How to spot and deal with the fall-out of boardroom battles
Passionate debate is one thing, an all-out bust-up is another. We look at when directors declare war
As American singer Charlie Rich memorably noted in his 1973 chart-topper: “No one knows what goes on behind closed doors.”
The silver-haired country crossover star was referring to the privacy of the marital home but the same veil of discretion tends to be drawn across the boardroom.
Yes, when strong-minded men and women meet to discuss the future of a business, the exchanges may be robust and very occasionally downright angry, but once the decisions have been reached, everyone falls into line.
As far as the staff, customers, suppliers and the world in general knows, the announcement that a company is to expand into Europe or plans to halve its product range has been agreed and endorsed by the whole board.
Indeed, when the MD and finance director stand together at a press briefing, explaining the thinking behind a new strategy, no one would guess that 48 hours earlier, they were still arguing over key elements of the plan. That’s the way it should work. Boards take collective decisions then present a united front to the world.
But sometimes the fault lines are so intense that any disagreements spill out from the boardroom into the public arena, where they are picked over by journalists and seized upon by competitors. In these situations it appears that everyone knows (or thinks they know) what goes on behind closed doors. The boardroom bust-up has gone public and the result may be resignations or sackings.
Disputes can arise at just about any time in the evolution of a business. Even if you keep the management and investment structure mean and lean – perhaps just you and your original partner – there is always the chance that at some stage a radical difference over the direction of the company will emerge.
Bring in private equity investors and suddenly you are working with people who not only have a signifi cant economic stake in your business, but also their own clear ideas about how it should be run and the strategy it should follow. Indeed, being ousted by investors probably ranks high on the list of founders’ nightmares. And it happens. These days serial entrepreneur Ben Way is managing director of The Rainmakers, a company set up to develop new technologies, but he first came to prominence as the youthful founder of internet search tool business Pulsar. It was, to say the least, a mixed experience.
The company did well enough for Way to make it on to the Sunday Times Rich List, but that achievement coincided with him being sacked by its investors. He’s sat on quite a few boards since then, coming to the conclusion that director unity can be a fragile thing.
“Boards can fall apart really easily,” he says. “One major event can destabilise a board.”
Cause and effect
The result of a disunited boardroom can be stasis or damage to fi nances and reputations, so how do you avoid acrimonious disputes? The fi rst step is to give some thought to the causes.
Differences over strategy are probably the most common reason for boardroom bust-ups. “Very often it boils down to the fact that the vision has changed for the business,” says David Gordon, founder of DG Law. “And everyone is either with it or against it.”
And as David Moss, head of the corporate department at law fi rm Kingsley Napley, adds, partners often fall out over exit strategy. “I see a lot of disputes that could be characterised by the question ‘to sell or not to sell’,” he says. “Succession issues can also be a source of friction.”
It’s not always about strategy. “Unequal contribution is another flashpoint,” Moss says. “For instance, when one partner feels that the other is not making the contribution that was promised when they began to work together.”
This kind of personal difficulty can be exacerbated by the growing pains encountered by most businesses. As partners grapple with setbacks in the marketplace or serious cashflow problems, relationships are often put under severe strain.
Larger companies tend to have more departmental representation at board level than their smaller counterparts, so in addition to the MD/CEO and his FD, you could well have IT, sales, marketing and even HR directors sitting around the top table. The danger here is that board meetings split into factions.
“There are often differences between the operational side of the business and the service side,” says Andy Cook, managing director of HR consultancy Marshall James, a company that provides advice to boards on a range of issues. “For instance, you often get a situation where the IT director wants to spend money on a project and he sees the FD as being obstructive. Very often there are big personalities here and neither is willing to back down.”
Situations such as this ought to be the easiest to resolve. Yes, there will probably always be disagreements involving the FD and certain other directors who are blithely tabling costly business plans, but a strong chairman or MD should be able to prevent a certain creative tension from modulating into sullen discord. However, if that strong hand isn’t there, the results can be very damaging.
“Factional disputes at board level tend to spill out into the company as a whole,” Cook says.”You get a silo mentality in the departments concerned.”
Less easy to deal with is the other classic boardroom split that can occur between those who run the company day to day and the directors appointed by investors. “The more stakeholders you have, the more likely it is that there will be tensions,” says Way.” They often occur between the managers who run the company and those who represent the investors.” The danger is that if the investors feel the CEO or MD is not growing the company fast enough or that a certain strategy is pushing back an exit date, they can take action in the form of an executive shake-out. “Sometimes directors will manufacture a dispute in order to achieve a certain outcome; for example, the exit of a particular director,” Gordon warns.warns.
That said, shake-outs of this nature can be justified. The management team that took a company from start-up through to its first or second round of investment may not be the right one to steer it towards a listing on AIM, for example. “Very often you get cases where the investors take the view that if the company is to move to the next level, new managers are required,” Mosssays.Moss says.
Oil on trouble waters
In an ideal world you should be aware of the flashpoints and take steps to address them before things get out of hand, and probably the most effective means of reducing tension is the simplest. Way explains: “The best way to address a problem is to communicate with the other directors.”
It sounds an obvious point to make, but unless you get to know your fellow directors – and not just the ones you work with every day, but also the non-execs appointed by you or your backers – you could well find that you are upsetting people without really being aware of it.
