Why some boards fail in times of crisis

Corporate boards are often criticized for their perceived inaction and inertia when their organizations face crises. Despite having access to detailed information and decision-making resources, many boards struggle to intervene decisively and make the tough calls required to steer a company through turbulent times.

In this article, we examine the underlying preferences and dynamics that can inhibit boards, particularly in European and Scandinavian contexts, from fulfilling their critical oversight role during periods of heightened uncertainty and existential threat. Drawing on industry research and case studies, we explore factors such as risk aversion, information asymmetry, and power dynamics that conspire to create board paralysis when bold leadership is most needed.

By understanding the roots of this problem, corporate leaders and policymakers can work to reform board structures and cultures to ensure more excellent responsiveness and accountability when the next crisis strikes. Cultivating a more proactive and empowered board mindset is essential for safeguarding shareholder value and stakeholder interests.

THE CHALLENGE OF DECISIVE BOARD ACTION IN CRISES

Corporate crises come in many forms - financial distress, product failures, regulatory issues, reputational scandals, and more. In these moments of heightened uncertainty, the role of the board of directors is critical. As the ultimate stewards of the organization, boards are expected to provide strategic oversight, counsel executives, and make tough decisions to navigate the company through turbulent waters.

However, a common observation across European and Scandinavian markets is that boards often fail to live up to these expectations. Rather than stepping up as bold, decisive leaders, many boards are characterized by inertia and a reluctance to intervene, even when presented with clear signals that radical action is required.

THE ROOTS OF BOARD INERTIA: PREFERENCES THAT INHIBIT ACTION

Several interrelated preferences and dynamics within the boardroom can conspire to create an environment of paralysis and indecision when a crisis strikes.

Risk Aversion: Many directors, particularly those with long tenures or coming from more conservative business cultures, exhibit a strong aversion to risk. They may be reluctant to endorse bold, uncharted courses of action, fearing the potential for negative consequences that could jeopardize their reputations or the company's standing. This fear of the unknown can lead boards to default to the status quo, even when the greater risk lies in maintaining the problematic "business as usual" approach.

Information Asymmetry: Boards often rely on information and insights provided by management teams, creating an inherent information asymmetry. Executives may be inclined to downplay the severity of a crisis or rationalize their actions, making it difficult for directors to gain a clear, unvarnished understanding of the situation. Without independent, fact-based analysis, boards can struggle to make well-informed, objective decisions.

Power Dynamics: The CEO and other executive leaders typically wield significant influence over the board, either through their ability to control the information flow or through long-standing personal relationships with directors. This power dynamic can make it challenging for the board to effectively challenge and override management's preferences, even when the situation clearly calls for it.

Deference to Authority: Many board members, especially in hierarchical, consensus-oriented business cultures, may tend to defer to the perceived authority and expertise of the CEO and other senior leaders. This deferential mindset can inhibit directors from asserting their independent judgment and taking a more confrontational stance, even when the circumstances demand it.

Lack of Diversity: Homogeneous boards lacking in demographic, professional, and cognitive diversity may struggle to cultivate the range of perspectives and willingness to challenge the status quo that is essential for effective crisis response. A lack of dissenting voices and diverse viewpoints can contribute to groupthink and an inability to see the full scope of a crisis.

Institutional Factors: The legal and regulatory environment in which a board operates can also shape its preferences and behaviors. In some jurisdictions, for example, directors may face greater personal liability for decisions made in a crisis, creating a strong incentive to err on the side of caution. Institutional norms and expectations around the role of the board can further reinforce a culture of inaction.

OVERCOMING BOARD INERTIA: PATHWAYS TO MORE DECISIVE CRISIS LEADERSHIP

To address the problem of board inertia in times of crisis, a multipronged approach is required. This includes:

1. Fostering a Culture of Empowerment and Accountability: Boards must cultivate a culture that encourages active, independent oversight and a willingness to challenge management when necessary. Clear performance metrics and accountability mechanisms can help ensure directors fulfill their fiduciary duties.
2. Enhancing Board Diversity and Expertise: Boards should prioritize recruiting members with diverse backgrounds, experiences, and cognitive styles. This can help inject fresh perspectives and a greater appetite for risk-taking into the boardroom.
3. Improving Information Flows and Analysis: Boards should have access to independent, objective assessments of the organization's situation rather than relying solely on management-provided information. External advisory boards or crisis management experts can provide valuable insights.
4. Strengthening Director Training and Onboarding: Comprehensive director education programs, covering topics like crisis management and decision-making under uncertainty, can better equip board members to navigate difficult situations.
5. Aligning Incentives: Director compensation structures and liability frameworks should be designed to encourage proactive, risk-aware decision-making rather than incentivizing an overly cautious, status quo-preserving approach.
6. Regulatory Reforms: Policymakers may need to revisit corporate governance regulations and norms to ensure boards are empowered and compelled to fulfill their oversight duties, even in the face of intense pressure and uncertainty.

By addressing the root causes of board inertia, organizations can cultivate a more responsive, accountable, and resilient model of crisis leadership - one that safeguards shareholder value and stakeholder interests when the unexpected strikes.