The pressures for the boards of organisations to review their effectiveness are many and varied. Whether from regulation, self-interest to protect against scandal, or to satisfy enquiring shareholders, gone are the days where boards could brush things under the carpet and hope the problem would go away.
However, is it not a mistake to see board appraisal as a matter of compliance or self-defence? There is a good argument, borne out of research in this area, that boards can be more effective if they spend a higher proportion of their time being more reflective and better challenged. And the area to concentrate on for boards to become more effective is the people dimension.
The Eversheds Board Report, 2011, shows that Directors themselves highlight ‘people’ and ‘team interaction’ as the factors with the most influence on board performance. Three-quarters of survey respondents selected the composition of the board as critical, half identified having an effective chair and a third suggested that a ‘collegial environment’ and the executive/non-exec relationship were vital. These board members also saw being challenged in their thinking as very important.
According to The Board Group, people issues figure greatly in the sources of board problems. Some of the main causes of problems in the boardroom include meetings being argumentative and badly run, a disengaged chair and/or ill prepared directors, too many ‘insiders’ or friends, and the experience and skills on the Board not matching the business strategic drivers.
As the Financial Reporting Council (FRC) code puts it:
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“The challenge [of running a board] should not be underrated. To run a corporate board successfully is extremely demanding. Constraints on time and knowledge combine with the need to maintain mutual respect and openness between a cast of strong, able and busy directors dealing with each other across the different demands of executive and non-executive roles. To achieve good governance requires continuing and high quality effort.”
These issues are all the more significant where there is a culturally diverse management team or a board with international responsibilities. As well as the usual question of team integration, you may have to accommodate very different perspectives stemming from different cultural backgrounds. These different backgrounds may also result in a large variation in world views and perceptions of business behaviour and ethics. This is aggravated if the chair is blind to these issues or unable to tackle them.
Some years ago in a Middle Eastern country the author had to work with a dysfunctional management team that apparently shared few common perspectives, in large part because national differences combined with functional differences to make a common approach difficult. The management challenge was exacerbated by the poor view the expatriate leadership apparently took of the local staff. The CEO was temperamentally incapable of holding the management team together, not least because he did not embrace diversity of views (Reilly and Williams, 2012).
In fact blatant disagreements are often easier to manage than covert ones. The figure below illustrates that the visible manifestations of organisational activity often miss the deeper seated beliefs and assumptions. Thus board members might appear to be committed to the same cause, but actually the way the ‘cause’ is defined might vary and their presence in the boardroom may come from a whole host of reasons – sense of service, additional income, career development, returning a favour….
But to be clear, diversity is no bad thing; indeed, it prevents the alternative, and more dangerous, emergence of group think that comes from cloning in board selection. As business school case studies show, boardroom myopia can be disastrous in responding to changing market habits and tastes.
So, against this background, how do you create an effective board?
Clearly it starts with recruitment: what sort of board composition do you require to govern the organisation in an effective manner? Organisations need a good understanding of the knowledge, skills and experience that is necessary to oversee them. You will probably want a mix of talent both in terms of background (relevant sector expertise and functional skills mix) and biography (appropriate age, gender, and ethnicity). It is vital that this composition reflects the business requirements. Too many boards are made up of middle-aged (white in the West) men, in companies that have a much more diverse clientele.
You should then ensure that you have the right sort of disposition and behaviours, such as independent thinking, preparedness to challenge, good communication skills, team working facility and so on. This is more critical than may be acknowledged, in that, as Patrick Lencioni has identified, a lack of commitment and inattention to results, a fear of conflict and an absence of accountability are common reasons for boards to fail. These may stem again from taking for granted personal assumptions that may relate to cultural background – a deference to the chair; circumlocutory rather than plain speaking; dealing with issues informally not in formal meetings or over reliance on rational argument.
The attributes you are seeking can be recruited but also developed through the induction process and training. How many organisations properly consider the necessary characteristics of non-executive directors and provide training support to encourage their enhancement?
These sorts of requirements should become particularly evident in the process of succession: who to bring in to replace those non-executives who are leaving. The better-prepared organisations have a grid of knowledge, skills and experience they need to recruit against, as well as the sorts of attributes they are seeking.
Finally, the quality of board performance from a personnel perspective can be encouraged in the way that the board is run. This includes proper processes and procedures before, during and after meetings led by an effective chair and competent company secretary. It also means ensuring clarity on the role of the board (especially in relation to the executive) and certainly of individual members where there are sub-committee responsibilities. It means building a climate of trust and of sharing information. It means insisting on honestly facing the facts and choosing courses of action based on that evidence.
As the UK parliamentary enquiry into HBOS’s failure as a company points out, ignorance and self-deception are ultimately self defeating. Most important is the creation of a common view of the organisation’s business goals and how they are to be achieved. To get to this stage, organisations have to work much harder at understanding the motivations and mindsets of their boardroom representatives.
By Peter Reilly, Director HR Research & Consultancy, Institute for Employment Studies