Boards only operate effectively if they operate unanimously

Boards can’t operate effectively unless they make decisions unanimously (no effective board operates on majority vote decisions). However unanimous decision making doesn’t mean there isn’t serious debate and discussion.

Boards need to speak with one voice outside the boardroom. You can’t have dissentient voices coming out of a boardroom any more than a political party can have ministers expressing their own views outside cabinet. To speak with one voice the board must reach unanimous agreement.

A majority decision in the boardroom, as distinct from unanimity, is sub-optimal because it means that some people on the board are unhappy with the decision. If a director believes a decision is not in the best interests of the shareholders then they’re not able to discharge their duty to the shareholders. That is an untenable position.

Debate is healthy, dissent is not

Arriving at a unanimous decision doesn’t necessarily involve everybody sitting around the table nodding. A board full of ‘yes’ people is just as ineffective as one with habitual dissentients. To reach a unanimous decision you need to ensure that propositions coming before the board are properly tested.

The main function of the board is to apply appropriate discipline to the ideas that are brought before it. The board is the custodian of the balance sheet and they need to make sure that capital decisions are made in a professional and well-considered way. When an opportunity is brought to the board, it’s up to the board to determine if that opportunity is the best one for shareholders. The best way to determine this is to query critically whether:

1. the opportunity fits the company’s strategy,
2. whether it has been weighed against other opportunities (or doing nothing) and
3. the financial case supporting the proposal (including assumptions about, e.g. prices and costs).

The board should consider all the options and risks, and in response decide whether to say yes, no or request modifications to the proposal. As part of this process, it’s important for different views to be expressed and heard so that the board can find the best answer for shareholders. But it’s important to make a distinction between debate and dissent.

Debate is essential to good process. In a normal, well-functioning board, it’s perfectly satisfactory to end a board meeting with some unanswered questions, allowing more time for the unresolved points to be addressed and dealt with. If there’s real dissent about whether a proposal is good or bad for the company then there may be something wrong with the proposal – or the board may be factionalised. You have to work out which one is true and act accordingly.

The best interests of the company must be paramount

A factionalised board won’t work in the long run because a company needs a board that can make decisions unanimously and efficiently. If dissentient directors won’t back off then the board simply can’t function and it may implode or eventually need to be replaced.

To reach a unanimous decision each director needs to work out what the right course of action is and take it. That should never be impossible because the best action is the one that maximises shareholder value.

It is acceptable for a director who has tested a proposition closely from an initially sceptical stance to allow himself or herself to be persuaded by the other directors to vote in favour of the proposition. In the end, however, a director who cannot be persuaded that an important proposition supported by the majority is in the best interests fo the company must decide whether he or she should stay on the board or not. One occasionally sees a director asking that his or her dissent be minuted. That might be an acceptable solution for that diretcor and the board once but, if repeated, probably means that the board is dysfunctional in that there is no common view on how to define the long-term best interests of the company.

Whatever happens, when board members speak to stakeholders they must put forward one point of view and stand by the decision. If they’ve all voted unanimously for a decision they can do this without issue. This is essential to make sure the company can operate effectively.

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