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.