With the corporate governance crisis at the turn of the century that shattered firms like Enron and WorldCom, academics and consultants turned their attention to enhancing corporate governance. What the 2008 financial crisis revealed is that the post-Enron governance advice has been insufficient in helping develop successful boards of directors: more work is needed to help us understand what makes a board effective or not. Nine factors are the difference between an effective and an ineffective boardroom, which can impact the strategic success of the organization. Readers, including current and prospective directors, will benefit from the shared experiences of nearly 200 of their peers.
The existing corporate governance regime consists largely of checklists, guidelines and so-called best practices. We find, however, four liabilities with the use of these tools and techniques.
- The first is the liability of simplicity – these approaches typically reduce scientific analysis of corporate governance to its most basic level – a shallow reflection of the original prescriptive advice.
- The second issue is the liability of misdiagnosis – the assessments employed with checklists, guidelines and best practices do not lend themselves to an in-depth examination of how an organization operationalizes each corporate governance principle. There is much value in asking tough questions.
- The third concern is the liability of sameness – these tools and techniques treat every firm, in every industry, in every country as equals, when differences may be prevalent and significant.
- The fourth weakness is the liability of the outsider – current governance best practices are all externally imposed upon the organization, its board, management and employees, rather than nurturing effective governance from within.
Our response to these four liabilities was to gather insights from those who know and understand boards best: board members themselves. We collected feedback from 193 participants in the Director’s College – a university-accredited director education program offered jointly by McMaster University and the Conference Board of Canada. Participants represented 139 different organizations, including publicly-traded, for-profit, not-for-profit, voluntary, institutional and governmental sectors from 19 industries across the country. We analyzed their feedback revealing nine keys to success for creating an effective boardroom culture that directors can use for enhancing board performance, growing their organizations, and reaching new levels of success. Primary factors
Of the nine key factors, five are fundamental behaviors that need to be developed and nurtured in order to create an effective boardroom culture. These include:
- a new approach on strategy-setting by the board;
- establishing mutual support and respect among board members;
- encouraging director preparation;
- fostering a board that is open to change; and
- bolstering the active listening skills of directors
An important responsibility for every board is to participate in setting the strategic direction of their organization. However, strategic behavior does not appear from the firmament when board members gather. Rather, it has to be institutionalized in a process that promotes the constructive engagement of the board. This can take many forms, but our director participants advocated a new twist beyond the traditional process of management proposing a strategy and the board then reviewing and approving it. They argued that directors need to be active participants in helping to create the front end of any strategic plan and, in particular, the creation of the vision, mission and high-level strategic priorities that will guide the organization over the long-term. But these strategic priorities must not only be established, they must also be actively monitored and evaluated in terms of their implementation. Indeed, only ten percent of organizational failures appear to be due to “bad strategic choices” whereas ninety percent are the result of “poor execution” and the failure of management to sufficiently focus the effort, energy and attention of the entire organization on the achievement of the strategy and each person’s contribution to it. Boards therefore must have regular assessments concerning the execution of their organization’s strategic performance, open communication about unexpected variances, and honest discussions of corrective action especially where the execution of the strategy is concerned. Participants argued that boards that establish strategy and actively monitor its execution will outperform both those boards that only set strategies but do not assess the firm’s ability to execute, as well as those boards that do not establish strategic priorities at all. Mutual support and respect among board members:
Many seasoned board members painfully recall occasions when the board chairperson, senior management, or external consultants were not as responsive to their questions or those of a colleague as they otherwise should have been. A critical component of growing an effective board, therefore, is establishing mutual support and respect among board members. To do this, directors need to learn the art of inoffensive contentiousness which means having the courage of their convictions to politely reject management’s recommendations (rather than trying to “score points” with their board colleagues). They need to provide constructive and helpful guidance – neither commands nor micromanagement – in order to challenge and perhaps change the actions proposed by management. They should also be willing to step up and support their peers when deserved, such as by restating the questions of a fellow board member in order to have their issues and concerns addressed more fully and completely. Failure to do so not only undermines a colleague, but left unabated, will undermine the effectiveness of the entire board.
