How Important is Board Composition on Organisational Performance?

History shows that many board members were selected by either the initial stakeholders, the financial backers or the CEO based on personal relationships, affiliations or friendships and were expected to vote with those who ‘brought them in’; and hence Epstein and Roy 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” (2004: 5).

 In fact Westphal and Khanna found that directors who challenged management decision making on strategic issues tend 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). 

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; (1) providing superior strategic guidance to ensure the company’s growth and prosperity; (2) to ensure accountability of the company to its stakeholders, including shareholders, employees, customers, suppliers, regulators and the community; and (3) to ensure that a highly qualified executive team is managing the company (Epstein and Roy, 2004). 

It’s worth noting that not all board structures are the same and Nadler helps us in this regard by identifying five types of board structure;

“(1) the passive board – this is the traditional model where the board has limited accountability and ratifies management’s decisions; (2) the certifying board – where the board certifies that the business is managed properly and that the CEO meets the board’s requirements; (3) the engaged board – where the board serves as the CEO’s partner. It provides insight, advice and support on key decisions; (4) the intervening board – this board is common in crisis and becomes deeply involved in making key decisions about the company and holds frequent, intense meetings; and (5) the operating board – where the board makes key decisions that management then implements. This model, for example, is common in early start-ups” (2004: 105).  

Creating a board with the correct knowledge and skill set will have an 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 (Conger and Lawler, 2001; Epstein and Roy, 2004; and Lawler, Finegold, Benson and Conger 2002). 

Of course selecting directors just on the basis of their experience, knowledge or skills is not enough, as these groups of individuals have to be able to work together to optimise the organisations short and long-term performance. The very fact that they are now ‘independent’, and haven’t worked together before can be as detrimental as it is beneficial. Hence the ability to work effectively as a team, to focus on issues and not personalities, will be a key influencing factor in the success of the board, and yet it appears that little, if any, attention is paid to team work and team development, often assuming that at this level they must already possess these skills (Conger and Lawler, 2001:16). Nadler takes the concept of teamwork even further stating that “the key to better governance lies in the working relationships between boards and managers, in the social dynamics of board interaction and in the competence, integrity and constructive involvement of individual directors” (2004: 102). 

The thought of having a position on a board may be many peoples way of assessing whether they have ‘finally made it in the corporate world’ yet board leadership is not a job for everyone, even for those who have been successful running their own businesses or have been successful in other pursuits. As Carver states “in their commitment to put governance on a path towards increasing competence, boards must determine the personal characteristics needed for optimal board leadership and then seek suitable candidates or seek to influence those who can elect or appoint such individuals” (Carver, 2007: 4).  

Researchers have also looked at the impact the size of the board has on strategic leadership and organisational performance, although in most cases the research has only evaluated large listed corporations. Some believe that in respect of board size, ‘the more the merrier’ as the organisation with a larger pool of expertise to call upon is more likely to be able to deal with all eventualities. The ultimate belief is that “larger boards are better able to make significant contributions in strategy development, because they integrate multiple perspectives and are able to develop more holistic alternative solutions”  (Ruigrok, Peck and Keller, 2006: 1205). Whereas Forbes and Milliken note however that “diverse boards are also likely to experience communication and coordination difficulties that inhibit the effective use of knowledge and skills, because their members may be unaware of each other’s expertise or unable to appreciate its applicability to issues facing the board” (1999: 498).  

Every year the Toronto Stock Exchange requires listed companies to disclose how they stack up against a set of 14 corporate governance ‘best practice’ guidelines. Scores were encouragingly high (80 percent or more) for guidelines dealing with control of board size and participation in strategic planning. However fewer than 20 percent of the respondents had any formal process in place for assessing the effectiveness of the board and even fewer had any process for assessing the contribution of individual directors (Kazanjian, 2000: 46); the New York Stock Exchange also requires similar board evaluations (Nadler, 2004). “The concept of board evaluation has met with particular resistance; directors remain either unprepared or unconvinced of the benefits gained from evaluation” (Long, 2006: 551). Unfortunately the potential benefits such as improved leadership and teamwork, clarity of roles and responsibilities, improved accountability, decision making and delegation, and enhanced communication and operations are countered by fears concerning operational disruption, board dysfunction, and individual humiliation and exposure.  

It is worth noting that many corporate boards have not transformed to the legislative, operational and leadership requirements of the 21st century, and are still caught in the ‘old ways’ of operating. Unfortunately there isn’t an option, board structures need to change to ensure effective governance and compliance, as board members are now under greater pressure to govern their organisations adequately.

