Governance Bites #130: Power cliques on boards, with Dr John Peebles

Uncover the hidden dynamics of corporate boards with Dr John Peebles, an expert with a PhD in governance and extensive experience as a director and executive search specialist. In this episode, Mark Banicevich talks with Dr Peebles about ""Power Cliques on Boards,"" revealing how informal groups control decision-making outside the boardroom.
Learn why boards are not seamless units, the shocking prevalence of passive acceptance of agendas, and why transparency and a good process are more important than diversity metrics. Discover the key questions every Chair should be asking and the best governance advice for new directors. Tune in for essential insights into the real power structures governing your business.
Dr. John Peebles is a highly experienced board director, governance consultant, and executive search advisor. In 2008, he was named one of the 50 most influential search consultants in the world by Business Week. His extensive board experience includes current roles as Chairman of Premier Lifestyle Villages Limited and past roles as a Director for The Broadcasting Corporation of New Zealand.
Dr. Peebles holds a Doctorate in Business and Administration from Massey University. His doctoral research focused on corporate governance, specifically investigating who determines the board's agenda in New Zealand's public companies. He found that directors often passively accept established agenda-setting systems, and his study suggests that competence and transparent boardroom processes are more critical to good governance than factors such as director independence, age, or gender.
#PowerCliques, #BoardAgenda, #CorporateGovernance, #BoardofDirectors, #BoardDynamics, #DirectorTips, #BusinessLeadership, #AgendaSetting, #GoodGovernance, #Transparency, #GovernanceBites, #Governance

Transcript

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Hi, welcome to Governance Bites. My name's Mark Banicevich and today I have the absolute honour again of spending time with Dr. John Peebles. John, thank you very much for your time. John not only has his PhD [Doctor of Philosophy] in governance, which we're about to talk about in this topic on Power Cliques on Boards, but also is chairman or director on a number of companies, one healthcare company, he's involved with a waste management company, a number of other interests in the governance space, has got a book on governance which we covered in an earlier episode, called "Parsley on Fish". So, an absolute gem of knowledge when it comes to governance, and it's an absolute pleasure to spend time with you, John. Thank you very much. You're welcome. Thank you, Mark. Power Cliques on Boards. The concept here is that on a board of directors you have small groups that essentially control the agenda or control the decision making and it was the subject of John's PhD. My first question for you John is how did you come to do a PhD in governance? I really fell into it by accident. I'd finished off a master's degree and my wife watched me one day as I was trying to line up a couple of papers at Waikato University, in communications I think, just to keep a bit of educational stuff going and I thought I'd just do a couple of papers and she said,"What a waste of time," and the next thing I knew she had enrolled me for some course which ran into a PhD. And I got these papers from the university and I sort of put them on the right hand side of my desk which is where all the stuff that I don't want to tackle goes and I put it there and left it there and then I got a call from the Prof [Professor] in charge of the course who said, "You are coming on Saturday." And I said, "What do you mean am I coming?" He said, "You are coming to"our opening day, aren't you, for the PhD cohort process." And I said, "Well, I haven't enrolled." He said,"That's no problem. We'll fix that when you've been." So the next thing I know, I'm sitting with a gang of other guys and girls in a course at Waikato, and they obviously had nothing to do either. So there I was, hoisted into it almost by accident and once I'm in I hate leaving things unfinished so it became a really interesting exercise to get through even if it is a little trying at times. And a PhD, as probably people will tell you, is piled higher and deeper. And that's definitely what happens to you during the process - the paper just comes at you like there's no tomorrow. In fact the biggest problem is dumping it at the end of it because you're not allowed to get rid of it for so many years and then you have to take to the tip, believe me, because no one else wants to read it. So it was an interesting process to get into it. Once I got into it, I did get engaged in it. I think the key essential, if you're going to do a PhD, is you have to have at least one of the Profs who you can really relate to, both on a personal level and on a professional level. And I was very fortunate to have a guy I regard as one of the best strategic thinkers and a crossover between academic and commercial. And he was great, and every now and then when would get into a bit of a bind about something, he would say, "Just suck it and get on with it,"John, don't muck around." And so finally I managed to conquer it largely due to him, I suspect. That's not unheard of, I'm sure. How did you fit it in? You're a very busy man. Yes, I did. I fit it in with everything, but then I fit in my master's part-time, as well. Look, you just fit it in. The old saying if you give someone who's busy something he'll get it done for you, well that still holds, right. There was a lot of late hours burnt, a lot of reading, a lot of times when I'd be sitting locked up at the weekends in the office and the phone ringing I'd love to come out but my wife would say, "Just get back in there and get on with it sunshine," and so you just have to persevere. What was your Masters in? I did an MBA [Master of Business Administration] and I did that. And they don't like MBAs, so when you're going for a PhD, so I had to go