Jun 3, 2018

The boardroom dilemma: to quit, speak out or stay?

When a non-executive director is unhappy about the performance of an organisation, they have a choice: they can step down, or stay and try to do something about it. The same applies to a shareholder in a public company when they detect managerial incompetence: they can sell out, or take an active stance and try to change the board. Likewise, customers of a business that is in decline can either switch their allegiance to a rival — or speak up about the problems.

This predicament is discussed in the remarkable treatise Exit, Voice, and Loyalty written in 1970 by the economist Albert Hirschman. Normally the easy, and selfish, option for anyone is “exit” — resign from the board, sell your shares, switch your custom — but this choice means the problem remains unaddressed. “Voice” is the braver response, but it takes commitment and loyalty to the organisation. It is the epitome of being responsible.

I gave up chairing two charity boards because I could not tolerate prolonged mediocrity; nor did I want to wage war against the executives. They were paid, full-time employees; I was pro bono and non-executive. I disagreed strongly with the way the organisations were run, and believed that management was weak. I might have been able to win over the board and replace executives, but I did not have enough skin in the game to apply myself to the task, so I walked.

Trying to force change can be a thankless task. In the non-profit sector there are no shareholders who suffer if an institution declines, and it is much harder to measure underperformance than in the private sector; who defines whether a charity is delivering sufficient public good? Moreover, I have found that the boards of such organisations prefer a quiet life. Upheaval and disruption — even if needed — feel too risky to most trustees. Slow decay can seem preferable to open dissent or a public row.

There is almost an entropic tendency in organisations towards gradual deterioration, inefficiency and underperformance. Many institutions are highly dysfunctional. Management by fear, corruption, complacency, bureaucracy, under-investment, insider capture, pessimism, excessive debt, resistance to change — countless diseases can infect companies and charities.

The cure might be takeover or merger — or transformation from within. This latter solution needs leaders prepared to make personal sacrifices to fix the ailment — putting duty before expediency. Almost invariably, involvement, rather than passivity, comes at a cost to those individuals.

This quandary applies across many aspects of modern life. Britain’s departure from the EU is likely to be a classic case of exit after endless attempts over decades to use its voice to reform the institution. Undoubtedly, as a people, we had less loyalty to the Brussels edifice than to some in Europe, which is why a majority voted to leave. The arrogance and dysfunction of the EU elite were exemplified when it failed to offer any real compromise after David Cameron tried to obtain concessions.

Meanwhile, wealthy parents in this country typically exit the state school system and educate their children privately, rather than using their voice to seek improvement in local state schools.

The dilemmas analysed in Exit, Voice, and Loyalty lie at the heart of good stewardship of society’s assets. Unfortunately, flabbiness is the natural order in both the corporate and public sectors, and almost no organisations produce their optimum output. Many suffer from dross at the top; the guiding principle of so many boardrooms is “Don’t rock the boat”. Exit is typically the short-term default decision on economic grounds, whereas voice is about politics and influence. Usually, the rule of concentrated benefits and dispersed costs applies in waning organisations — a few winners, but many losers. Tackling such vested interests can bring criticism and create enemies. But exit could be labelled desertion, if confronting the difficulties might lead to a better result.

Diplomacy can sometimes achieve improvements, but usually challenge and complaint are resented, and ultimately there can be no substitute for direct action. Under many governance arrangements, consensus is prized and inferiority indulged, while employment law and fear of reputational damage can protect inept leaders from exposure and removal. As Edmund Burke said: “The only thing necessary for the triumph of evil is for good men to do nothing.”