This is the Resolution, BoardOutlook's premier podcast, where we delve into the vital matters shaping the decisions of boards and executive teams. From navigating governance challenges to optimising board performance, we uncover the strategies and data-driven approaches driving success in the boardroom. Join us as we explore the critical issues facing today's leaders and chart the course towards informed decision-making and impactful resolutions.

In this podcast episode, the panelists Steve Pell, Tessa Bamford, Louise Pocock and Tania Cabrera discuss board evaluations and the dynamics of board culture. They highlight the critical role of the Chair in fostering an environment where directors feel comfortable challenging and contributing effectively. Tessa emphasises the importance of diverse perspectives on boards to avoid groupthink, particularly focusing on the need for diversity in cognitive styles and personalities, not just demographics. Louise underscores the necessity for more sophisticated board recruitment processes akin to those used for executive roles, suggesting that current methods are too simplistic.

Steve shares insights from recent board culture data, noting a significant gap between board and management perceptions, particularly regarding overestimating the probability of success and under-contributing directors. The discussion reveals that management often desires more engagement and constructive criticism from boards. They also touch on the importance of industry experience on boards, with Tessa noting that in the UK, industry experience is highly valued over professional backgrounds like banking or law.

The panel agrees that critical thinking and asking the right questions are vital skills for non-executive directors. They also discuss the growing inclusion of Chief People Officers on boards due to their comprehensive understanding of organisational dynamics and remuneration issues. The episode concludes with a consensus that regular feedback, particularly from Chairs to directors and vice versa, is essential for effective board functioning and culture.

Listen to the episode here or on Spotify, Apple Podcasts or Google Podcasts.

You can also read the full transcript below.

Access to the data referenced in the episode can be found here.

Podcast Transcription: Season 1, Episode 1

Steve: Hello, I’m Steve Pell, CEO at BoardOutlook. I’m joined here today for this fascinating discussion about board culture data by Louise Pocock, Client Partner at BoardOutlook, Tania Carbrea, our Managing Director of UK and Ireland, and Tessa Bamford, Senior Advisor to BoardOutlook and a director on UK FTSE100 boards. Welcome everyone.

Steve: We have some fascinating data to jump into today that goes to what’s perceived as the greatest risk factors to board culture. I’ll share some of the insights now, but I’d really encourage anyone that is listening, please jump into the show notes – you’ll find a link to this data to see it. What we’re looking at is the responses across 2023 to a question to a couple hundred boards that we work with at BoardOutlook: What are the greatest risk factors to your board’s culture moving forward?

Steve: And in the data we’re looking at, we can see that “overestimating probability of success” and “groupthink” were the two most selected options that came through, with about 25% of respondents on both, followed by “confirmation bias”, “some directors over contribute”, “some directors under contribute”, “overconfidence in the CEO”, “delaying decisions unnecessarily”, and “not enough trust in management” all falling between that 20 and 10% of respondents range. Some of the less selected options include “cliques on the board”, “sunk cost fallacy”, “the board being a cheerleader for management”, and “decisions driven by self-interest”. It really is fascinating to look at where people are perceiving the risk, and how consistent they are at that top end. Really excited to jump into this conversation. Perhaps if we start with “overestimating probability of success” and “groupthink” and why we see these as the really common risks that people have identified.

Tessa: I think the biggest risk to board culture is the Chair. Because the Chair is responsible for all this. And on our data it shows that groupthink is a key risk, which I would not disagree with at all, but how do you avoid groupthink? First, by having a really good board composition. And it's not just about diversity by box ticking. It's diversity in the truest sense of the word, which brings people with all different types of experience, whether that is sector, age, gender, function, or board experience. And whose responsibility is that? Ultimately, it's the Chair. And when you sit in the boardroom, it is for the Chair to really set the tone for the meetings and for the board as a whole, ensuring that everyone contributes. The data shows that some people over-contribute, some under-contribute. Again, it’s the Chair’s responsibility to make sure all members of the board are used as efficiently and as productively as possible.

