The Harrison Drury Blog

Dealing with disputes in a fragmenting boardroom

boardroom disputePeople who own and run limited companies will always have their differences – that’s just a fact of life.

It is sometimes healthy for individuals within these businesses to have differences of opinion to enable ideas and decisions to be scrutinised and improved for the good of the business.

The important issue is often whether members of a board of a limited company have the ability to keep such differences ‘positive’ without allowing them to hinder the business, or create irreparable rifts between individuals. So how do you spot the early signs of trouble and ensure that you can navigate away from danger?

The common reasons why boardrooms become split

There are a whole host of reasons why disputes can surface in the boardroom; particularly in relation to owner managed companies. Many of these frustrations can be traced back to the inception of the business. There may be unease about unequal shareholding allocation, but which may have been glossed over at the time in the interests of pulling in the same direction to make the business a success.

Disagreements in relation to strategy, or concerns that certain directors aren’t contributing fully, are common causes of boardroom tension. In my experience, there are four common features that cause these disputes.  The following is on the footing that you have a business which is a limited company which is comprised of directors and shareholders

  • Different personal circumstances: Differences in personal circumstances can lead to different levels of commitment. You may have one director that treats the company as a ‘lifestyle business’, while another needs the business to create significant income for them. Likewise, some directors may be married with children, others may not have any dependents. There may also be issues arising out of differences in age; particularly if one director is coming up to retirement age and no contingency plan has been made. All of these factors can create varying attitudes to risk among directors and lead to different views about the course the company should take.
  • Different personality traits: While it is often beneficial to have a spectrum of different personalities who can offer differing insights and skills, this can also lead to misunderstanding and frustration. For example, one director may feel undermined if the other cannot understand and support his ideas. Similarly, there may be a scenario where one director wants to spend money on a project, but another director will not support the idea. These situations can lead to one or more directors feeling undermined.
  • Lack of experience: Many boards have little experience of what a board does and why it is important. The business may expand, but at some point growth may stall because the skills and experience needed to move it to the next stage are absent. This can cause frustration and disharmony, perhaps with some directors looking to keep what they have (with an eye on the exit door), and younger directors more willing to take risks to grow the business.
  • Breakdown of communication: Without some fundamental processes and communication mechanisms in place, conflict can arise and trust can be lost. Board members need to be able to understand colleagues’ motives and trust them to work effectively together.

What are the overt signs of a fragmenting boardroom?

I suspect most directors who have been involved in boardroom wrangles will not need to be told this, but from previous cases I have been involved with, it is surprising how long the warning signs are exhibited before they are addressed. Some common signs that all is not well include:

  • Board members hold fundamentally different views about future strategy
  • One director frequently expresses concern about another’s performance
  • One board member makes decisions without consulting other directors; often in breach of the company’s constitution
  • A lack of communication and transparency between board members
  • Board members split into factions rather than working together for the good of the company; Cliques start to appear and certain meetings are held in private
  • Investors and shareholders regularly express concern about management decisions
  • Directors become reluctant to challenge decisions made by other board members
  • Rumours circulate about certain directors

What you can do about it

There are many actions business owners can take to avoid disputes arising and this is not necessarily a director. First, the issues need to be identified and subsequently a plan of action to tackle these issues before the business is fundamentally damaged and relationships made irreparable.

Perhaps the best way to protect your business from boardroom disputes is by putting protections and measures in place from the outset, such as clearly drafted constitutional documents such as Articles of Association, Shareholders’ Agreement and the like. These documents should assist and reflect the intentions of the parties to it.  They should also provide for common situations such as death, retirement and the manner in which voting is dealt with at meetings.

These documents should be regularly reviewed and updated to ensure that they evolve with the business.

Sadly, it is not always possible to reconcile these differences and in such instances it is vital that appropriate legal advice is sought at the earliest opportunity to protect both the business and your personal interests.

For more information on overcoming boardroom disputes, or any other litigation matter, contact Nick Booth or Sean Gibbs on 01772 258321

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