But according to Elspeth May, partner at executive coaching firm Praesta Partners, a surprising number of directors spend very little time cultivating relationships with their fellow board members. “Directors are often very good at managing up or managing down. But in my experience they often neglect managing their peer group,” she says.
This can be a problem even among apparently close-knit partners. For example, if you happen to hold the majority shareholding in a business it may be tempting to make decisions without consulting your junior partner. You might get away with this for a while, depending on the personalities involved, but be-aware that a deep well of resentment is probably building up. The solution might be as simple as both partners sharing an office to keep the channels of communication open.
In the case of larger boards, many founders fall into the trap of failing to realise that their plans are not carrying support. May believes that it is crucial to sound out the opinions of other directors – and not just when you’re facing them at the monthly board meeting. “You need to talk to people informally,” she says. “A lot of communication goes on outside the boardroom and if you want support for a strategy, make sure you lobby for it in advance.”
Chris Wilks, head of the corporate department at solicitors SA Law, is a great believer in shareholders’ agreements, and not just because they bind the relationship of board members into a legalistic framework. “The magic of the shareholder agreement is that in order to draw one up you have to sit down around a table and really talk things through,” he says. “In doing that you begin to understand the people you’ll be working with and, in particular, you get to know their sensitive points.” In other words you begin to find out how they like to work and what they expect from the company.
But while a shareholders’ agreement will certainly provide some degree of protection, it won’t prevent situations where boards divide into two, with the majority group forcing out those in the minority. Often this will be non-executive shareholders acting against management.
Way believes that the only way for founders to minimise the risk of an investor-led coup is to ensure they are in the strongest position possible when they partner with new shareholders. It’s not just about retaining a majority stake.
“I always make sure that I have a very strong management team – a team that can’t really be faulted by investors,” he says. “The other important factor is that I am now in a position to be much more selective about the investors I work with.”
Facing the inevitable
As with marriage, some workplace differences are irreconcilable. The board has become dysfunctional, business is suffering and everybody’s money is on the line. So what can be done?
The obvious solution is that somebody has to go. The question is who? In the case of larger boards, it’s a simple enough equation. If you have two strong-minded individuals at loggerheads with each other, the one who can secure the backing of the other shareholders will prevail.
But if the board consists of two partners, each with an equal share in the company, we’re into the sort of territory where an unstoppable force meets an immovable object. And in this situation everyone may be a loser. “In the worst-case scenario, the only alternative may be winding up the business,” Wilks says. “This happens quite a lot – especially if the company is young and there isn’t too much at stake fi nancially.
But there are legalistic solutions. One of Wilks’ favourites is the so-called russian roulette clause in shareholders’ agreements. It works like this. Partner A is dissatisfied with the way things are going and would like to take 100% control. Under the shareholders’ agreement he is entitled to make an offer for shareholder B’s 50% stake. But here’s the rub. Partner B may say yes, but if he says no, then the agreement states he now has the absolute right to buy Partner A’s shares. “In that way, the party who triggers the offer bears the risk,” says Wilks. A neat solution, but one that raises other fundamental issues, not least how to value the shares?
This can be a major bone of contention because the departing partner will want the best deal. Those involved could agree a value among themselves or bring in an independent third party. Depending on the shareholders’ agreement, there could also be ‘good’ and ‘bad’ leaver provisions, which would impact on the money changing hands.
Another line of thinking goes that if you have to play russian roulette with the business or call in the lawyers, you have already let things go too far. Mediation or arbitration may be possible but it often leaves bruised egos and therefore losers.
Ben Way stresses there’s no substitute for talking things through before they reach crisis point and occasionally admitting that you have been wrong. “One of the strongest things I’ve learned to do is apologise. When I mess up, I say sorry.”
The warning signs of a fragmenting boardroom
l One partner frequently expresses concern about another’s performance
l Partners or board members hold fundamentally different views about the future strategy for the company
l A lack of transparency. Board members feel they don’t have sufficient information
l One partner or board member makes decisions without consulting partners
l Board members split into factions, fighting to safeguard their own departmental corners – IT, human resources, finance etc. – rather than working together for the good of the company
l Investors regularly expresss concern about management decisions
l Directors are reluctant to challenge decisions made by other members of the board
l Whispering campaigns and rumours circulate against certain directors.
Redbus Interhouse: spinning out of control
The media loves a boardroom bust-up. Fleet Street?s hacks focus on companies in the FTSE-350 but if the circumstances are suffi ciently dramatic, almost any company can fi nd itself on the business pages.
Take the case of Redbus Interhouse, an internet hosting company backed by Demon Internet founderturned- investor Cliff Stanford. He resigned his nonexecutive directorship at Redbus Interhouse in 2002 as a result of a disagreement with chairman John Porter. The two were at odds over strategy, with Stanford favouring further investment to expand operations and Porter backing cost-cutting.
Once outside the board, Stanford took out a full-page ad in the Financial Times asking shareholders to vote out the board. The directors survived the vote, but things got worse for Stanford. He had hired a private detective to intercept Porter?s email, thereby uncovering information about Porter?s mother, former Westminster Council leader Dame Shirley Porter.
To cut a long tale short, the emails proved the disgraced politician was, contrary to her claims, wealthy enough to pay fi nes imposed after the ?homes for votes? scandal. Stanford blew the whistle, but was sentenced to six months? prison (suspended) for breaching data laws.