Pre-meeting director research and preparation:
There are times when the opinions of senior management and the board will be different, which is understandable, given the various demands and interests each are facing. There is also the on-going issue of directors and managers each simply trying to understand what the other is saying or meaning. It is generally understood that senior management will always present the board with only that information – reams of it, in fact, – which supports their preferred outcomes in order to influence their decision-making. To fulfill their legal obligations, however, directors need to carefully scrutinize the information presented to them as well as the recommendations suggested by management with the goal of gaining reasonable assurance that what management is proposing makes sense. What is essential, therefore, is that directors undertake independent pre-meeting research and preparation in advance of board meetings, including gathering information over and above that supplied by management.
Feedback from our director participants emphasized in particular the need for their peers to be well read regarding their industry and its issues; familiarizing themselves with the organization’s stakeholders, including visiting customers, talking to employees during site visits and shareholders during AGMs, and attending industry conferences in order to be aware of different perspectives on issues presented to the board. Additionally, participants recommended that independent directors meet in camera, prior to every board meeting rather than only at the end, in order to share their understanding of, and the degree of support for, management’s proposals. This would provide an opportunity for directors to consolidate their views regarding management’s recommendations and would provide a forum for pre-meeting opinions, research and perspectives to be shared in a less confrontational setting. Openness to change:
While forming an opinion on issues before the board meets is one way to demonstrate pre-meeting research and preparedness, the willingness to change that opinion reflects both an openness to change and a commitment toward enhanced board performance. This is why our director participants encourage their colleagues to be flexible in their mindset, considerate of alternative perspectives on the issues, and be willing to be swayed by rational arguments away from their initial favored point of view. The questions “how do I know I am right” and “how do I know the other person is wrong” were cited as much needed considerations when engaging both management and peers. Indeed, there are times when a director needs to become more open to change than they would normally be otherwise inclined. Directors who hold their views steadfast and resolute and are unwilling to change, even when exposed to rational arguments to the contrary, send a troubling signal. For those board members whose refusal to change is consistent across several meetings, the chair may wish to suggest that they reassess their future service on the board. Active listening skills:
A boardroom culture that facilitates active listening is the fifth behavioral factor identified in our analysis that enhances board performance. There are many indicators of active listening skills. One of the most important is choosing to seek clarification on management’s recommendations prior to stating one’s own opinion about them. To paraphrase Stephen Covey, seek first to understand before wanting to be understood. The avoidance of cynicism is another: it is one thing to be cautious; it is another to voice sarcasm and be dismissive. Participation by all directors in the conversation and ensuring that the dialogue is not dominated by more vocal directors also contributes to an active listening environment. Additional indicators of active listening involve building upon the comments of others and calling upon less vocal directors to share their opinions. Lastly, self-reflection on one’s own listening skills is seen as a way for improving each director’s own behavior over time. Secondary factors
In addition to these five key factors that enhance a board’s culture and performance, four secondary factors were also identified by participants as playing an important supporting role:
- decision-making orientation;
- director satisfaction;
- curtailing rogue behavior; and
- director support for the chair when deserved.
These factors influence how, and the extent to which, the five primary factors stated above contribute to enhancing the effectiveness of a board.
Decision-making orientation to agenda setting:
Boards whose agendas are structured so that each issue is framed as a decision opportunity will outperform those boards that do not. Our director participants stated emphatically that it is essential to have a clear consensus regarding the objective(s) for each meeting as well as an expected outcome for every topic on the agenda. Two kinds of agenda items should, in particular, be clearly identifiable: those that are purely for information, rather than deliberation (and these should be part of a ‘consent agenda’) and those decisions listed in priority order which require director consideration. The latter should be developed by the board chair in consultation with the CEO and confirmed by the board at the start of each meeting. While a board may perform reasonably well in spite of poor agenda setting, a decision-orientated approach to agenda setting will contribute to both effective decision-making and enhanced board performance.