through a postgraduate diploma of business research, and the key criteria they wanted was an A minus, at least in quantitative techniques. I had no intention of using quantitative techniques, I thought I'd do it in a qualitative way. And to finish, I actually finished up doing it in quantitative techniques, so it was probably just as well. Yes, absolutely. But I did it. What inspires you to focus on board agenda setting? I was actually, very interesting, I was looking at a couple of topics, quite different topics, and one of the Profs that I had in communication school in Massey [University] in Wellington said to me,"Look, I've got a guy coming up from the United States, and he wrote a book with a"guy called McCombs." He wrote a book with another man called Shaw [1972], and they had studied the agenda-setting process of the president. And they said, "Look, this is how much he can control,"and this is what goes on around him." The President of the United States? Yeah. And they were talking about how the control that the President has is getting filtered into a narrower and narrower channel. And all the other things that impact on it. And I got into this, and I looked at it, and I had the chance to meet this man when he was here, and, of course, I read a lot about his stuff. And I thought, "Gee, that's really interesting." He's saying these people control the agenda, so the question I've got is who controls the board agenda? So that was where it really started from. And I started looking at where that control lay. Right. How did you access boards and directors for the research? Did you have any challenges? No problem, I'd appointed many of them. In fact that was one of the reasons that the university was quite happy for me to go along and do this because it gave them access to corporates and to directors and chairmen that they hadn't had before. So they're more than happy to let me go and have a crack at it. And so I ran several focus groups during the course of the process which actually were quite fascinating with some of the really influential chairmen and directors. It was very interesting to do that because some of the chairmen themselves would say to me, "It's all very well"going along to a teaching institute or to a forum or to"even a meeting of the Institute of Directors. But when we're sitting in a focus group,"I'm sitting around the table for the first time with six or seven other people"who've got the same problem that I've got, and they're heavyweights,"and suddenly I can really open up about my issues." So the focus groups were particularly interesting. Right, yes, that's something I didn't mention earlier on, that you started your career as a journalist, but then for a long time did executive search, and so you've appointed a lot of directors and CEOs[Chief Executive Officers] and things at senior levels. Correct, I moved out of the HR [Human Resources] into process improvement, and commercial management and then across from HR was one of the areas I was working on and then moved across into search. Right, okay. Did you encounter any surprising patterns or behaviours during your field work? I think probably the thing that surprised me most, and I hadn't even thought about it, was that boards I always thought functioned as one seamless unit and they don't. They are just as much as any other community broken up into segments and they all have different power or influences and they're all keen to get their way and so there's these power cliques inside the board that are very very interesting to deal with and you can suddenly see the problem a chairman would have if he's got a board that's somewhat fragmented. And in fact it's one that I've experienced myself, and you have to look at the board and say,"Where's the work going to be done here?" And in fact when you get that most of the work is done not in the boardroom, which ratifies decisions, it's done outside the boardroom where you actually get agreement on decisions. Right. So you're working and negotiating outside the board often with different groups or different people or different power blocks and you have to reach a compromise that you can put on the table and everyone will start. People think that it's something the board sits around and all chats about and they make a call. They don't necessarily. Many of them come to the table already with the decision made, and there's actually research in the US [United States] that shows that quite clearly. And how much of that is in formal subcommittees, and how much of it is more ad hoc arrangements? It's all ad hoc. All ad hoc arrangements. None of these power cliques are formal. They would tell you they don't exist, but they do exist. The chairman will ring two or three people after a meeting and say,"Come and talk about this, we're going to move this way, or we're going to do this," and he'll get them all on side and they'll carry the majority, he'll go look for the majority. The decision, you'll then get what I call "disruptors" inside a power clique and they will make sure, they'll try and make sure, something doesn't happen. And then you'll get quite regularly two people who move from the executive rank to the board rank, forget that they've moved away from executive, and they still try and get an infinite view of detail, which frankly is irrelevant. They're there for a different purpose and they've got to realise it and transfer their thinking processes. Yes, yes. You describe directors as having passive acceptance of established agenda-setting systems. Why do you think this specificly exists? Well, people come in and they look at the board agenda and you ask a director how many times have you reviewed the board agenda and I think I was staggered at how few of them had actually said, "Well, we have a form of review of the board agenda." Now what's on the agenda determines what you talk about, that's the parameters of decision making. But frankly I think it was only about 40% had ever been through a review of their agenda. So it was very, very low. So no one, and that's a