Is an “inner circle” actively operating within your board? We interviewed a panel of public board members, CEOs, professional service providers, and shareholder advisory professionals to sharpen our understanding of the workings of the inner circle and reach conclusions about their impact on governance.
First, do inner circles exist? Yes. Our panel indicated these coalitions operate pervasively.
Their value? Our panel indicated that inner circles most often function as a constructive facilitator of board dynamics and efficiently catalyze the full board's deliberative process — especially valuable during times of increased scrutiny, uncertainty, and heavy workload.
The inner circle defined
The inner circle is an informal subgroup within the full board of directors. This coalition emerges around the chairman or chief executive. Its existence is known but not officially acknowledged. Its power to agitate, act, and advise is known to all members of the board. Respect, trust, and candor emerge within the inner circle.
This is not a special task force or special committee or a special adviser.
This inner circle is an alert, continuously operating force for communications, influence, and guidance. During crisis, this coalition can mobilize to take charge of key decision-making responsibilities. Ultimately, the inner circle operates collectively within the full board to protect shareholder value.
What brings the inner circle to life?
The inner circle is born when care becomes a cause. Initially, natural factors of interpersonal attraction, including affinity and expertise, comprise the foundation of a fledgling inner circle. Then, it grows. Care was frequently cited as the essential intangible that tipped a simple social clique to a more focused and interlocked coalition that collectively assumes responsibility for protecting each other's reputation and professionalism — a get it done and get it done right mentality.
The inner circle is anchored around the chairman of the board or lead director, with power ceding to the chief executive during good times and reclaimed by the chairman or lead director during troubled times.
The inner circle typically numbers three to four (occasionally five) members. Our panel reported that it is not a given that inner circle members assume the head of the audit or nominating committee. Also, the panel indicated that the compensation committee head was infrequently a member of the inner circle. Some inner circle members feel that holding a committee head position overly formalizes their full board responsibilities and requires them to play a more official, governance-bounded role, i.e., committee leadership constrains their ability to operate.
An informal hub and spoke structure emerges and operates with regular, informal communication moving around the hub, i.e., the inner circle. Less frequent, more formal communications reach out from the hub to other board members who comprise the spokes of this informal structure. We call these members the “2nd ring.”
A newly appointed chief executive is initially given provisional status within the inner circle. With this provisional status, the CEO receives coaching and encouragement to move to the center of the inner circle, over time. Our panel was unanimous in reporting that any CEO wishing for longevity must earn the privilege of remaining within the inner circle — this is not an entitlement.
For the 2nd ring, the path into the inner circle is uncertain, and results from meritorious contribution that may stretch into years. The 2nd ring is discussed later.
The power of the inner circle
Traditional sources of power that operate within hierarchical organizations — the power to reward, punish, or coerce; the power derived from job rank — do not work well in non-hierarchical organizations such as a board of directors.
Inner circle power comes from subtle sources — their “juice” comes from the art and expertise of striking true rather than striking hard, loud, or simply often. Their leverage includes questioning techniques that gather information to educate, lead, and reveal; from wisdom and vision that leads to sound strategy. They possess a knack for using their expertise in ways that shape rather than dictate or demand. Trust allows this coalition to lead and, if necessary, take charge.
Our panel did describe “bully” board members who attempt to apply traditional sources of power to hijack or threaten a full board. These attempts meet formidable opposition as a result of the inner circle mobilizing the board to repudiate self-indulgent power grabs. These members fail to join the coalition and never pass the litmus test of caring.
The privilege to influence is continually earned. Resulting from well-managed processes, the inner circle accumulates power. With this accumulation, the role of the inner circle becomes more defined and its action more influential.
The inner circle does things the full board just cannot
Jim Brown's book, The Imperfect Board Member (Jossey-Bass, 2006), presents two fundamental responsibilities performed by every board — protect and direct:
• Protect: Boards pursue risk mitigation, especially during these turbulent times — losing ground seems more easily done than gaining ground. So, boards of protectors guide operating management toward more thorough, robust inquiry, which results in the minimization of risks rather than maximization of opportunity. The outcome is preservation of the brand and the business.
