To Dine or Not to Dine: Should You Socialize With Fellow Directors?

January 2nd, 2017

governance-12-30-16.pngI know a number of bank boards where the directors have a big dinner the night before the board meeting. I guess the idea is that the group will work better together if they get to know each other. Maybe it’s an offshoot of the sports concept of building team chemistry.

A bank’s board of directors, though, is not a sports team, and I just don’t think any of the sports clichés about everyone rowing in the same direction apply. Yes, everyone on the board should be in agreement on the strategic plan, but I think good corporate governance might require some of the tension and push and pull that you don’t want on a sports team.

My feeling is that camaraderie among board members can actually be a bad thing, and too much socializing might hurt the directors’ ability to be impartial in their oversight duties. No one wants a troublemaker on the board, but there are times when someone needs to point out that an emperor has no clothes. And you might be less inclined to point this out if you just had dinner with an emperor or member of his court, shared a bottle of wine, and talked about your kids and your favorite sports teams. Perhaps sharing a meal together as part of a rather long board meeting or retreat is no big deal. But we have to consider the possible impact of too much camaraderie.

When you look back at the banks that got into trouble over subprime mortgage lending, it’s hard not to wonder about the boardroom dynamics when decisions were made about taking on this new level of risk. My guess is that there wasn’t a whole lot of discussion and even less challenging of management on it. Maybe the directors had become too friendly with each other. Maybe they didn’t want to rock the boat and cause dissension with people that had become friends.

Small group dynamics are interesting, and my own observation is that many people in small groups simply don’t want to stand out. I’ve been on four bank boards, and I saw this with one board many years ago. Aside from not wanting to stand out, there’s also the fear of sounding stupid. This can be particularly true when the discussion turns to some arcane accounting matter if you’re not an accountant. Same thing for IT matters for those of us who aren’t technology experts.

What does any of this have to do with board dinners? A fair amount, I think. As for fear of standing out or sounding stupid, it’s only human nature to care more about what our friends think of us than what complete strangers think. And the more directors socialize, the more they probably care what the other directors think of them.

If directors have been to even a handful of board dinners, they’re probably aware of whatever image the other directors have of them. Most people will want to come across as intelligent, thoughtful, and knowledgeable about banking. Why risk ruining that image and that reputation by asking something that might be perceived as being out of line, stupid or even disloyal? It’s easier to simply keep quiet. If, on the other hand, you’ve never really gotten to know your fellow directors on a personal level, wouldn’t it be easier to ask tougher questions, to risk damaging that team chemistry?

Oakland Athletics’ Billy Beane (who was the subject of Michael Lewis’ 2003 best seller “Moneyball”), once told me team chemistry was all nonsense. Teams think of themselves as having good chemistry when they win, and bad chemistry when they lose. “Show me a winning team, and I’ll show you a team with great chemistry,” he told me. “And show me a losing team, and I’ll guarantee you that people will say they have bad team chemistry.”

Success might lead to good team chemistry, but Billy’s point was that good team chemistry doesn’t lead to success. If you’re not a baseball fan, let’s put it this way: Show me a bank with a bad CAMELS rating, a consent order, and ongoing losses, and I’ll almost guarantee you an unhappy board that doesn’t get along.

The point is, chemistry may be all in our heads, but performance is not. Are board dinners a good thing, a bad thing, or are they just dinners? I think they can be a bad thing, but in the end, each board should decide for itself. Billy Beane just might agree with me.

jgarrett

Joe Garrett is a director of a bank in Southern California and was the CEO at American Liberty Bank during 1989-1994 in Oakland, California, and at Sequoia National Bank during 2000-2004 in San Francisco. He is a principal of the consulting firm Garrett, McAuley & Co.