Episode 5 - Naughty Shareholders who cross the line

Shareholders play a critical role in governance, but what happens when ownership starts bleeding into Board decision-making or management operations?

In this episode of Off the Record, Adam Coonan and Lisa Coletta explore the challenges that arise when the boundaries between shareholders, Boards and management become blurred.

They discuss the difference between ownership rights, governance responsibilities and operational accountability, and why governance relies on clarity around who decides what, through which forum, and under which authority.

The conversation explores the behavioural dynamics that emerge when influence begins operating outside formal governance channels, including informal lobbying, side conversations, boundary drift, hesitation, appeasement and the erosion of trust in decision-making processes.

Adam and Lisa also examine why founder-led, family-owned and privately held organisations can be particularly vulnerable to these dynamics, and how even well-designed governance frameworks can become destabilised when influence starts operating through unofficial pathways.

Transcript

0:05

Well, hello, listeners and watchers. Possibly. Uh, welcome once again to Off the Record, a podcast full of governance conversations that don't make the minutes. I am Adam Coonan, and I'm here with my friend Lisa Colletta. We are both governance consultants, and between us bring different lenses to governance. In this podcast, we explore what's really driving decisions inside boardrooms, not just the structures and frameworks, but the dynamics, tensions, feelings and conversations sitting underneath them. Everything we share is drawn from our experience working with boards, chairs, and executive teams. These are, of course, our perspectives and do not constitute legal advice or formal governance guidance. And so with the introduction and disclaimer gone, I go to today's topic, which I think I alluded to in a previous episode, Lisa. It's one I suspect many organizations quietly recognize. Partly founder-led, privately held um family business environments are can we just go again? Sorry, I just got that word wrong and it was bad. Start again. Particularly, particularly your word. Let's start again. Go for it. Good afternoon, everyone, or morning, depending on where you're joining us from. Welcome once again to Off the Record, a podcast full of governance conversations that don't make the minutes. I am Adam Coonan and I'm here with Lisa Kolletta, my great friend and uh sparring partner. We are specialist governance consultants and bring, as you will know if you've heard us, different lenses to this governance caper. And in the podcast, we explore what's really just driving decisions in boardrooms, not just the structures and frameworks, but the dynamics, tensions and conversations, and dare I say feelings sitting underneath. Everything we share is drawn from our own work experience working with boards and their executive teams. These are our perspectives only and do not constitute legal advice or formal governance or guidance. Uh, with the uh formalities and disclaimer out of the way. Uh let's get to today's topic, Lisa. Uh, one that I suspect many organizations quietly recognize. I I alluded to this, I think, in a recent podcast, but it's particularly founder-led, privately held and family business environments that uh this is really prevalent in. Um, and that is what happens when shareholders forget which hat they are wearing, or perhaps never realize the hats that they uh have on or have don't have on are meant to stay separate in the first place. Um we call this uh as a working topic uh naughty shareholders. Um Lisa, where do you think this starts becoming problematic? Oh, look, I think it often starts from a really understandable place, Adam. A shareholder wants visibility, they want involvement, they want comfort, they want reassurance and connection to what's actually happening inside the business, particularly when they've invested a significant amount of money and time and energy or even their identity into building it. And it's and in many organizations, particularly those founder-led businesses, that can feel very normal for quite a long time, but normal and appropriate are not always the same thing. Um, and that complexity really begins when shareholders' influence starts bleeding into governance decision making or directly into management operations. Um, and you know, as you know, Adam, those roles are really fundamentally different. Shareholders have ownership rights and boards have governing and fiduciary responsibilities to all shareholders, and they're making decisions as a collective, of course. And management has operational accountability to the board. And once those lines start blurring, decision making can become incredibly distorted very, very quickly. Indeed, because governance, and here is you know, my hat as we take in these uh things, and we're talking about hats today. Yeah, we are. Governance fundamentally relies on clarity of role and authority in a technical sense. So shareholders absolutely have important rights and influence, but those rights are designed to operate through defined mechanisms like shareholder meetings and their voting rights, uh, the constitution and the reserve matters, I guess, for shareholders, and and you know, the formal governance structures. So what becomes difficult is when influence starts uh occurring outside of those structures. And again, you you you focus on the fact that it's understandable. But, you know, for example, you see shareholders directing management informally or lobbying directors individually or attempting to shape operational decisions without uh the accountability that normally sits alongside the formal authority. And often the people inside the organization don't know how to respond because technically the shareholder holds power, and in you know, some of these environments um you know that's a lot of power. But governance frameworks are designed so that power is exercised through these clearly defined roles. They are um so what do you see happening behaviorally once those boundaries begin dissolving? Yeah, look, usually confusion. Confusion starts emerging really, very quickly. Management can become unclear about who they're actually accountable to, you know, whose direction to take that takes priority or where decisions are generally being made. And the board itself can start operating in a really destabilized environment because governance slowly shifts away from these formal forums onto side conversations and private lobbying and informal influence and the pressure outside the room itself. And of course, none of that makes the minutes. Um, you know, the minutes still show the resolutions, the approvals, and the actions, but they often don't actually capture the invisible power dynamics sitting underneath those decisions themselves. And this is where people can start feeling really exposed, I guess, psychologically, because challenging a fellow director is one thing, challenging a majority stakeholder, particularly one who can influence your position, your