• Direct: High performance is expected from the enterprise. So, boards of directors engage in defining strategy, setting priorities and targets, and positioning the enterprise to deliver. This responsibility is demanding of time and expertise — navigating issues to consensus, stepping up to crisis, and remaining alert trustees over lengthy time frames. The outcome is competitive capability and marketplace wins.
Within Brown's parameters, our panel pinpointed six roles that are uniquely fulfilled by well-functioning inner circles. Exhibits 1 and 2 present these roles and define the work of the inner circle.
The special case: Taking charge
There are few, yet crucial, events that demand the full board to demonstrably step ahead of the chief executive in the daily management of the company: crises that endanger the viability of the enterprise; personnel matters that threaten to tarnish the brand; strategic opportunities that must be seized.
It is a time when power cedes back toward the chairman or lead director and away from the chief executive. Our panel indicated that rapid and seamless response was possible largely as a result of coalition's ability to access special knowledge from the 2nd ring and rapidly muster full board decisions. The short list of crucial events includes:
— chief executive replacement;
— M&A opportunities;
— public relations gaffes;
— local country statutory compliance requiring immediate corrective action;
— mobilization against a predatory board member.
Availability and accessibility were repeatedly mentioned as necessary “threshold' qualifications for inner circle membership. Beyond these, our panel identified behavioral characteristics that differentiate more highly contributing members. While none of our panel described a vetting process, the factors presented in Exhibit 3 are indicators of inner circle success.
When the inner circle becomes dysfunctional
We began our work with concern that an inner circle might simply be the vestigial remains of ceremonial board practices; a covert group that obscured transparency and threatened good governance practices. We pressed hard during our interviews — particularly with female and minority panel members — to investigate this issue. Our panel deemed this a nonissue.
Yet, inner circles do fail. But, their shortcomings were characterized more so as lackluster behavior — very rarely as destructive. The list of dysfunction includes:
• Troublesome Personal Agendas: On occasion, coalition members play their hand too forcefully. They oversteer, perhaps due to a personal agenda or simply by being overzealous. Strong coalitions self-correct; weaker ones lose their privilege to influence.
• Misunderstood Time Horizons: Many boards serve an enterprise geared toward operating in perpetuity; others are fixated on short time horizons with something like a liquidity event on the near horizon. This conflict is troublesome as members pursue their fiduciary responsibilities. It is the task of the inner circle to resolve this conflict.
• Inept Relationship with the 2nd Ring: There is an important balance of inclusion vs. exclusion between the inner circle and the 2nd ring. It falls to the inner circle to manage this balance. Ground rules for information, access, voice, and utilization play out, yet when the 2nd ring perceives their contribution as marginalized, the full board loses cohesion.
• Unearned Consensus: When groupthink invades the board, uncritical levels of consensus can lead to lax scrutiny and irresponsible decisions. The inner circle takes the lead in guarding against rubber-stamp mentality.
• Role Ambiguity: Members of our panel used the phrase “East Coast vs. West Coast board” to describe the divergent focus of boards. East Coast boards are more cognizant of the demarcation between governance duties of the board versus duties of operating management. In contrast, West Coast boards are skewed toward actions that build shareholder value and more comfortably cross over the boundary. Inner circle members assist in both member selection and setting the tone for managing the boundary between governance and operations.
Life in the 2nd ring
The 2nd ring is respected by the inner circle. Board membership continues to represent an honored class even as ceremonial board participation is replaced with professional board participation. As such, our panel reported that respect is extended to all board members as an entitlement, with influence remaining an earned privilege.
No matter the actual professional breadth and depth of 2nd ring members, they are generally considered as specialists or role players by the inner circle. As the inner circle's responsibility for 2nd ring inclusion plays out, the inner circle takes initiative to informally catalogue and calibrate the talents of the 2nd ring members and then adroitly leverage their value during both protect and direct situations.
