voluntarily chosen conflict’s intensity tends to be less adversarial than in by parties who want the settlement of a dispute court cases and outcomes can be a “win” for both sides. determined by an impartial arbitrator of their own ADR procedures include negotiation, mediation, and mutual selection. The parties agree in advance that arbitration. (See Figure 7.1.) the arbitrator’s decision, based on the case merits, will be final and binding. If the parties choose nonbinding • Negotiation is an interactive process in which two or arbitration, they retain the right to bring a claim before more parties with differing interests seek to agree to a the court. better outcome or solution than a party could take on its own. On the other hand, litigation is a legal or judicial process that may be appropriate when there is a question regarding • Mediationis a voluntary, confidential process in which the proper application of the law. Decisions are imposed a respected impartial third party (mediator) actively and are supported by law and reasoned opinion. Those helps the disputing parties work toward a negotiated decisions may be appealed in court. (See Table 7.1.) agreement. The parties in mediation craft the terms of Figure 7.1: Alternative Dispute Resolution ADR Nonbinding (Interests) + Confidential Binding (Rights) Negotiation Mediation Arbitration Litigation Facilitated Deliberations Mediator Less Time and Resources More More Party Control/Flexibility Less Adapted from: Alternative Dispute Resolution Manual: Implementing Commercial Mediation by Lukasz Rozdeiczer and Alejandro Alvarez de la Campa. (Washington, D.C.: IFC, 2006) Preventing and Managing Boardroom Disputes 31 Table 7.1: Comparing Mediation, Arbitration, and Litigation MEDIATION ARBITRATION LITIGATION Mediator Arbitrator Judge Selected by parties Selected by parties Imposed decision maker • Informal • Formal and legal • Legal, with rigid rules • Voluntary • Voluntary • Involuntary Private Private Public Outcome: Outcome: Outcome: Mutually acceptable agreement Imposed decision, supported by Imposed decision, supported by law and reasoned opinion reasoned opinion Mediation is the most common ADR technique. It is • Flexibility: The parties can decide on the type of about mending fences and finding a constructive approach mediation and how to set up the procedure, including to conflict resolution—an approach that brings to the the timing and the location. surface issues of mutual concern, reviews the various angles of the issue at stake, and allows the conflict to be • Confidentiality: Parties can disclose only what they used as a learning tool and as a basis for improved relations wish to. The content of the mediation and information among the parties. Mediation enables parties to resume, exchanged usually remains confidential, and not or sometimes to begin, negotiations to agree to solutions generally a matter of public record, but the parties may based on interests, not positions, and to implement and agree to disclose the agreement. monitor agreements. It has the following benefits: • Limited risk:Parties do not have to settle, and they Transaction costs are considerably lower than • Cost:  have the option to seek another form of dispute those of adjudication. resolution, including a court decision. • Speed:The process can start as soon as the parties agree • Liability: It doesn’t have to be admitted to reach to mediation. This rarely takes more than a few days. a settlement. Experienced mediators estimate that even complex corporate governance cases take a maximum of five • Enforceability: While the process is nonbinding, the days to resolve. outcome may be enforced as a contract or registered as a consent judgment. • Quality: Mediators can be selected according to their skills and field of expertise. • Voluntary:Unless required by a court, the parties do not have to go to mediation. In all cases, parties do not • Predictability: The decision cannot be imposed on have to settle. the parties. • Perspective: Parties can gain a more objective, • Control: The parties own the dispute and craft detached perspective on their positions before their its solution. views solidify and the battle lines are drawn (making 32 Preventing and Managing Boardroom Disputes a resolution more difficult to achieve). Further, the company’s dispute resolution. So the board should ensure parties’ circumstances may have changed from those that its skill profile includes the right mix of expertise prevailing when the conflict occurred, thus allowing and capabilities to manage corporate governance disputes for an interim assessment. properly, including one or two people who can act as a mediator if the need arises. Mediation is flexible and allows the parties to control both the process and the outcome of the dispute. The The best solution is to detect potential problems when they parties own their dispute and own the solution, and thus are small—and solve them before they become severe. In mediation fits the board environment particularly well. many situations, a board member can encourage and lead the board to articulate concerns and to press for early Who Should Manage the Dispute Resolution Process? resolution to a potential dispute while the level of intensity is still low. If a board has not yet developed that degree of The board needs to ask: Who should be in charge of peacemaking capacity, it can call on an external expert, managing and implementing dispute resolution strategy consultant, lawyer, or mediator to assist in applying and and policies? A board member, the chair, a board implementing the company’s governance dispute resolution committee, the CEO, or possibly a senior executive could strategy. Whether internal or external, the peacemaker assume this responsibility. Once the strategy is developed, should have the mix of skills listed in Table 7.2. it is important to identify who can assume the role of peacemaker/mediator for different types of conflict that are likely to arise. Not everyone is a talented peacemaker, is trained in dispute resolution skills, or is willing to take a leading role in the Table 7.2: Peacemaker Skills Mix DISPUTE RESOLUTION SKILLS CORPORATE GOVERNANCE SKILLS • Impartial, independent • No vested interests • Diligent, discrete • Knowledge of corporate governance framework • Responsible, patient • Knowledge of corporate governance • Trusted best practices • Active listener • Respected • Nonjudgmental • Strategic • Consensus builder • Leadership • Understanding of the dynamics of • Board experience disputes, resolution approaches • Understanding of issues in dispute Preventing and Managing Boardroom Disputes 33 Key to choosing between an internal or an external An external, impartial dispute resolution expert can be corporate governance peacemaker is determining who especially desirable to mediate or help settle disputes would provide the highest level of trust and comfort to all between the board and external stakeholders. No matter the parties involved in the dispute: how well-intentioned or objective a board director may be, it is unlikely that external stakeholders would fully –chair, independent director, • Internal peacemakers trust that person, precisely because he or she is a board corporate secretary, or