Board members have not only seen an increase in their responsibilities but also seen that “the complexities and the competitive standards are increasing, along with the recognition that boards need to have regard to more matters and to deal with them more effectively” (van der Walt and Ingley, 2001: 314).

So isn’t it time for us to take board structures more seriously?

References

Brownbill, N. (2008). Exploring the relationship between strategic leadership and corporate governance.  Academic Paper presented at the 7^th International Conference on Studying Leadership.

Carver, J. (2007). Beyond board self-evaluation. Board leadership, Jan-Feb: 4-5.

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.

Nadler, D.A. (2004). Building better boards. Harvard Business Review. May: 102-111.

van der Walt, N., and Ingley, C. (2001). Evaluating board effectiveness: the changing context of strategic governance. Journal of Change Management. Vol.1, No.4: 313-331.

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. 

What’s the Impact on Society When Role Models Turn Bad?

“Not content with winning by breaking the rules, he rewrote the record books for cycling’s blue ribbon event and constructed a detailed phoney biography with a kernel of truth in his battle with cancer and a tissue of lies about his triumph of mind over matter. He then used that biography to turn himself into a living icon and his name into a mighty fundraising brand.” (p.2). Lance Armstrong inspired people beyond sports, to include people in business, education and with their own personal battles with life’s harsh realities.

This man, who had inspired so many people, vehemently denied any involvement in cheating and using his band of ‘blindly loyal’ followers destroyed anyone who accused him of such low and disgraceful tactics. Only when there was no way out, did he have to look up the word ‘cheat’ in the dictionary and for the first time admit to cheating – not because he was sorry for the lives he’d destroyed, but because he realised he’d been caught and needed to get his public relations machine moving for his own narcissistic image – hoping he could still get people to feel sorry for him.

Yet as Simon Barnes of the Times wrote in an aptly article entitled ‘the winner who made us all losers’ - “the world has a need for heroes. In youth we love our heroes without reservations, in age we see them more plainly – but we still love to admire admirable people; to establish that meaningful, one-way relationship with a person that has done heroic things. Sport exists to fulfil that need, where last summer brought us heroes in the UK like Jessica Ennis, Mo Farrah, Andy Murray, Ellie Simmonds and Bradley Wiggins, who won the Tour de France.”

And we mustn’t forget the ‘tag line’ for last year’s Olympic Games in London was “Inspire a Generation” something that is desperately needed and if we’re not careful this fantastic catalyst will be lost forever.

Through history we have had a steady stream of inspirational role models that made us want to be better – better people and better civilisations; yet in an era when inspirational and ethical leaders should be easier to find and easier to be promoted though all the media options available - they seem to be a bit thin on the ground.

Hugh McIlvanney went even further in the Sunday Times, writing “cheating might not be the most repugnant element of Armstrong’s legacy. Perhaps that is to be found in his unscrupulous readiness when he was a competitor to devastate the reputation of anyone who crossed him. With him, the term killer instinct went alarmingly close to being literal,” (p.18).

What are our youth meant to think – we want to find role models that will inspire the youth of today, many of whom struggle to find a light at the end of their tunnel to drive and motivate them to achieve their dreams. And here they see a man who has cheated and lied to the world, making millions of dollars through lying, still living a luxury lifestyle and being able to sit centre stage with Oprah Winfrey claiming he feels he’s been treated harshly – when not that long ago an honourable man would have fallen on his sword in disgrace and not long before that would have been banished from the kingdom to walk namelessly and alone for the rest of his life.

Will Pavia writing in the Times reminds us that this is the man who said (amongst other things) “for the people who don’t believe in cycling, the cynics and the sceptics. I’m sorry for you, I’m sorry you can’t dream big” he had said in 2005 after his seventh and final parade to the winner’s podium as the man who recovered from cancer, mounted his bike and beat the world – also saying “I’m sorry you don’t believe in miracles,” (p.16).

Yet the realities are best voiced by other sports personalities where “Novak Djokovic, the tennis champion, called him a disgrace saying ‘he cheated the sport. He cheated many people around the world with his career, with his life story….He should suffer for his lies’ and Nicole Cooke, the British cyclist, called him ‘a disgusting human being’. Where it is hard to argue with their assessments, for they know better than most that cheating is always cheating, as this man by doping was stealing from any rider who was brave, honest and strong enough to stay clean.” And where in France Rue89.com had already voted Armstrong ‘the Sports Bastard of the Year’.

As Simon Barnes writes “Armstrong cheated all his admires; cheated everybody who followed sport; cheated everybody who believes that when we see a person achieve something special, we should not withhold our admiration.”

