Blogs & Comment

Why trust is crucial in a boardroom environment

Without trust, transparency and accountability will suffer.

(Photo: Richard Boll/Getty)

Picture a disruptive CEO in a board meeting. He sits with his arms folded. He interrupts board directors in an almost antagonistic way. He even uses his laptop—something pretty noticeable when no one else bothers to bring one.

It sounds like a far-fetched scenario, but I’m actually describing a board meeting that I once observed. Afterwards, I was told the directors felt the CEO was withholding information on account of his behaviour. So I developed a coaching program to help the CEO improve his relations with the board, and for a short time the situation improved.

But over the long haul, it appeared that permanent damage had been done: the board simply didn’t trust the CEO, and as a result, he was replaced.

Trust is something I thought about after serving on a Lexpert panel discussion in Toronto last week. The panellists and I were discussing what good governance is and why it matters. One of the panellists, the CEO of a financial institution, made a brief remark about the importance of trust on a board. “Trust is not in any of the regulations,” he said. Quite true.

And yet trust is crucial to promoting transparency and accountability in a board environment. Without trust, there are gaps in oversight and information. Decision-making failure can and does result.

Trust, however, is underpinned by personal integrity. Integrity is the building block of trust.

“Integrity” has a very specific meaning in the governance context. It means consistency between what a director says, writes and does. It means authenticity, candor, reliability, confidentiality, solidarity, and a willingness to accept personal accountability and be bound by board decisions and a director’s own role within them.

Most importantly, integrity means putting the interests of the organization above your own, and even putting your own reputation or that of the organization at risk in doing so.

If a manager or director has defects in integrity, others will not trust them. Then trust breaks down.

There are at least three levels of trust that are crucial to a healthy board environment: (i) Board-CEO, (ii) CEO-C-Suite, and (iii) Director-Director trust. Let me elaborate on them.

(i) Board-CEO trust

The board needs to trust the CEO to bring full disclosure and transparency into the boardroom. Likewise, the CEO needs to trust that board directors will react to candid thoughts in a mature, measured and confidential way. From both parties, integrity is crucial. If a CEO is defensive, holding cards close to the chest and selectively disclosing, a board will notice and get frustrated. Here’s an example: Dismissed Citigroup CEO Vikram Pandit was not adequately keeping his board informed and kept it “out of the loop” at times, said The New York Times. This is a trust issue.

(ii) CEO-C-Suite trust

Earlier this year, it was revealed that then Yahoo CEO Scott Thompson had an academic misstatement on his resumé. (On Yahoo’s website and in a regulatory filing, it claimed that Thompson had a computer science degree, which wasn’t true.) For quite a while, Thompson didn’t address the allegations. Yahoo employees were “livid” with Thompson’s behaviour, said Business Insider.

A board should therefore know the CEO’s views by direct reports. In a board review I undertook recently, I canvassed the views of all direct reports to the CEO, otherwise known as a “360 review.” I recommended to the independent chair that all directors see these views. The C-Suite also had opportunity to express their views of directors and where they could improve, which was very helpful (and eye-opening) to directors. Likewise, the directors had opportunity to express views on the CEO.

In the end, the C-Suite was dissatisfied with and didn’t trust the CEO, who was later replaced by the board.

(iii) Director-Director trust

Directors need to trust that their colleagues will support board decisions once they occur, will respect confidentiality, and will be consistent and honest in what they say and do. The opposite is what occurred at Hewlett Packard for several years, during which information was leaked from the boardroom, thereby leading to stock price volatility and frustration on Wall Street. This is a trust issue. If a director or chair acts out of self-interest, directors will not work as a coherent team.

I conducted a peer review recently (directors assessing each other) and it was apparent that one director had integrity concerns. I convened a meeting with the board chair and governance committee chair. Without breaching confidence, I advised of this issue. Ultimately, the director with low integrity rankings was asked to resign.

Integrity is so important that it should be recruited for, developed and assessed. Don’t avoid having internal controls over integrity. It can be done. And if a director or manager doesn’t possess integrity, they need to go. In the words of Warren Buffett:

“In looking for someone to hire, you look for three qualities: integrity, intelligence, and energy. But the most important is integrity, because if they don’t have that, the other two qualities, intelligence and energy, are going to kill you.”

Recruit directors and officers with the utmost integrity and replace those who do not have it. Your board will be better for it.