And then I think the third reason that the Chair is super important in the whole aspect of board culture is that the key relationship in any company and any board is that between the Chair and the Chief Executive. If that works well, then you're going to get the right balance of relationship between the whole of the board, including the non-execs and the whole of the management team. And the relationship will be open and transparent. So those are the three factors that I would say are the best way to avoid groupthink, which comes up pretty high, and making sure that the board has the right culture for the company at the right time, because if you have the right tone from the top, the right culture, you will have the right debate. You will come to the right conclusions, which will end up with the right P&L responses, whatever, and the right outcomes for all stakeholders.

Steve: Tessa, my only perspective was that it is something that we think about and hear a lot that, in a way, a board performance review or board effectiveness review is really a Chair effectiveness review in so many aspects.

Tania: Absolutely. And I was going to say, Tessa, your point around the Chair and the CEO relationship, I mean, that has so much influence on how the rest of the board dynamics work, because when that relationship is either strained or there's a lack of trust or it's just not in the right place, it literally throws off the rest of the board. And I think that does become much more of a misalignment or a tension between the executive and the non-executive side of the table.

Tessa: I completely agree. There's a reason why chairs are paid four times as much as non-executive directors. They have a big responsibility. It's fundamental.

Steve: I'm just looking at this data and clearly it's showing groupthink and overestimating probability of success as the two top factors, with 25% of boards approximately identifying both of those as the greatest risk factors. It strikes me that overestimating probability of success is perhaps one that's come about more recently, that it might be a more recent factor here. Did anyone have any other perspectives on that? More self-awareness? That kind of perspective?

Louise: Yes. Look, I think that can sometimes arise due to optimism bias. And certainly in Australia, we do see boards from time to time underestimating risks and overestimating the probability of success due to a sort of can-do corporate culture and performance pressures. And I might add that there's also been, in Australia at least, a relatively uninterrupted run of economic prosperity over the last 30 years, and that really contributes to that optimism.

Tania: That's really interesting. I was just going to add, which might be a slightly left-sided view, but I think overestimating the probability of success seems to be happening time and time again. I was just thinking through some of our big corporate disasters throughout the financial crash over here in 2008 or more, not only over here. I think there was a lot of potentially overestimating our ambition of success. I mean, just thinking through like Tesla over here, and what had to happen in that case, because I think there was a lot of confidence that the CEO's pursuit of growth was warranted, and to all effect, I'm sure there were some sound elements to that, but clearly there was an overconfidence in how that was going to pan out.

Tessa: I think it's a mixture of maybe overconfidence or ignorance. Because if you look today versus ten years ago, the role of being a non-executive director is a lot more onerous, rightly so, because non-executive directors are expected to understand what's going on and to be able to contribute. Nobody is brilliant at everything, but if you have the right composition around the boardroom table, everyone should be collectively – and it is a team game – the board should be sufficiently knowledgeable to challenge the executive on all aspects of whatever is put in front of the board, hopefully constructively, so you can have a proper, open and transparent debate amongst everybody and no one goes away feeling offended. But I think if you look back to RBS, Carillion, and all those things ten years ago, they just had the wrong boards with people who were not qualified to understand properly the business. And I think today Chairs are much more conscious about having the right mix of people around the table so that you can have the right debate, so that actually there is a constructive debate going on and they do make the right decisions so that the probability of success is fairly gauged. I mean, no one's going to get everything right all the time, but I think that is one of the changes I've noticed over the last several years is that non-executive directors have much, much better inductions, so before they even hit the board they know much more about the business. They know much more about the people. They know much more about the market. They know much more about the strategy. So they come much better educated into the circumstances and the issues that are facing the board than they did in the past.

Tania: I find it really interesting because you're right. And I think there is so much more better process in place right now. But at the same time, what role does psychology play in behaviour? And I think in a boardroom dynamic where it's a closed room roundtable and there's almost all these levels of power at play, and I think human psychology kicks in and takes over. And sometimes leads to even the best, most diverse board reacting in ways that we find surprising.