Satisfied directors contribute more and perform better than ones who are dissatisfied, according to our director participants. Board members who are frustrated or dissatisfied are inclined to either raise their voice or distance themselves from board discussions in a passive-aggressive manner. An effective board chair, therefore, needs to be alert to either of these indicators of director dissatisfaction and take remedies to address them in the moment, if possible, by identifying the problem as it occurs (e.g. “Gee Fred, your body language is telling me you are either upset or withdrawing from this meeting. Am I right and if so, let’s talk about it right now.”). However, it is important to note that boards consisting of directors who are dissatisfied may succeed despite themselves: while boards may exercise their responsibilities adequately in the presence of director dissatisfaction, directors who are more satisfied contribute more to top performing boards. Curtailing rogue behavior:
Worse than having a dissatisfied director who is not contributing to their fullest extent is the rogue director who undermines the success of the board and those around them. Roguish actions include attending meetings unprepared; an unwillingness to listen to others; an inflexibility to consider opinions other than one’s own; and thwarting the board from reaching a consensus on decisions. An effective chair may reduce rogue behavior by enhancing director satisfaction, but even a single, disruptive director may engage in actions contrary to the interests of the organization. Care must be taken in the handling of rogue behavior as the 2006 Hewlett-Packard spying scandal teaches us so effectively (Sims, 2010). The methods employed to curtail rogue behavior can, in some cases, be more egregious than the actions which the chair is seeking to curb. But “calling out” and “naming” the rogue behavior is a first step that good board chairs need to take – often after a meeting to avoid embarrassing the offending director – if it is to be eliminated at all. Director support for the deserving chair:
Effective boards may reasonably be expected to have effective chairs, but not every board is quite so fortunate. It is possible for a board to have a strong boardroom culture despite having an ineffective chair but it makes effective boardroom performance more difficult to achieve. Our director participants emphasized that their colleagues should support the chair, not blindly, but where that support is merited, in order to make board meetings more successful. In cases of an ineffective chairperson, however, they further suggested that directors need the courage to provide helpful guidance (they called it “nudging”) to improve the chair’s leadership skills, and be willing to “help lead the board from behind” if warranted. Failure to act may undermine not only the effectiveness of the chair, but of the entire board, as director satisfaction may decline. RecommendationsReject the external; choose the internal
Our approach to corporate governance differs markedly from the litany of checklists, prescribed guidelines and best practices imposed by external actors upon a board of directors. Our perspective is that the most effective corporate governance regime, based on board performance, has to originate within the board itself and the behaviors of its directors. By thoroughly examining and comprehensively assessing the behaviors that we have identified, followed by the continuous improvement of board performance in these areas, directors can create for themselves and their organizations a more effective boardroom culture. Keep your eye on board performance
The ultimate focus of these primary and secondary boardroom culture factors is the performance of the board. Accordingly, we believe that the most direct assessment of a board’s performance is one undertaken by the board members themselves. Board performance can best be measured through periodic, comprehensive, and anonymous self-assessments conducted by board members but facilitated by a skilled and qualified consultant. When board members attempt either a self- assessment or a non-anonymous peer evaluation, they are immediately confronted with the possibility of jeopardizing important on-going relationships. If a board’s internal evaluation process is sufficiently objective and unbiased, then directors will be well equipped to honestly and reasonably evaluate their individual, peer and collective performance. Further, if the assessment emphasizes the factors that we have outlined above, and if the board follows up on these assessments with efforts to improve their performance in each of these areas, then participants from the Director’s College suggest that improved board performance will result.
Reprint from Ivey Business Journal
[© Reprinted and used by permission of the Ivey Business School]