Boards of directors are not immune to power dynamics. This carries great weight in determining board dynamics and consequently, the quality of the board’s decision-making. Board dynamics often work at the subconscious level and are impacted by board capital which is a combination of human and social capital. Human capital comprises the skills and knowledge of the board and their education and experience.

Social capital comprises directors’ life experience, their network of relationships, access to information that other directors do not have, and highly specialized skills not possessed by other members of the board.1

Some board members subconsciously defer to other directors due to the latter’s personal qualities, characteristics or reputation (referent power), expertise or knowledge in a particular area (expert power), or the seniority of a director on the board, namely the Chairman (legitimate power). In other words, they defer to directors whom they perceive as having more board capital than themselves. Consequently, board capital determines the ‘invisible’ ranking of directors on the board.

“When the impact of power dynamics on boards is not openly acknowledged, it affects the quality of decision-making.”

As with any other group, directors subconsciously internalize where they sit in the board’s power dynamics. Those with less board capital tend to engage in conscious attempts to gain approval and build relationships to enhance their position on the board, which could result in group-think. If there are several directors on the board with high board capital, the rest of the board members may align themselves to either one of those directors, resulting in sub-groups contesting for power on the board.

When the impact of power dynamics on boards is not openly acknowledged, it affects the quality of decision-making. Directors with lower board capital, and therefore less power, may not speak up if they have divergent views. They may also silence any doubts they have about certain decisions. This creates a cycle where directors with more board capital become more dominant by prematurely providing their views and dismissing doubts raised by directors who are perceived to have less board capital.2

As an example of the implications of board dynamics: Wells Fargo Chairman and CEO John Stumpf created a high-pressure sales culture that resulted in unethical sales practices and supported members of management who reinforced this culture. Various reports indicated that the board had been made aware of red flags (such as the dismissal of whistleblowers who reported the unethical practices) at least four years before legal action was taken against Wells Fargo by regulators.

However, the board chose to defer to Stumpf who had been acknowledged as one of the best bankers of his time, and accept his assurances that the unethical practices were anomalies and not widespread throughout the bank.3

Closer to home, the former Chairman of SRC International (a division of scandal-ridden 1MDB, which made a series of questionable investments) indicated that the board had approved decisions due to information provided by the CEO, Nik Faisal Ariff Kamil, whom they believed had close ties to former Prime Minister Datuk Seri Najib Abdul Razak. As advisor emeritus and Prime Minister, Datuk Seri Najib had the power to appoint and dismiss members of the board.4

In another case, the board of FGV Holdings, a government-linked company (GLC), comprising current and former very senior civil servants, agreed with the Chairman’s proposal to acquire non-core businesses which were not in any way beneficial to FGV Holdings, at exorbitant sums. The Chairman of FGV at that time was a Member of Parliament and senior member of the then-ruling party, UMNO.5 The proposed acquisitions fell through only because the CEO exposed them to the public.

In both these cases, it would appear that there was one board member perceived as having more board capital, and therefore more power than others, which influenced the rest of the board members to defer to him, instead of carrying out their fiduciary duties effectively.

Managing power dynamics

The first step towards managing power dynamics on boards is to acknowledge that it exists and to keep it at a minimal level. The Chairman should ensure that subject matter experts or persons of high stature are called upon last to provide their views. If the Chairman has much more board capital than other directors, he should not provide his views until all the other directors have had a chance to speak.

The Chairman should also provide a safe space for directors to ask questions or express their views. Providing a psychologically safe space will improve the robustness of board discussions and subsequently, the board’s decisions.

“The first step towards managing power dynamics on boards is to acknowledge that it exists.”

Another step is for Nominating Committees to be cognizant of power dynamics when appointing new directors. When conducting a board skills analysis and identifying gaps based on the company’s future strategy, Nominating Committees should go a step further and consider the candidates’ board capital and how this will impact board dynamics.

If the board is helmed by a dominant Chairman, the Nominating Committee should ensure that candidates’ board capital, taken together with other directors, is sufficient to balance that of the chairman. This is made easier if the Nominating Committee is headed by a senior independent director (SID) who possesses high board capital, and is one of the reasons why best practices in corporate governance recommend the appointment of a SID who should chair the Nominating Committee.

The power dynamics in owner-managed companies and GLCs which have appointed politicians or representatives of major shareholders as Chairman of the board needs to be addressed carefully. While the Malaysian Code on Corporate Governance discourages the appointment of politicians on boards of listed companies, this decision may be out of the hands of the Nominating Committee. The appointment of a SID or other directors with high board capital may provide a counter-balance to the power of the Chairman.

It is also important for incumbent directors to be conscious of the role that power dynamics plays in the quality of the board’s decision-making and to act accordingly to neutralize such power structures. Chairmen should not shy away from discussing power dynamics with newly appointed directors during their onboarding sessions. This will allow all directors to consciously monitor their behavior at board meetings.

Board diversity is another way of managing power dynamics on boards. Regulators and governance practitioners have recommended that boards have more diversity in terms of educational background, gender, culture, and age, among other things, on the grounds that diversity leads to better decision-making. Diversity affects existing power dynamics, as appointees tend to challenge the current power dynamics simply because they are unable to ‘read’ the informal power play in the boardroom.

However, the key to making diversity work is not merely to appoint directors from different backgrounds, but to ensure that there are sufficient numbers of such directors (at least 30%) with sufficient board capital to stand their ground.

Conclusion

The best board dynamics can be achieved when directors acknowledge that power dynamics play a role in the board’s interaction and decisions. If boards, especially Chairmen were to acknowledge and address this head-on, it will go a long way towards neutralizing power structures in boards.

References

1. Hillman, A. and Dalziel, J. (2003), ‘Boards of Directors and Firm Performance: Integrating Agency and Resource Dependency Perspectives’ Academy of Management Review 28(3) 383 – 396. 
2. Thuraisingham, M., Strong Board Dynamics Could Increase Effectiveness and Influence’ Australian Institute of Company Directors at https://aicd.companydirectorscom.au/membership/company-director-magazine/2019-back-editions/september/board-dynamics   
3. Hiltzik, M., ‘Wells Fargo Scandal Report Details Board of Directors’ Dereliction of Duty, but Gives Them a Pass’ Los Angeles Times, April 10, 2017; Egan, M., ‘Wells Fargo Scandal: Where was the Board? CNN Business, April 24, 2017; Veetikazhi, R. and Krishnan, G., ‘Wells Fargo: Fall from Great to Miserable: A Case Study on Corporate Governance Failures’, (2019) South Asian Journal of Business and Management Cases 8(1) 88 – 99. 
4. Izzul Ikram and Emir Zainul, ‘SRC Appeal: Najib was entrusted with dominion of RM4b, says Sithambaram’,  The Edge Markets, April 19, 2021 at https://www.theedgemarkets.com/article/src-appeal-najib-was-entrusted-dominion-over-rm4b-says-sithambaram  
5. Jose Barrock, Esther Lee and Adam Aziz, ‘FGV in Turmoil’, The Edge Markets, June 22, 2017 at https://maa.theedgemarkets.com/article/cover-story-fgv-turmoil