Many directors are placed on boards by groups who anticipate they will keep their best interests in mind. Such groups are varied: industry sectors, geographic regions, beneficiary groups, ownership interests, customers or staff.
The intent is well meaning. These people will help the board understand important stakeholder groups, often directly affected by the work of the organisation. Fair enough. But often the expectation carried to the table by these directors is that they will ensure that, at a minimum, nothing is done contrary to the interests of the group they ‘represent’. Not-for-profit organisations, Crown Entities and commercial boards all display these traits.
The obvious problem is that once the ‘representative’ director sits at the table, they are obliged under law to act in the interests of the organisation as a whole. The various statutes, Companies Act 1993 (s131), Incorporated Societies Act 2022 (s61), and Crown Entities Act 2004 (ss49 & 55) are all very clear about that. The Charities Act 2005 obligation (s36A) is simply to deliver on stated charitable purpose. There are possible exemptions with subsidiary companies when a director can act with the primary interest of the holding company in mind.
These directors tend to want to fight their corner—it is, after all, why they have been put there. Useful and timely information about the stakeholder environment is fine, but broken-record parochial behaviour is not. It works against the board’s core big-picture duty and risks it being mired in a small corner of its world.
Expectations placed on such directors are essentially unfair. They can become the meat in the sandwich between two parties. Each director has but one vote and cannot realistically sway the organisation in any given direction not transparently in the interests of the whole. The perceived obligation to represent can diminish or obscure any genuine contribution that person may be capable of.
This is made worse if several people around the table represent several different groups. Their interests are unlikely to wholly align. Fans of Star Trek may well cite Mr Spock in noting that it is the board’s job to consider the needs of the many, not the needs of a few. Each director is expected to contribute in a positive not negative way to that discussion.
Often ‘representative’ directors make it onto boards by virtue of passion for their constituency rather than the necessary governance skills, especially if election processes are involved. Again, this is unfair on the individual and unhelpful to the wider board. Competence in governance is the first requirement. An understanding of the stakeholder environment is important but comes next.
There is a danger in assuming that such directors know everything about the group they ‘represent’. This is rarely true and, ironically, boards without this type of director often, by necessity, have more sophisticated and constructive stakeholder engagement mechanisms.
Subsidiary boards
Subsidiary boards of all kinds frequently have owner’s representatives, often being directors common between the entities. This is reasonable and helpful in some ways. However, we frequently see an over-reliance on such directors in common to communicate between the holding company and its subsidiary entity. Adequate policy, performance expectations and clear reporting regimes are often lacking, placing an unreasonable expectation on these directors to represent inadequately expressed owner expectations. The main board can become overconfident that ‘our people’ have this under control—a risky and very subjective approach to oversight.
Better options
All boards need to engage with stakeholders. We recommend a governance-level version of a stakeholder communications plan. This makes clear who is important, what issues are on the table and how we are going to connect with them. How this is done will vary according to the type of entity.
Formal routes to engaging stakeholders may exist. Industry bodies often have an adjunct Stakeholder Council, sometimes with the power to appoint the main board and with a formal schedule of engagement.
Advisory groups or taskforces can be established with a broad membership. Forums can be convened around particular issues or to add to strategic thinking, or even simple online surveys can be useful.
Honesty is fundamental in stakeholder relationships. Nobody can deliver on everyone’s full wish list. And when something is not working out as anticipated, say so and explain why. Over-communication is a lesser evil than leaving gaps for others to fill with their own stories.
What does not work is a single person being sent to the board to ‘represent’ a narrow perspective. There are better ways to get these views and certainly far better ways to constitute a board.
This article draws in part from Good Governance 35 - Is thinking changing about the basis for board membership?
