Leadership in the boardroom: Navigating conflicts for effective governance

The concept of leadership being a contact sport is particularly true in business, including the boardroom. The board of directors typically comprises highly accomplished individuals who, together with their executive management team (typically the CEO and CFO), strive to achieve the best outcomes for the company. Occasionally, the board and executive management may have conflicting views on key business matters.

Here are some of the typical conflicts and tips for SMEs on how to navigate these challenges. The key is for all parties to remember that they are on the same team and to resolve matters in the best interest of the company. A trust relationship between the board and executive management is critical to manage and minimise conflicts and ensure an effective leadership structure for the business.

Common conflicts and recommendations

1. Strategic direction vs. Operational focus

• Conflict: The board may focus on long-term strategic goals, while executive management is concerned with day-to-day operations and immediate challenges.
• Recommendation: Ensure regular and open communication between the board and executive management to align short-term operational goals with the company’s long-term strategy.

2. Risk tolerance

• Conflict: Executives might favour growth strategies that involve higher risk, whereas the board may prefer a more conservative approach to mitigate risks.
• Recommendation: Establish clear risk management frameworks and risk tolerance levels agreed upon by both the board and executive management.

3. Performance metrics and expectations

• Conflict: Disagreements may arise over KPIs, targets, and expectations. Executives might view targets as unrealistic, while the board may see them as necessary for driving performance.
• Recommendation: Develop KPIs collaboratively and ensure they are realistic and aligned with both short-term operational goals and long-term strategic objectives. Proactively adjust expectations when new information or facts arise.

4. Resource allocation and financial management

• Conflict: Disputes can occur over budget allocations, financial controls, and expenditure, particularly if executive management requires more resources than the board is willing to allocate.
• Recommendation: Implement a transparent budgeting process with regular reviews and updates to ensure alignment between budgetary needs and board expectations.

5. Succession planning

• Conflict: The board and executive management may have differing views on succession planning and the readiness of potential successors.
• Recommendation: Develop a clear succession plan with input from both the board and executive management, and regularly review and update it.

6. Governance and accountability

• Conflict: Executives might resist board-imposed governance changes or additional reporting requirements.
• Recommendation: Promote a culture of accountability and transparency. In line with King IV, the board should ensure that governance practices are applied on a proportional basis, considering the company’s context, size, and operational complexity.

Tips for avoiding conflicts

• Clear roles and responsibilities Define the roles and responsibilities of the board and executive management clearly to prevent overlaps and misunderstandings. Documenting the Delegation of Authority (DOA) that can be amended as the company’s context changes is key.
• Effective communication: Foster open and regular communication between the board and executive management. Regular meetings, updates, and discussions can help in aligning goals and addressing concerns promptly, especially outside of formal meeting settings.
• Collaborative goal setting: Engage in collaborative goal-setting processes where both the board and executive management have input. This helps in aligning expectations and fostering a shared vision.
• Performance evaluations: Conduct effective performance evaluations to ensure that the agreed objectives are being met and to address any emerging issues before they escalate. King IV encourages governance bodies to also evaluate their own performance (i.e., performance of the board, the board chair, individual board members, and board committees).
• Conflict resolution mechanisms: Establish appropriate mechanisms for resolving conflicts to ensure that they are handled constructively.
• Training and development: Provide training for both board members and executive management on governance, strategic planning, and conflict management to enhance their ability to work together effectively.
• Independent advice: Seek independent advice or third-party expertise when needed, especially on complex issues where there may be a lack of consensus.

High-profile corporate governance learning opportunities for SME boards

The board and executive management will make mistakes from time to time. When this happens, the best course of action is to learn from the crisis and move forward. Remember the saying, “don’t let a good crisis go to waste.” SMEs in South Africa can draw real-life lessons from the following examples:

Steinhoff scandal:

• Overview: In 2017, Steinhoff, a global retailer, was embroiled in an accounting scandal when it was revealed that the company had overstated its profits and asset values by billions of euros. This led to a dramatic collapse in its share price and a significant loss of investor confidence.
• Lesson: Ensure financial transparency and ethical financial reporting practices to detect and prevent financial irregularities. Board oversight is crucial for maintaining integrity in financial reporting.

Eskom governance crisis:

• Overview: Eskom, South Africa’s state-owned electricity provider, has faced numerous governance issues, including corruption and mismanagement. These problems have led to frequent power outages, known as load shedding. The new board is determined to address systemic issues, including organizational culture, criminality, and leadership instability.
• Lesson: Promote ethical leadership and a culture of integrity. Develop effective risk management strategies and ensure accountability at all levels to mitigate risks and enhance organisational performance.

Tongaat Hulett financial misconduct:

• Overview: In 2019, Tongaat Hulett, a major agricultural and agri-processing business, admitted to overstating its financial statements, leading to a significant restatement of its financial position. This resulted in a major drop in its share price and a loss of stakeholder trust.
• Lesson: Ensure accurate financial reporting and ethical financial reporting practices. Board vigilance is essential to prevent financial misrepresentation and maintain stakeholder trust.

African Bank collapse:

• Overview: In 2014, African Bank faced a major collapse due to reckless lending practices and inadequate risk management. The bank had to be rescued by the South African Reserve Bank.
• Lesson: Implement prudent risk management policies and ensure compliance with regulatory requirements. Foster appropriate collaboration between the board and management to make well-informed strategic decisions.

Conclusion

By learning from these examples, SMEs can implement stronger governance practices to mitigate risks and enhance leadership effectiveness. Establishing clear conflict of interest policies, fostering transparent communication, defining roles and responsibilities, ensuring independent oversight, and developing robust governance frameworks are key steps towards achieving this.

For tailored corporate governance solutions that can help strengthen your SME’s board processes and practices, contact us at admin@abuengadvisory.co.za.