Effective boards shift between passive, mentor, partner and control modes to optimise engagement.
The Covid-19 pandemic unexpectedly prompted a much-needed change in boardrooms. Many boards, once content to simply sign off on decisions, were forced to collaborate closely with management to navigate the crisis. They shifted from a passive, backseat approach to one of active engagement, providing more feedback and advice, or even getting involved with decision-making.
On one end of the spectrum is the passive approach, where boards give management complete freedom to make decisions. On the other end is the command-and-control approach, where boards exert absolute control over decision-making.
Between these extremes lie mentor and partner boards. Mentor boards actively participate in discussions, providing feedback and expert advice. Partner boards, while also offering expertise, are more involved in decision-making, treating it as a negotiation and closely monitoring implementation.
We found that most boards default to a single engagement style, which limits their effectiveness. For instance, a passive board, while suitable for certain situations, might be more inclined to defer to the CEO’s judgment and avoid challenging their decisions.
A classic example of a board’s passive approach leading to negative consequences can be seen in the case of Enron.
The board, despite early warning signs of financial irregularities, remained largely passive, relying on management to provide accurate information. This lack of oversight and critical questioning allowed fraudulent practices to go unchecked, ultimately leading to the company’s collapse.
Our research shows that a flexible approach, adapting to the specific situation, is crucial for optimal board performance.
Most boards are stuck in passive mode
The data we collected revealed that most boards adopt a passive approach, deferring to management on key decisions like mergers and acquisitions and director appointments. More specifically, we found that 46 percent of the boards we studied primarily operate in passive mode, compared to 14 percent that use a mentor approach, 12 percent that play a partner role and 19 percent that stick to control mode.
Just 9 percent of boards used multiple approaches. And when they did, they typically switched between passive and control modes – particularly when something went wrong and they inserted themselves into a range of decisions.
Companies like WeWork have experienced this shift. During periods of rapid growth and expansion, the board likely took a more passive approach, trusting former CEO Adam Neumann’s vision and strategies. However, as the company faced challenges and scrutiny, the board became more active, intervening in decision-making and even replacing the CEO.
Likewise, during the Covid-19 pandemic, we found that passive engagement mode decreased from nearly 50 percent to around 35 percent. Passive boards shifted to mentor or partner boards. However, this increased engagement proved short-lived, and many boards have since reverted to a more passive stance.
Choosing the right engagement mode
As our research indicates, a one-size-fits-all approach can significantly limit board effectiveness. Boards should be adaptable, shifting their engagement based on the specific decision at hand. This involves regularly reviewing their agenda and identifying the appropriate level of engagement for each decision:
Passive mode for routine decisions
For routine operational decisions with limited strategic impact, such as technical roadmaps, marketing plans, talent reviews and compensation, a passive approach may suffice. The board can delegate authority to management and focus on higher-level strategic issues.
Mentor mode for strategic guidance and expertise
Boards can provide valuable guidance and mentorship on long-term strategic direction or mergers and acquisitions, particularly when members possess important skills or knowledge that management may lack.
Partner mode for collaborative decision-making
A collaborative approach is essential for significant decisions that require careful consideration. These include organisational structure changes, financial management, stakeholder engagement and risk management.
Control mode for governance decisions
Decisions related to governance, such as CEO succession, board member changes and executive compensation, often require boards to enter control mode. The board should actively oversee these decisions to ensure they align with shareholder interests and the company’s long-term success.
Consider a retail giant facing declining sales and increasing competition. An agile board would delegate routine operational decisions to management, while assuming a mentorship role to guide long-term strategy and identify growth opportunities. When significant strategic decisions arise, such as store closures, e-commerce investments or acquisitions, the board could partner with management to assess options and make informed choices. In times of crisis, like a data breach or product recall, the board may need to take a more controlling role, overseeing crisis management and ensuring compliance with regulations.
To maximise impact, boards need to determine the appropriate level of board involvement for each decision. Factors such as the decision’s strategic importance, potential risks and management’s capabilities should influence this choice. This approach ensures that the board’s time and expertise are focused on the most critical issues, while delegating routine matters to management.