The 2nd ring members accurately perceive their status. They concede that while they have a board vote, they rarely have an equal board voice. Their fulcrum often balances between personal concerns about being underutilized versus concerns about being marginalized as a result of their status. Signs and symbols may be subtle but are nonetheless clear markers of status and their avenues of influence to the chairman and full board. The signs and symbols of 2nd ring membership include:
— Others have more comprehensive board information and have it sooner;
— Sentinels surround the chairman, access is limited;
— There is reasonable disclosure but not confidential disclosure of information;
— Emissaries arrive to explain or “test” upcoming board matters.
Members in the 2nd ring expressed concern about heightened risk due to having less board information and often-shorter time periods to digest, formulate, and test decisions than inner circle members. Their perceived risk was described as both fiduciary — making accurate, informed decisions on behalf of shareholders — but also more personal, including concerns about liability as a result of decisions being often prepackaged and already on the downhill side of closure by the time a matter was surfaced.
Some 2nd ring members are content with the more limited demands on their time. For these members, the 2nd ring is a relatively safe and inconspicuous place to serve and learn.
Marquee-value executives rarely make the inner circle of boards other than their own. They generally do not have the time availability and engagement to match well with the inner circle. Their motivation to serve may be more weighted toward being away from their operation for a day or two, wishing to learn best practices from another organization or simply observing how another leader and board does their work.
Bottom line: while members of the 2nd ring provide somewhat more limited service than inner circle members, the inner circle views this deficit as a matter of limited availability, not limited capability.
The personal price of being in the inner circle
Board members self select into the inner circle. They are drawn by the belief that they contribute more working in the center than working on the periphery of the board. This enhanced accountability extends beyond protecting shareholder interests to a broader role in representing customers, suppliers, and employees, as well as shareholders.
Inner circle membership requires surprisingly greater availability, impromptu access, and loss of privacy. Our panel reported that new coalition members are unprepared for this intrusion. New members leave behind their own personal priorities — they no longer blend into the full board. Their skills, experiences, and capabilities are fully exposed — some try to perform these roles and create distance between themselves and their role but find they are unable to remain within the coalition. These members typically leave the service of the board.
Interaction with the 2nd ring changes. Candid and informal conversations are replaced with more staged and formally managed conversations. Nothing is off the cuff. Members of the 2nd ring don't have to speak up — inner circle members must speak up offering direction, wisdom, and persuasion.
The inner circle is often asked to carry through in delivering tough messages and personally handling tough tasks. These tasks are never 2nd ring tasks.
This is the price to pay when care becomes a cause.
Does the inner circle add value?
Shareholder advisory professionals suggested that any concentration of control over the board was a threat to good governance. They added that it was ideal but unrealistic for every board member to be fully informed and fully included. Practically, they suggested that the inner circle was a necessity, and most likely a reassurance to institutional investors.
In addition to shareholder advisers, many of our panel indicated that the inner circle was a necessity — enabling efficient information management, maintaining sound interpersonal dynamics, and offering wise counsel in guiding process and shaping decision.
Boards of directors are most frequently staffed with current or former masters of their own hierarchical organizations. These high achievers join together in the high-stakes application of participative management to govern U.S. public corporations. Yet, for corporate officers and independent directors, the dynamics of interpersonal relationships both inside and outside the boardroom demand personal temperament and professional management skills that typically are not honed, reinforced, and rewarded as their careers ascended.
Our work pulls back the curtain and sheds light on the collective behavior of an influential subgroup that can and most often does wield constructive influence in directing and protecting their corporation. Our definition of the role and work of the inner circle, plus individual member competencies, provides a more precise understanding and vocabulary of board dynamics where it has not existed previously in these areas. â–
The authors can be contacted at pdailey1@yahoo.com and charlie@chicagochange.com.