Role of the Board in a Crisis and Dilemmas in Corporate Governance

Uncertainty and instability across politics, trade, and other areas are increasing the potential for crisis situations. So, when a crisis hits, what is the role of the board in shepherding their company through it? In a recent session that was part of Egon Zehnder’s Directors Development Program, Namrita Jhangiani, Partner at Egon Zehnder, was in conversation with O.P. Bhatt, former chair of the State Bank of India, on the boards’ role in a crisis and associated dilemmas in corporate governance.

In keeping with his background as well as the audience, Bhatt’s lessons on crisis management focused mainly on the banking industry and its specific challenges; for example, conflicts of interest, bad loans, frauds, government pressure, or misselling. “In the banking industry, these are some of the kinds of dilemmas that we face,” said Bhatt.  “And in the recent past, there have been lots of banks that have had problems because of lack of good corporate governance…So those are the kinds of problems I believe require corporate governance solutions or corporate governance actions of the highest order.”

Crises and dilemmas such as these require a collective response from the bank or firm, not an individual response from just the CEO or just the board. In fact, in situations where one of those entities is just a rubber-stamp for the other, accountability falters and crises are likely to worsen. Bhatt brought up several examples of boards that didn’t investigate potential problems in their banks. Through internal audits, technology audits, or other methods, these boards could have spotted issues within management or elsewhere before they spiraled out of control.

“Anything and everything, including somebody sneezing and that sneezing causes a storm, is the responsibility of the board,” said Bhatt. “You must have systems that will tell you directly or indirectly the health of the organization or specific issues if they stray from the normal. That is our responsibility as people who are stewards of this organization.”

As the potential for crises mounts, so do the responsibilities of the board. Many boards now count corporate social responsibility (CSR) and sustainability initiatives as part of their repertoire. And these arenas come with their own challenges and dilemmas. “So the responsibility of all board members increases manifold,” said Bhatt. “It is not only the business of the organization, but also the peripherals which are becoming more and more important.”

With this ever-broadening scope, it’s somewhat unsurprising that problems are able to slip past the board’s attention, only to be called out later by a whistleblower. But that’s not an excuse —rather, it should be a wake-up call that board members need better systems in place to detect these problems.

“The fact that many of these scams or frauds happen is testimony to the fact that our systems are not adequate,” said Bhatt. “And if our systems are not adequate, it is the board's responsibility to make sure that they are adequate.”

Bhatt listed several duties that should be enshrined in all board operations: care, candor, and loyalty. But, as he cautioned, “You can perform none of these duties if you have a conflict. If you have a self-interest. If you have a bias. If you are responding to some pressure. You have to be independent of all conflicts. Only then can you perform these duties.”  

When measuring one’s performance as a board member, Bhatt continued, this ideal should be front of mind. The most vital board members aren’t those who simply show up to every meeting. They are people with strong moral compasses, and who are able to call out troubling issues they see in the company. “People want to be wishy-washy or bury the problem or make it go away,” said Bhatt. “That is where there is a need to have some tough conversations.”

Bhatt advised that a tough conversation doesn’t necessarily have to be an impolite conversation or, even further, a shouting match. Instead, a board member’s point should be made with “fluency, logic, rationale, and consistency.”

When moving to diffuse a conflict or impending crisis, board members should remember one specific duty listed above: loyalty. Importantly, Bhatt explained, a board member’s duty of loyalty does not mean loyalty to the CEO, the chair, or any other individual person. Instead, it is loyalty to the company, and avoiding confronting conflicts that could hurt the company is doing a disservice to it.

“If you are sitting on the board, you must sit on the board with the consciousness that everything here, everything in this organization, is my responsibility,” said Bhatt.

The other two duties Bhatt mentioned—candor and care—are also instrumental in handling dilemmas or crises.

Candor means total transparency, and the formal disclosure of problems depending on the industry. “You should not hide anything,” said Bhatt. “There should be no surprises, and if there is, then you should be the one to call it out.”

Finally, the duty of care revolves around board members putting considerable effort and time into comprehending the questions and responsibilities in front of them. “The duty of care is that any decision that you make about the company, about the agenda, about the domain, it should be done with full application of mind, full curiosity, and full understanding,” said Bhatt.

When taken together, these duties form a kind of moral code that should guide board members in their response to a crisis. And in the end, that response can take several forms: a utilitarian approach that minimizes harm, a rules-based approach that considers established company principles, or a socialized decision based on a range of feedback. When a final choice is made, Bhatt says the rationale for it should be documented to show that due diligence was done, as people may still be hurt or impacted by that decision.

“Being a leader is not always about heroism and doing the right thing,” said Bhatt. “Many times, it is about carrying the pain, carrying the hurt, carrying the burden…If there is somebody who doesn't agree with you, so be it.  You have done the best possible job under the circumstances, and you have documented it, and you should be at peace with it.”