With these kind of revelations maybe we shouldn’t be surprised with the constant stream of unethical stories from business, sport and politics hitting the headlines on a regular basis all driven by narcissism and greed – but what it should tell us is that it’s time for ‘us’ the public to start demanding and recognising those genuine, humble role models who are out there and who can inspire, motivate and guide this generation and generations to come to embrace and recognise the real benefits of ethical values and ethical leadership.

References

Barnes. S. The winner who made all of us into losers. The Times. 19.01.13. p.17

Leading articles. Broken Lance – If cycling’s worst cheat seeks atonement, he has some way to go. The Times. 19.01.13. p.2

McIlvanney, H. Confessions of a con man. The Sunday Times. 20.01.13. p.18

Pavia. W. I didn’t view it as cheating: it was just this perfect story. The Times. 19.01.13. p.16

Is Employee Loyalty a Realistic Business Proposition in the 21st Century?

Prior to the early to mid-20^th Century most of the world was used to lifetime employment and where Britain, for example, had such a strong manufacturing industry that lifetime employment was the norm and generations from the same family would work for the same company, rarely leaving their community.

It was during the sixties and seventies that the norm changed and ‘career advisors’ were recommending people to have moved jobs three times before their thirties, suggesting that this gave them greater exposure to different business methodologies across different firms (which was sound advice as long as the organisations were reputable); and during this time the concept of lifetime employment became the exception rather than the rule.

But it’s not clear why the concept of employee loyalty should have been lost with the change in employment practices, as career development shouldn’t stop employees and organisations working in an environment where employee loyalty can exist (while they are with the organisation).

Thirty years ago Japanese style management was being taught in business schools across the world, where lifetime employment and employee loyalty was the norm and where the positives of ‘encouraging’ and ‘building’ employee loyalty was considered a competitive advantage for the West to incorporate back into their business models.

In fact it makes sense for organisations and employees to work together to create an organisational culture that encourages a natural loyalty to the organisation during their tenure at the company. Someone who is loyal is more committed, more content and more dedicated than the alternative working environment.

Organisations should accept that employees will leave to gain further experience, maybe in a different function, or a different industry or a different geographic location; but that doesn’t mean that the ‘talent’ won’t come back again with a new set of skills later in their career, in fact maybe that’s exactly what some organisations should be encouraging. Further a ‘loyal’ employee that leaves for further experience and development elsewhere, can still be a great ambassador for the organisation or organisations they have worked for – not just speaking highly of their products and/or services, but encouraging other ‘talented individuals’ that this is an organisation they should want to work for.

The foundation of customer service proposes that offering loyal service gives an organisation the advantage, not only to be able to fulfil their customers’ present needs, but also the ability to anticipate their future needs. This ability to anticipate presents the firm with the opportunity to surprise and delight customers on a consistent basis thereby reinforcing to the customer, the firm’s service loyalty and subsequently affecting a responsive and sustained patronage.

In fact Jay Kandampully wrote way back in 1998 that one of the greatest challenges facing organisations today is the ever-growing competition, the continuous increase in customer expectation and customers’ subsequent demands as service improves. Moreover, customers are becoming increasingly critical of the quality of service they experience. Customer demand and competition are forcing firms to cut loose from the traditional customer satisfaction paradigm, to adopt proactive strategies which will assist them to take the lead in the market-place.

And I suggest that what is true for the customer is also true for the employee – they have greater expectations and demands than ever before; and are becoming increasingly critical of their employers.

Employee loyalty can be developed in a mature business culture that accepts that employees will migrate for various reasons in today’s global business environment; and rather than frowning upon it they should embrace it and where possible include migration paths within the career development strategies for their most talented employees, as a minimum.

Employee loyalty may not seem a natural concept in today’s fast paced and uncertain world – but the basics that allow loyal relationships to develop are solid business principles that organisations should want to see as part of their organisational culture.

Employee loyalty often doesn’t get off the starting grid as organisations and employees fight over the ‘chicken and egg theory’ – i.e. who will make the first moves to allow loyal relationships to be formed; and it takes a strong and confident leader to make the first move. But that’s exactly what’s required if the organisation is going to reap the significant performance and cultural rewards that a firm of ‘loyal’ employees generates.

So one question you should consider in 2013 is how loyal are my employees and do we have an environment that encourages loyalty?

References:

Kandampully, J. (1998). Service quality to service loyalty: A relationship which goes beyond customer services. Total Quality Management, Vol. 9, No. 6, p.431- 443.

Will You Take the Right Strategic Approach in 2013?