an ombudsman: Directors prefer member and possibly part of the problem. handling their disputes behind closed doors. From within the company, those who are in the best position Helpful Documents to handle corporate governance disputes are the board chair and the chairs of board committees. The board A number of the basic documents of a company can be chair is naturally positioned to build consensus, prevent used to install ADR processes and techniques.8 Some may conflicts, and ensure proper resolution of disputes. not be appropriate to a particular corporation or business situation. All must be consistent with legal requirements of In their leadership roles, these potential internal a particular country or jurisdiction under whose laws the peacemakers are naturally expected to develop corporation is created or in whose domain it is situated; consensus on organizational principles and procedures therefore, they will be customized differently in different and apply discussion protocols. The responsibilities of jurisdictions and for different kinds of business. the nominating/governance committee chair make that person particularly well-positioned to create dispute When drafting the documents that affect corporate resolution structures, policies, and processes. governance, it is essential to this process to involve lawyers who understand governance issues, practices, • External peacemakers–negotiator, mediator, consultant, and procedures and who, at the same time, are expert in standing neutral, or an arbitrator : Even though they may corporate law matters. These professionals will be most have a strong peacemaker within their ranks, boards expert in helping anticipate the types of governance should also consider drawing on external professional disputes a particular company may be likely to face. Doing dispute resolution expertise. Beyond helping the board so guides the process of inserting ADR procedures and design an effective dispute resolution strategy and techniques early in the company’s life. Table 7.3 lists and related policies, independent third parties or dispute describes company documents that may lend themselves to resolution experts can help prevent or dissipate disputes ADR installation. by facilitating board discussions and retreats outside of standard board meetings. 8 This subsection is excerpted and adapted from an article by Alan Rudnick. It is copyrighted by Masters-Rudnick & Associates LLC, which has granted permission to IFC, its affiliates, and all who have completed the IFC training courses to reproduce all or part of this work on the condition that they provide proper attribution. 34 Preventing and Managing Boardroom Disputes Table 7.3: Documents that Support ADR Installation DOCUMENTATION THAT IS PART OF THE CREATION OF THE CORPORATION. Charter (called articles The charter is the baseline corporate document. It creates the company’s basic economic of incorporation in some structure, and it incorporates matters that are at the core of the corporate enterprise and jurisdictions) provisions provide protection for shareholder investments. If appropriate, the charter can contain provisions requiring mediation or arbitration. Depending on the law of the jurisdiction of incorporation, charters can also contain provisions as to the particular jurisdictional law that will be applied to dispute resolution, as well as the site of any litigation against the company. CAVEAT: Typically, charter provisions can only be changed by shareholder vote. Once a provision is in the charter, it is very difficult to amend it. Cautious lawyers often keep charter provisions to a minimum to ensure board flexibility as the enterprise develops. Bylaws Bylaws contain governance requirements that the board of directors itself determines. Bylaws can be changed by the board. They provide another place where binding procedures to be used in the event of a dispute are spelled out. Articles of incorporation can be drawn to permit shareholders to also change the bylaws; so while shareholder approval may not be required for a bylaw, shareholders can retain the right to do so. In some jurisdictions, the company law may give shareholders the right to make bylaw changes. Shareholder Agreements Often, the documents that create the corporation are accompanied by a separate agreement among shareholders. If the potential for dispute is high among various investors, a shareholder agreement can be a potent tool. It can also provide a useful procedural roadmap that makes clear for all disputants how matters will be resolved. GOVERNANCE DOCUMENTS THAT CAN HELP AVOID DISPUTES OR PROVIDE A PROCESS FOR RESOLVING THEM Statement of Corporate This document lays out governance principles and practices that apply to the company’s board Governance Principles of directors. It can easily include provisions regarding procedures to be taken when disputes arise. Debate and discussion is a positive attribute of a board. These debates typically are resolved through a vote. However, when differences of opinion continue, whether among directors, officers, or shareholders, this document can articulate the tone that disputes are to take, as well as how they are to be handled. Statement of Directors’ It is important and very helpful to articulate in advance exactly what duties directors have Responsibilities and what responsibilities each director is expected fulfill. This document, which can also be incorporated as part of the Statement of Corporate Governance Principles, can help set the tone for director conduct, including handling differences of opinion as they arise. This document should be shown to all prospective directors so they understand in advance what is expected of them and that their joining the board means they have agreed to its provisions. Committee Charters Committee charters articulate each committee’s jurisdiction and the specific responsibilities it must carry out during the course of a year. Questions of committee jurisdiction—such as which committee considers and decides certain issues—can be contentious. Charters remove uncertainty from this process. Board of Director Manuals Every board should have a manual that 1) pulls together all relevant governance documents, 2) spells out various company policies, and 3) answers practical questions that may arise for corporate directors, including questions about compensation and benefits. These manuals do not themselves resolve disputes, but they are quick-reference guides for what to do when matters become contentious. There is no reason why they cannot also include procedures for handling disputes. Along with the Statement of Directors’ Responsibilities, they should be shown to people before they join the board, and it should be made clear that their joining the board involves an agreement to the contents of the manual. Code of Conduct Every corporation should have a written code of conduct that articulates the ethical and operational culture of the company and its operating values. The code of conduct can include a provision that facilitates the resolution of disputes. Preventing and Managing Boardroom Disputes 35 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA Tel: +1 (202) 458 8097 cgsecretariat@ifc.org www.ifc.org/corporategovernance