Tessa: Again, it comes back to who's running the board. The CEO runs the business, but the Chair runs the board. And if you don't have the right Chair and you don't have a good Chair, you won't get good results.

Steve: Just on an interesting side piece here, Tania and Tessa, are you aware of the experiment that ASIC did down here, where they put a psychologist in the boardrooms in Australia? Top 50 or top 30? Anyway, they paid a psychologist to go and sit in these boardrooms to observe what was happening and the power dynamics at play. They went away and wrote up a big report. But what the board directors said as a result of this was that there were then two board meetings that were happening. There was a board meeting that happened when the psychologist was in the room, when everyone was on their best behaviour, and then another one when people went, "Ah, let's have the real board meeting over dinner" or whatever it was at that stage. So it was quite an interesting experiment.

Tessa: But that's where BoardOutlook and board evaluation can come in because a really good board evaluation will actually surface those types of issues.

Steve: It's just a really good example that every board evaluation, honestly, if you want it to be, people can play to an audience. It doesn’t matter if you have the best evaluator in the world, the best psychologist, the best judge, people can play to an audience. You either have to be intellectually honest or not. That’s the exercise.

Tessa: Completely. Funnily enough, I was talking to a UK Chair last week who's going through one of our board evaluations at the moment. And they said to me, having filled in, you know, all of the questionnaire, they said, "My God, this is really actually it's a board evaluation, but it's a me evaluation, at the end of the day." And they were fascinated. They're sitting on tenterhooks to see how the rest of the board responds and how the whole comes out as opposed to the individual. So we shall see. But that was a Chair who has a background in psychology. Um, but it was interesting that they very quickly got to that position. You know, "This is actually all about me doing a good job, isn't it?"

Louise: It's just interesting talking about, you know, the psychologists going in and forming assessments as to how the boards interact. One thing that struck me is that when we're talking about groupthink on boards, you immediately think about diversity as a potential antidote to groupthink. And in Australia, certainly, great strides have been made around gender diversity, with, I think, around 35% of ASX300 boards being women. Less progress has been made around cultural and ethnic diversity, less again around other differences like age and education and socioeconomic background. But when it comes to cognitive points of difference, like personality behaviours or attitudes, no one really is turning their mind to that in any kind of structured way. And that's where you get real diversity of thought on the board. And that's how you're avoiding that groupthink at the end of the day.

Tessa: I completely agree with you, Louise. And it always amazes me as a former search consultant who ran a boards practice – and maybe we were at fault as much as anyone – how simplistic board recruitment is in comparison to executive recruitment. An executive would never be recruited for a senior, you know, Xcom or board level role without going through all sorts of psychometric tests and proper evaluation. Whereas most non-executive directors currently and Chairs are picked on the basis of thorough and in-depth interviewing and referencing, but not much more to your point. And so I think the time has come for board recruitment to be professionalised, dare I say that? And I think with the new generation of Chairs coming up who've come up through the executive ranks and being used to being evaluated themselves, I think we will get a more scientific approach to board recruitment hopefully over the next few years.

Tania: So we were onboarding a FTSE100 company last week and the Company Secretary actually sort of said exactly that, Tessa. A couple of the execs that have joined the recent board meeting were contributing as to how their psychometric, their personalities of assessment had helped their discussions in the executive team and were sort of putting this across to the Chair who thought it was a fantastic idea for the board to go down in and alongside their board evaluation and traditional assessments, something that's more akin to a psychometric. And I think back to Louise's point, real diversity of thought and behaviour does massively come down to all of those personality traits that we learn and develop throughout our lives. So it's an interesting additional element, I think, to just throw in there.

Tessa: I think boards just need to think about what the word diversity means, and it does not mean just gender or ethnicity. It is a broad definition of all sorts. And Louise articulated the different aspects of diversity, which are all equally important, if you're going to get good boards and to avoid groupthink.

