It happens: relationships on a board can break down. Sometimes, they can be fixed; sometimes, differences linger and result in one or more of the directors leaving. Here are some thoughts.
1 Pretending the problem doesn’t exist might work but it probably won’t over the longer term – it depends what the problem is and the characters of those involved. A perceived slight (for instance, that a director hasn’t been given as much time to speak as other directors) can generally be addressed. A fundamental difference of view about a firm’s strategic direction would generally be harder to address.
2 Challenge by a NED shouldn’t result in conflict – two points are relevant here:
- Challenge should be polite but firm and there’s no need for bad manners.
- Regardless of how challenge is presented, it can sometimes be seen as breaking ranks, not being a team player or not toeing the party line. All boards should accept challenge; non-executive directors – particularly INEDs – should provide appropriate challenge to management and the Chair should foster a culture in which this is accepted.
3 Crisis situations can be a breeding ground for conflict – different views can emerge about the reasons for the crisis and/or how to address it. If there’s even a hint of blame or resentment, divisions can appear on the board and it’s essential to restore a solid working relationship.
4 The Chair of the board plays a crucial role in addressing any conflict – the Chair (ideally, supported by the senior independent director) should be the best-placed person to address perceived slights, resolve differences and restore a solid working relationship to the board. Any fundamental differences of view – linked to strategy, risk appetite, relationships with shareholders/investors or financial difficulties experienced by a firm – should be aired with a view to re-establishing a working relationship in spite of the differences.
5 The position is trickier where the Chair is one of the directors in conflict – the SID will generally need to play a part in trying to resolve difficulties.
6 It’s important to consider if there’s loss of confidence in a director as a result of the conflict – if the rest of the board loses confidence in a director (including the Chair) as a result of conflict on the board or how the conflict is handled, it might be appropriate for one or more of the directors involved to leave the board. And regulators don’t like to see a board in conflict.
7 A conflict on the board should be sorted quickly; it shouldn’t fester – in extreme cases, a board in conflict can lead to board paralysis; at the very least, it will be unpleasant and is likely to impact board effectiveness. If a conflict lingers, it might be appropriate for a director to leave the board but there should be considerable effort – by all involved – to put things right before that.
8 Firms should sort the problems themselves, rather than taking the problem to regulators – neither the PRA nor the FCA wants to be asked to sort problems for firms and this shouldn’t be an approach the board takes.
9 Depending on the extent of the problem, it might be appropriate to notify regulators about the issue – this might be necessary and I’ve seen cases where it’s happened, always setting out for regulators how the board will be dealing with this (usually, by one or more directors leaving the board).
10 Don’t get to a position where regulators tell the Chair there’s a problem – regulators telling a firm there’s an issue is never a comfortable place to be. It’s rare that matters would reach a stage where regulators direct a firm to sort the problem but I’ve seen regulators intervene where a board is no longer effective, including situations where the underlying issues involve a conflict, in some form, between directors.
11 A key test is whether the board remains effective – if it doesn’t, action will need to be taken. It will be important to have agreed criteria for what makes the particular board ‘effective’, bearing in mind that there’s a high chance of ‘X said; Y said’ conversations about what happened and who’s responsible
12 Consider whether everyone involved remains fit and proper and whether any senior manager or general conduct rules have been breached – these points all arise under the senior managers regime and the overlay it provides to wider corporate governance requirements.
This note is intended to provide general information about current and expected topics and perspectives that might be of interest. It does not provide or constitute, or purport to provide or constitute, advice relevant to any particular circumstances. Legal or other professional advice relevant to any particular circumstances should always be sought.