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 7th 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.