Steve: One point here that I think is quite interesting I think, as we talk about overestimating the probability of success, something that someone touched on a bit earlier, this idea of bringing through more industry experience onto boards and that that might be triggering some of this because it's giving instead of just the bankers and lawyers and accountants, we've got more industry experience to understand where the risks might sit. It does tie quite interesting to something that we see out of the skills matrix, where I think the greatest prioritised factor that we see boards putting on those composition assessments that are done is definitely industry experience. It's about 30, 37, 38% of boards, I think, are identifying that as the number one skill they need to add to the board being more industry experience. And I'm interested in what impact people think, if any, that might be having on this board culture data.

Tessa: I think in the UK, industry experience on boards has always been very important and actually UK boards have been less stuffed full of bankers and, you know, the like, and lawyers. And still to this day, you know, bankers and lawyers are very lowly represented on boards. So I think industry experience has always been greatly valued. And from the different functions within the industry. So you want people who've run P&Ls as well, but also people who've got experience from not conflicting but maybe tangential industries, experience of supply chain or experience of geographical expansion or experience of technical transformation or crisis management, because these are the people who've got real lived experience. Advisors spend their life, I'm an ex-advisor, so I can probably say it's spending their life advising but not doing. And so actually having people who've really been through it, I think, are by far the most helpful people on boards. And if you ask many CEOs which are the board directors they value the most, often they will be fellow CEOs who've had the experience, the holistic experience of running the whole show and have been through it themselves. But you can't have boards full of CEOs. And one of the problems about having, and this comes on to maybe a separate section, is currency, because currency is super important on boards. And traditionally, you know, you've had a few old people. Now experience is great, but you need people who are current with what's going on in the world now and where it's going in the future. And the problem is that day jobs are getting so much busier that it's more difficult for sitting executives to sit on boards as a non-executive, even doing one, and particularly for CEOs to sit on boards. So in the UK, you're seeing fewer CEOs sitting on boards as non-execs, even though they are often the most valuable non-execs on boards that they sit.

Tania: That's really interesting. Yeah, I think there's been an interesting addition to the boardroom recently of the HRD or the chief people person. I think everybody's taking a lot more stock of how important the consumer is. They've also now equally caught up with the voice of the employee. So I think having the people person come in there as an existing executive to lend their views to how the board can close.

Tessa: I think in the UK that's largely been led by remuneration because often the chief people person is the one who really is in the thick of things on remuneration. Remuneration is such a big issue in the UK. But what you need to get are the chief people officers or the CHROs who are really in that top troika. Because if you think about a corporate structure, actually the three key people at the top are the CEO who runs the business, the CFO who runs the numbers, and the CPO who runs all the people which make up the business. And you need really commercial CPOs and they are fantastically valuable on boards. I completely agree with you. If they're just personnel people, they're less valuable, and they're the type of people who will only be able to contribute on remuneration, which is not super helpful. Helpful, but not enough.

Steve: I'm just going to throw out some interesting data as some soundbites and see if anyone's got any different opinions or controversial ones. When we look at some of this board culture data and we see overestimating probability of success identified by nearly 35% of board respondents, but only about 10% of management respondents. It's a really big gap between that board and management perception, probably one of the largest. Does that surprise anyone? Has anyone got any controversial takes on that? Anything different to what we might expect?

Tessa: Well, I think that comes back to the comment I made earlier about boards not being sufficiently educated about the business, you know, the management of the people who are running the business and doing the work. And so therefore they're the people who should be the pragmatists and the realists.

Tania: I agree entirely. I mean, they work in the business every day. They are much closer to how they're performing, where they're at, you know, how close they are to being on track or off track with their strategic imperatives, etc.

Tessa: Although the gap is disappointingly, sadly wide.

