How Do You Create an Effective Corporate Board?

An effective board, consisting of executive and non-executive directors, should be viewed as a key requirement for organisations of all sizes competing in today’s global economy, allowing organisations to be lead from the top and to be able to create focus and confidence in uncertain times and uncertain markets. The board should be a source of competitive advantage that can be used to enhance an organisations short and long-term performance, thus giving confidence to its shareholders, employees, suppliers and customers.

In fact a superior board should lead to superior financial results, compared to those of their competitors; and these strategic leaders will develop organisations that have highly developed people who are flexible and focused on their own needs, the needs of their departments and the needs of their organisation, leading to the organisations greatest asset being its intellectual capital.

History tells us that most board members, especially non-executives, are either selected by the initial stakeholders, the financial backers or the CEO based on personal relationships, affiliations or friendships and are expected to vote with those who ‘brought them in’; and hence Epstein and Roy (2004) believed this was the reason why “many directors have not been the active counsellors, vigilant monitors or sceptical judges that are necessary for high performance boards and high performance organisations” (p.5).

In fact Westphal and Khanna found that directors who challenged management decision making on strategic issues tended to be informally sanctioned by other directors. Although institutional investors have pressured outside directors to adopt a more controlling posture, Westphal and Khanna found that such pressure has not weakened normative sanctions against challenging the CEO on strategic issues and may even have strengthened them as corporate leaders ‘close ranks’ to protect their decision making autonomy (2003, cited in Westphal and Stern, 2006:174).

Ruigrok, Peck and Keller (2006) commented that “outside directors are a potentially rich pool of expertise; as the involvement of outside directors in strategic decision making has the potential to enhance the quality of strategic decisions and thereby to improve the company’s competitive position” (p.1221). Where “inside directors on the other hand depend directly on the CEO for their career advancements, and may thus hesitate to oppose and challenge strategic proposals of the CEO” (p.1206).

Although there are different thoughts as to what an organisational board’s key responsibilities are, most agree that the board has a fiduciary duty to represent the corporation’s interests in protecting and creating shareholder value and must determine whether the company is managed well to achieve long term success. As such high performing boards must achieve three core objectives (Epstein and Roy, 2004);

1) Provide superior strategic guidance to ensure the organisations sustainable growth and prosperity;

2) To ensure accountability of the organisation to its stakeholders, including shareholders, employees, customers, suppliers, regulators and the community; and

3) To ensure that a highly qualified and effective executive team is managing the company.

Creating a board with the correct knowledge and skill set will have a direct impact on the strategic leadership and corporate governance equation. There has been considerable research into the key knowledge areas that should be understood (and practically applied) by board members, and these include; corporate strategy formulation; competition; global markets; leadership; strategy implementation; change management; group effectiveness; organisational design; government, investor and community relationships; functional knowledge and ethics.

So just how effective is your board? Do you have a board with the right mix of executive and non-executive directors – do you have a group of people who;

1)     Challenge the organisation to be the best it can be;

2)     Bring a set of special skills and business networks;

3)     Have a passion for the organisation and its future;

4)     Aren’t afraid to challenge the status quo;

5)     Willingly commit the time and effort required to perform their role – they go the extra mile, for the organisation. 

Finding the right non-executive directors, should be a priority and key responsibility for all CEO’s and Chairmen/women – as it’s this special group that can turn good organisations into great organisations.

References

Brownbill, N. (2008). Exploring the relationship between Strategic Leadership and Corporate Governance. Paper presented at the 8^th International Conference on Studying Leadership.

Epstein, M.J., and Roy, M-J. (2004). Improving the performance of corporate boards: Identifying and measuring the key drivers of success. Journal of General Management. Vol.29, No.3: 1-23.

Ruigrok, W., Peck, S.I., and Keller, H. (2006). Board characteristics and involvement in strategic decision making: Evidence from Swiss companies. Journal of Management Studies, 43:5, July: 1201-1226.

Westphal, J.D., and Stern, I. (2006). The other pathway to the boardroom: Interpersonal influence behaviour as a substitute for elite credentials and majority status in obtaining board appointments. Administration Science Quarterly, 51: 169-204.