future, or your, you know, all the commercial environment around you, it feels really, really different. And I think it's important to say that you know, that hesitation in those environments, it's it's not a weakness for those that are actually in that position. Often it's a completely rational read of the room. And the real issue is the environment that made hesitation feel like the safest option itself. And um, yeah, I think Yeah, well, look, I I think that's where many boards quietly struggle, yeah, particularly in these founder-led organizations, which you advise all the time, where a shareholder may have been historically in the operations for years and years. There's a there's a history attached to the business, uh, it's part of their identity, possibly. There's an emotional investment, um, certainly a financial dependence. And and then uh, dare I say it, sometimes you even see the family dynamics playing out. Yeah. So even when formal governance structures evolve, uh for various good reasons, behavior doesn't necessarily always evolve at the same pace. And the board can slowly start accommodating um this sort of boundary drift um informally, perhaps, but but rather than consistently holding the the governance line. Um and this is, I think you made the point. It's not a weakness necessarily, because it's it's not necessarily a lack of capability, but but because the holding of the line can feel uncomfortable, um, politically difficult, and you know, in a lot of cases, uh sometimes even career limiting. Oh, look, it look it definitely can. And once it happens, that behavioral environment around decision making, it changes really quite significantly. Because when people start believing that influence sits outside the room or that decisions are really being shaped somewhere else, the integrity of the boardroom itself starts eroding. And you begin seeing behaviors like silence, appeasement, political positioning, passive alignment, and avoidance emerging. Um, and not necessarily because people are incapable, but because the environment no longer feels clean. And clean is actually one of the words I hear most often when people describe healthy governance environments. Not sophisticated, not compliant, clean. So, you know, meaning people understand where decisions are made, how authority operates, and they trust the process enough that they don't need a second conversation afterwards to understand what really happened there, like really happened. Um, you know, because structurally, the governance framework might still exist on paper, but behaviorally, the power is now operating through a completely different system. And eventually the formal board process can start becoming performative, and the discussion occurs in the room, but the real decision making is happening somewhere else. So, from a practical governance perspective, I think the the first thing boards need, well, in any environment, but definitely in these ones, absolute clarity around decision rights. Uh, so this person who's wondering what happened, you know, there's never a scenario of like, oh, didn't you, weren't you in that conversation with Lisa? Uh, but you know, the decision rights, who decides what, through which forum, using which authority, and importantly, which matters properly belong at the shareholder level, the board level, and the management level. Because once those lines become blurred, particularly when you've evolved a governance structure and made a transformation to you know something new, um, confusion and inconsistency follow just as a result very quickly. Um I think the second piece is discipline. Yeah. Boards need to consistently redirect matters back to the appropriate uh governance channel when there's a either uh seeing or or or feeling of boundary shift or boundary drift starting to occur. Yeah. Um, because governance frameworks only work if the people are willing to operate within them consistently. Yeah, that's not sure whether that resonates when you step into these environments and experience these dynamics. What what signs do you usually see? Yeah, look, it's a few things tend to appear pretty quickly. Um, what we see is management seeking informal approval outside the formal channels. You know, I'll just check with the chair, I'll just check with so and so. You know, directors becoming hesitant to challenge particular individuals around the table, um, even if they don't agree, or even if content or what they're actually saying is factually incorrect, which is a little bit scary. Decisions are being revisited after meetings because conversations occurred elsewhere. Um, so the decision may have been no in the boardroom, but yes outside the boardroom, or even confusion around whether a decision is actually being made at all, because um there was a discussion, but there wasn't real clarity on the landing. Um and that discussion may or may not have been in a boardroom and it may or may not have been with the whole board present. And you know, does that really constitute a legal or in the minutes, dare I say? Or in the minutes, exactly right. You know, does that really um, you know, was there really a decision made and is it a legally binding decision? Um and of course, one of the strongest indicators is when the board at meeting itself starts feeling performative, you know, the papers are tabled, the discussions all had at a really sort of surface level, resolutions get passed, but everyone quietly understands that the real influence that's somewhere outside the formal process anyway. Uh and over time that becomes incredibly destabilizing because people stop trusting the process. They don't trust the forum, and sometimes they don't even trust the governance roles themselves, which is really concerning. Yeah, yeah, no, that's that's a really interesting perspective. I I think uh ultimately governance only really works when authority, accountability, and influence operate through the right channels. I I possibly have already said that, but interestingly, the the organizations that get this right are not always the ones with the, and again, I'm shooting myself in the foot here, I know, uh, aren't always the ones with the most sophisticated governance documents. Um they're usually just the ones with enough discipline and clarity to consistently say, I guess, perhaps chair-led but equally strong directors, look, that's a shareholder matter. So let's deal with it through the appropriate forum. It's obviously a simple sentence, but it's, you know, a very difficult discipline. And again, particularly in these um evolving environments. Absolutely, absolutely. Because, you know, once those lines become blurred, the impact isn't just structural, it's behavioral. And it changes how people speak and challenge and escalate and ultimately make decisions. Um, and those are exactly the kind of governance dynamics that really make the minutes, Adam. Indeed, indeed. Well, thank you everyone again for joining us for an episode of Off the Record, and we'll see you next time. Absolutely, and it's a podcast full of governance conversations that don't make the minutes. Thanks for joining us. Indeed, indeed. Okay, bye everyone.