Steve: I'd say it kind of implies a sense of lack of ownership from the board there, when really you can go in and get better data. You can dictate better quality of board papers or better oversight in terms of what you're not satisfied with. This is kind of niggling doubt without real substance to me, almost. I think it's just a little bit of ownership.

Tessa: But that comes down to confidence as a non-executive director, because one of the things that as a non-executive director, you really have to remember is it's in the title, you are non-executive and executive directors hate over-interfering non-execs who are trying to do their day job for them. So it's really important to strike the right balance between, as you say, Steve, having enough understanding about the business and knowing the questions to ask and what further data and information to ask for so that you can have a good debate and come up with the right answers versus over-interfering versus being completely non-executive, and am I bothered? There are eight other directors around the table, so what does my view matter? And again, it comes back to having a good Chair, making sure that the board as a whole covers all the bases.

Tania: I think there's a muscle that's often underused, and that's critical thinking, which can be a skill, almost an attribute and a behaviour. But the ability to think critically about all of the information that you're presented with really goes to then counter both the groupthink and the overestimating of success on behalf of the management. But having talked to lots of boards, I don't see that critical thinking piece comes through as much as it should or needs to. I mean, often people know that maybe the information is not quite in the right place, or the conversations aren't as productive as they need to be in the boardroom, but they don't necessarily hone in on, well, what are the questions actually, that I can be asking to really challenge this and to really get me comfortable and confident with what I need to know. I think that critical thinking piece could be better used.

Tessa: The art of being a good non-executive director is knowing how and when to ask the right questions. It's so important and it can make all the difference when it comes back to our overall theme about culture. Having sufficient critical thinking to ask the right question in the right way so that you actually get a constructive and proper answer rather than piss people off. And just so discontent within the management team who will feel defensive and feel they've been criticised, as opposed to actually, we're all in this together. As Steve says, collective ownership. Let's talk about it properly.

Louise: There's a fine line between encouraging an amicable culture and a lack of holding each other to account. And sometimes members, in their efforts to achieve consensus and develop a rapport, might lose sight of that real need to ask those hard questions and realistically appraise alternative ideas and options.

Tessa: I completely agree. And again, a good Chair will bring out people who are being a bit too sycophantic. One hopes.

Steve: I think just to call out some data points here that might prompt us even further down that train of thought. Two of the factors that were called out most across this data by management relative to board are directors under-contributing and not having enough trust in management. And I think it really does support just what we've been talking about there in terms of that whole conversation.

Tessa: Yeah, because a good management team actually welcomes a good board and constructive debate. And often you find in the feedback from board evaluations, the management replies are they wish that the board would be a bit more engaged, involved, criticise constructively, etc., etc. and that's often what you see, what the data shows, isn't it? So that didn't surprise me. And I think that the onus is on the non-execs to actually contribute properly.

Tania: And I think that rounds us back nicely, Tessa, to the point that you started out with, which is the role of the Chair in all of this is so critical. You know, and that regular individual director feedback, right? I think now the FRC has been a bit more explicit with the fact that that should be a regular thing, like an annual thing, because it's really important from a development perspective that there is that feedback loop and it goes from chair to non-exec, it goes from chair to exec. And it also goes the other way, from exec up. Then it's all about the open dialogue. And I think that open dialogue then fosters trust. It makes everybody feel more comfortable that they can challenge and voice whatever they're thinking, even if it's different from the rest of the group.

Steve: Well, maybe we're previewing a future episode here because it is easily the number one feedback point that is provided to Chairs from boards is more feedback to the director cohort. And it's not even close between number one and number two in terms of being the most frequently asked for piece of constructive feedback that goes to Chairs. So very interesting on that point, Tania.

Steve: Well, thank you so much for joining us, Tania, Tessa, and Louise. That was a great conversation. I'm looking forward to jumping in next time with some more of this really interesting data that we've got to dive into and obviously the perspectives across Australia, UK, and the rest of the world. Thank you so much. We'd love everyone to subscribe, share, follow whatever you'd like on your platform of choice, and we look forward to jumping back in again soon