process problem which comes again under the heading of the chair who's got to be responsible for that, because sooner or later every day or every year he's got to open up that agenda and say,"Is there anything we're missing? Is there anything we"should be talking about in here? Is there stuff you'd like to be talking about?" And he's got to actually get the board input on that. But only 40%, I think, when we surveyed them had actually ever been through a review or had even thought about it. That's fascinating, isn't it? Your research suggests that competence and transparent boardroom process outweighs factors like age, experience, gender and independence, and what you just said suggests that, as well. Why is that finding significant? Well, if you look, let's just take a current modern day one, netball, and look at what's gone on with the head coach. Now, there's a coach there was obviously a complaint about, whatever the nature of the complaint they've not told us, we don't know at all, because they've not been transparent about it. But they weren't transparent with the coach either, so they went about a formal process off to one side without telling the coach they were doing it. And then they've gone into a dispute mode. Now, if there's a problem with something like the coach, wouldn't you have thought the chairman would sit down with the coach and say, "For God's sake, what's going on here,"and how do we resolve this?" And I think the public would be wanting to know what's going on here. We're supporting these people. Why don't we know what's going on here? We don't care who's at fault. We just think the process should be open and should be transparent, should be seen. And I think that's a key role. If you go and look at something when it goes wrong in a board, and we've had a couple of them, and you can point to some of the major companies who've had things go wrong internationally, and the chairman or the Chief Executive has beat his head on the table and is obviously controlled by the lawyers. Forget it. People want to know two things, that you're sorry this has occurred, and this is what you're doing to fix it. And they'll stick with you if you do that. No matter what the problem is, they'll stick with you. But you have to be transparent. You lose so much support if there's no transparency. And that comes back to getting the right things on the agenda. Absolutely. Right, right. How prevalent were power cliques on boards, and how did they influence what was discussed? Yeah, I think there's probably, I would have said, 70 or 80% of the boards I saw had power groups in there that were really quite influential. And what it did was it almost negates the concept of an independent director. So we talk sometimes about you put on an independent director because that person can change things. That's rubbish. That person just gets isolated pretty well straight away. And so there's not many boards where, there are some really good chairs. Let's not, let's not be stupid about it. There's some really good chairs and there's some really good boards and I've seen some great ones. And the people work really openly and transparently. But there's a lot that do not work like that. And that actually raises another question about these power cliques. Was there any commonality around who was on the power clique? Did it involve the chair and the CEO, for example? Were the independent directors tended to be isolated? Was there any... There can be things where if you're dealing with assets, for example, it's someone who's got an interest in those assets, and you can have all sorts of things that are not declared. Now, of course, if you've got good process, which you should be running, those things should be ethically declared and everyone should know they're on the table. But there was a really interesting one that cropped up this week, which I was fascinated with, and that is that Mr. Trump, in his wisdom, having taxed the Chinese very heavily, is suddenly surprised they're no longer buying his soybeans and that all his farmers are in deep trouble and he's got to throw in a $50 billion bailout for the farmers in the United States because the Chinese have now gone to South America to buy the soybeans. What was even more fascinating was that the head of the Treasury, as I understand it, owned soybean farms. Now what do you think the Chinese are having a crack at? Are they having a crack at America? Or are they hitting the man who's actually sitting on top of the decision-making process? So, I mean, I don't know, but it's an interesting concept. It certainly is. Yeah, absolutely. What do your findings suggest about how boards should approach agenda setting? You've alluded to this a little bit earlier. Yeah, I think that what you do is you have a series of things during the year which you put on what you'd call a risk matrix. And they'd be things like what happens if there's a disaster, if there's a fire, if there's this, there's that. And we go through it, what happens if there's a big health scare, how do we close things down, how do we deal with what's going on. And once, I like to think that about once a month or once every two months, depending on the weight of your agenda, you notify the guys that you're going to put one thing on the agenda and discuss it. So you don't just do it during the strategic session once a year. You put something on and you do what is commonly called a "deep dive" - Yes. - into that aspect and have a real good look at it. And the agenda is one of those things, right. Let's take the agenda apart and say, are we getting what we want on the agenda? Are we getting the material we want on the agenda? Because I've had one director say to me,"It's not what you put on the board table,"it's what you keep from the board directors that's important." And it shouldn't be. It should be something you say, and there should be a critical review of what we're getting and how we're getting it, and whether we think it's well enough done. And then sometimes there's boards, and we've had one recently I