The global recession has effected organisations differently across different industry sectors, while in different stages of their business life-cycle and operating in different markets; but a key question is, “are you approaching your organisational strategy for 2013 from a clean sheet of paper perspective or simply adding to your past strategic discussions?” - where if the latter, don’t be surprised if cracks start to appear in the foundation of your planned future.

 

Strategy is a core activity that if developed and implemented correctly drives the organisations future growth, as well as the functional strategies of sales and marketing, operations, the human resource, finance, IT etc; so it’s worth doing it right and giving it the attention it really deserves.

 

As Kathryn Hopkins, Economics Correspondent of the Times highlighted in a recent article, “fears are growing that Britain’s beleaguered economy is on the verge of going into an unprecedented triple-dip recession after the country’s dominant services sector suffered its first contraction in two years.” This on top of the US spending too much time on political positioning rather than fixing their horrendous level of debt, which could lead to a further meltdown in the US economy, remembering that over 46 million people are already below the poverty line according to the 2012 census.

 

There seem to be three distinctive styles to approaching strategy – the passionate futurist approach; the we’re okay as we are approach; and the ostrich approach.

 

The passionate futurist is someone who knows that strategy plays a key part in defining their organisations future, where they just don’t want to be ‘part of a future’ but want to be part of ‘creating the future’ for their industry. They have strong, professional leadership skills and know that everyone in their organisation has something to contribute to the organisations future and want to hear what ‘they’ think the opportunities and threats are to the business. They will always start each year’s strategic progrmme from a clean sheet of paper perspective, where all assumptions and facts have to be re-checked and nothing can be taken for granted; and they appreciate that the final strategic outputs will be defined by the integrity of the analytical inputs to the process. Far from being nervous about bringing in outsiders to facilitate the strategic development process and support the implementation process, they appreciate the importance of bringing in the right ‘outsiders’ that have no pre-conceived ideas about the organisations future and who will ask those often simple but business changing questions and facilitate the process from start to finish.

 

The “we’re okay approach” is way too common, where the leadership are ‘happy’ with how things have gone and are currently going. Strategies are less formal and often comprise of the famous ‘strategic weekend’ when the focus is on regurgitating common assumptions about their industry, customers and competitors. The CFO will give an appraisal of the financial position which looks good to average before they meet their wives for a lavish dinner to say thanks to the executive team. They then go back to their organisation and again, if you’re lucky, there will be a communication session to the whole organisation; more likely it will be left to the divisional managers to ‘do their own thing’ with their staff (which is where strategic confusion often starts, with a different emphasis being put on the future by different executives). They approach outsiders with scepticism (which can sometimes be well placed, based on bringing in ‘wannabe’ strategic specialists, who just managed to alienate the whole top team and send them down an expensive path to a fancy 100 paged document no one understands and which has no strategic meaning). Unfortunately though, this do-it-yourself approach loses out on the real reality check of the business and the real opportunity to optimise their businesses future growth. While they stay ‘okay’ things just tick along and they’re happy following the market leaders. Of course the down side is that without the clean sheet of paper approach they often miss opportunities (they didn’t even know about) and are often totally lost when the business starts to fail or the market changes significantly.

 

The ostrich approach is applied by the leadership of organisations that can be either too arrogant or too scared to truly embrace their own weaknesses about business. Strategy to them is a boring concept invented to make other people rich rather than having any practical place in business – where either, what they don’t know about their business isn’t worth knowing or what they don’t know about business is too scary for others to find out. They do have ‘business’ visions, which they tell their executive team about but often lack the reality check on their business environment. When things start to go wrong they blame the executives in change of the failing area or areas; and as such they often have a high staff turnover at all levels; but in an economy where supply of labour outstrips demand always find someone else to fill the ‘void’ and to be held accountable. Many of these organisations will close over time, but the leaders have often amassed sufficient savings to not only survive but not to recognise that they failed the business and their staff, often believing themselves to be competent leaders and entrepreneurs.

 

The final category may sound quite harsh but strategy is about optimising an organisations future, through strategic outputs that influence products and services; target markets; pricing, costing, expenses and investments; the human resource and it’s development; customer relationship management; management control systems etc; which can only be truly optimised if, firstly, the organisation uses a rigorous and proven strategic process and secondly, if the inputs are honest and legitimate, since errors in the validity of the inputs will lead to erroneous outputs and strategic plans that have significant errors which will lead to suboptimal solutions.

 

Organisations should take the time in 2013 to complete a comprehensive strategic development and implementation process, ensuring that they are optimising their organisations future and bringing in the right people to help facilitate the process. Anything less could be considered irresponsible in these difficult times.