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Corporate governance and productive conflict

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Benito L. Teehankee

The View From Taft

Corporate governance and productive conflict

When an online newspaper article declared that “Sereno violated SC collegiality,” I took some time to view the YouTube videos of the House Justice Committee hearings on the impeachment complaint against Chief Justice Maria Lourdes Sereno. During the hearings, her fellow justices testified on her alleged questionable practices. I found myself cringing many times through the videos. It’s not every day that the dirty laundry of a hallowed institution is washed so publicly.

It will be a while before the impeachment issue is settled by the Senate, if it ever gets there. But hearing about infighting from the associate justices has diminished whatever notions of professionalism and collegiality I may have had about the Court. It seems that the justices concerned (the CJ included) are not able to resolve their differences in a constructive manner.

I shouldn’t be surprised. Groups of highly qualified and intelligent people tasked with complex decision making usually face all sorts of conflicts. Occasionally, these groups fail to resolve such conflicts in positive ways. Researchers and corporate insiders have reported the same problem for corporate boards.

The SEC’s Code of Corporate Governance states its first principle: “The company should be headed by a competent, working board to foster the long-term success of the corporation….” Most people would think that this principle refers mainly, if not only, to the technical competence of board members. Unfortunately, having the most technically competent members do not guarantee effective board decisions.

When highly successful and technically competent people are assembled in a board, some of them will strongly believe in their ideas and push for these quite forcefully. Ideally, others with different views will push back. The important debate that follows (what governance researchers call “substantive conflict”) should result in the best decision for the good of the company.

In practice, however, individual members may push their ideas too hard and, in the process, fail to show adequate collegial respect for or even listen to and consider the views of others. This lack of interpersonal (not technical) competence turns useful, substantive conflict into harmful interpersonal conflict. Before long, emotional infighting begins to sap the board of its energy and its effectiveness.

Beverly Behan, in Building Better Boards, refers to these problematic members as “pit bull” directors — overly aggressive and combative directors whose “questions of management and fellow directors always sound accusatory rather than inquisitive.” She elaborates, “Pit bulls can have enormously corrosive impact on a board’s culture. They inhibit open discussion and put nearly everyone around them on the defensive.”

Similarly, Katha Kissman, in Taming the Troublesome Board Member, refers to “controlling personalities” who have “an obsessive and inappropriate need or desire to control other people or situations and acts in a domineering, intimidating, or threatening manner in order to get his or her way.”

Consequently, a harmful side effect of infighting is that members who have legitimate questions hesitate to bring them up, fearing further escalation of interpersonal conflict. A false sense of consensus engulfs the board, and critical questions are no longer asked.

Kurt Eichenwald described the bad governance effect of infighting within Enron in his book entitled Conspiracy of fools: A true story. When Enron’s board audit committee, chaired by renowned accounting expert Robert Jaedicke, met to review possible accounting problems, they were assured by the external auditor that “Arthur Andersen’s financial statement opinion for 1999 will be unqualified. There were no significant audit adjustments, or disagreements with management, or other significant difficulties.” Earlier questions about the company’s conflicted accounting and compensation practices critically raised by both Enron insiders and external auditors were not discussed. Worse, no questions were asked by the audit committee members. Jaedicke would later claim during a congressional investigation that Enron management hid information from the board.

If boards are to function properly, the roots of dysfunctional interpersonal conflict must be addressed. Kissman suggests that a possible first step in managing a troublesome board director is for the board chair to initiate a conversation with the director to clarify perceptions, to develop options for resolution, and to solicit the board member’s understanding and agreement to a course of action and a plan for follow-up to ensure successful resolution for all.

For the board as a whole, Kissman recommends that directors be oriented on the importance of working as a team and on board meeting etiquette. Board job descriptions and annual team-building and leadership development exercises should also be helpful.

The board is ultimately responsible for the prudent direction and oversight of the corporation. All directors, led by the chair, must work collegially to work through substantive conflicts while getting interpersonal conflicts out of the way. Those who govern should always act wisely and not like fools.

 

Dr. Benito L. Teehankee is full professor of management and organization at De La Salle University.

benito.teehankee@dlsu.edu.ph

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