was involved internationally, where the board was run by an international company who appointed the key directors, except for the one director in New Zealand, and yet they complained when something went wrong, that the New Zealand Director was at fault, and in fact the Board had never met because they'd never allowed them to meet. So who's to blame at the end of that exercise? So the Board has to get together and they have to look critically at what they're talking about. So you're suggesting then once a year they pull apart the agenda and say, "Have we got it right." Absolutely, take it apart, start from scratch. Yes, right. How might your research inform the training and development of new directors? Yeah, that's really interesting. I think some people come out of the executive ranks and they're very well prepared and they've done all of the stuff. But I'd like to think that you're either appointing a director for a specific purpose. You could be doing it because you're looking at environmental or social concerns, and that person's an expert in that area. Or it could be accounting. Just about everybody's got an accountant on the board. That's because only 31% to about 35% of your directors will get a pass in financial literacy. So only a third of them will come. So they need a comfort zone, so they'll have an accountant in there. And then there may be a lawyer, particularly if you're dealing with a lot of contractual stuff. If you're dealing in, say, a specific industry like a property industry or something like that, or asset management, you will find people who know something about it. There'll be someone in there with that sort of expertise. So you're looking for expertise, then you're looking for abilities around certain skill sets. Marketing, strategy, accounting would be the things, and risk. They'd be the things that you'd be saying,"What do we need in here?" It all comes back to the board sitting down and saying at the beginning,"What are the three things we want to do this year?"And what do we need to do them with? Have we got the right format here?" And that's a chair's decision again. And you don't have to necessarily appoint a director. The director might bring in an advisor to comment on that. So that we, for example, in one of the ones I was chairing recently, we've been looking at the risk of electric vehicles parked under buildings. And you wouldn't want to put someone on who knows about that. You bring someone in who is an expert and get them to talk to you, or several as we did. And then you have to make a decision. And I think the conclusion we came to was that there's so much argument over the scientific fact we had to stop talking about what the percentage of liability was and start thinking about what the consequences would be if we did have it, if it went wrong and so we focused on the consequences not on the on the technical side. Right, so drawing expertise in. I think you've alluded to this a little bit before. How do you think your findings in your research, which were around New Zealand boards, compare to other jurisdictions? I think you have to be very careful because in other places like the United States, the president is often a working president. Yes, a managing director type role. And he's different, yeah. He's not a non-executive chairman as we would predominantly get here. Yes. And the situations can be quite different. And also here you tend to pay your board. There there's a lot of incentives and smorgasbord of things that go on with board directors, as well. Right. So they're benefiting from some of the moves that go on. The power cliques will still exist, I think. Absolutely. And what about in places like the UK, Canada and... It'll be still the same. It's people. Yeah, at the end of the day. Okay, it's people and people form groups. Yes. If you were to extend your research, research always has, "These are the next questions." What are the next questions that fall out of yours? What was, well, what was unsatisfactory about the research when I finished it and I looked back on it was that I was taking a snapshot of boards as they were. Now I'm a believer that in the Otago University thing where they took the lifespan of children and followed them through and they used numerous researchers. I don't think you can see the impact of certain decisions boards make unless you take that longer-term view. A longitudinal study. And it may mean the board changes, but the study on the group and where the company goes remains constant. And I think if someone at university was to pick that up as a project I think we'd learn a lot more about boards so we wouldn't just see that snapshot of a board as it is today, we would see how it influenced, and what decisions influenced, and that's what's missing from a lot of our research. Yes, right, okay. That's interesting to to keep in mind. One final question for you, you've been in governance a long time, what's the best governance advice you've received? Probably, don't be afraid to ask a stupid question if you've read the papers. Okay. That's nice and succinct. Well, the thing about a stupid question is it can often raise a debate where someone will say,"Hey, we haven't really thought about that. Why don't we just"pick that up and deal with it." Yeah. And that's again falls back on the chairman. I've seen really a number of good chairman say, "Wait a minute that point that was"mentioned there. Why don't we take a note of that and come"back to it. And let's just pick it up and have a more serious"debate about it." Right. John, thank you very much for your time. I really appreciate you sharing the expertise. I'll look forward to catch up again soon. And to seeing you next episode. Thanks very much, Mark. Thank you for watching this episode of Governance Bites. We have more episodes on YouTube and your favourite podcast channel, where I interview directors and experts on various topics relating to boards of directors and governance. We'd love to see you back, and please like, subscribe and share the videos and podcasts.