Research spotlight – Sharpening up

A catalogue of scandals – enron, worldCom, and more recently RBS, not forgetting the perennial favourite of fat cat bonuses – has exposed misbehaving boards to a barrage of public condemnation. In these and other high profile scandals, when the integrity of company boards is called into question, there are widespread repercussions.

There has been a proliferation of codes of conduct to tackle areas of failing practice, to develop greater transparency and accountability. But despite interventions such as Sarbanes Oxley in the US, the Combined Code in the UK and a raft of reviews and reports such as the Higgs

Review and Walker Report, which have focused attention on complicated issues relating to the role of non-executive directors and financial aspects of corporate governance respectively, there appears to be no end to the scandals.

Research currently being conducted by Dr Silke Machold at the Management Research Centre, University of Wolverhampton, attempts to discover why some boards of directors may continue to disgrace themselves, and more positively, to identify characteristics for healthy governance.

Silke’s research has given her unprecedented access to a number of boardrooms in the UK across the private, public and voluntary sectors as an impartial observer. So what has been going wrong? In simple terms Silke can identify two reasons why good governance is hard to achieve:

Five benchmarks for good governance

  1. Put an end to marathon board meetings - meet more regularly for shorter periods and set aside time for quality interactions like board development days.
  2. Create the right mix - aim to build a diverse board membership and encourage constructive challenges, expect board members to work for your company inside and outside the boardroom.
  3. Have an outside board assessment done – it will give you a new perspective on how you perform as individuals and as a team.
  4. Attract rounded individuals – board performance is positively influenced by the range of experiences board members bring to the boardroom, especially in small businesses.
  5. Applying knowledge – boards that are ready to learn and apply the latest thinking are more likely to innovate and grow the company.

Visit: www.wlv.ac.uk/cgec

“Firstly, you have to accept that there are always a very small number of people who act disreputably, no matter how sophisticated a regulatory system you have. So what has happened to some extent is that in response to these offenders, the whole sector has faced interventions. Secondly, much of the guidelines or regulations on good governance have focused on structural prescriptions, such as increasing the number of non-execs or having remuneration committees.

With such structural prescriptions you can only do so much in terms of improving board performance, this is the area that my research is particularly interested in.”

Whilst the question of who should to sit on a board of directors has dominated codes of practice, Silke believes that this is only one side of the story. The way boards perform as an entity is equally significant. Although she is still analysing her data, she is already honing in on a number of boardroom behaviours which she feels are kkey to understanding board performance:

“It’s the way board members interact to reach decisions that we hope to understand. What are their tasks, what processes do they use to achieve them; and what are the behaviours which contribute to effective processes to achieve their tasks?”

Boardroom dynamics

Benchmarks for good board performance are already starting to emerge from Silke’s research.

Her observations suggest that for a team to perform well, there should be a certain amount of cohesiveness, execs and non-execs need to trust in each others’ competence. However, too much of it and a board can slide into what is known as ‘group think’. This phenomenon can appear particularly in boards which are very homogenous - composed of the same gender, age, race and background and therefore tend to think in the same way. Silke explains: “Ceasing to challenge what they are doing and agreeing with each other all the time is detrimental to board performance. We would advocate introducing board members who can question what the board is doing, and be a catalyst for constructive discussion.”

Even if a board manages to achieve a balanced composition. Silke explains that there are other barriers to good performance. The impact of dominant personalities can have a great influence on boardroom dynamics. Little research has been conducted in this area of diversity of psychological traits, and it is something that Silke’s PhD student Alan Walker is in the process of addressing:

“If you have an Alan Sugar or a Fred Goodwin in the boardroom, we can hypothesise that he or she will strongly influence the kind of interactions that are going on in the boardroom because of their strong personalities. It will be interesting to see what conclusions can be drawn from our research.”

Leading by example

As is so often the case in many walks of life, fully rounded individuals usually have the most to contribute to group discussions. Measuring ‘effort norms’, a term Silke uses to describe the degree of effort board members invest in performing their roles inside and outside the boardroom, is often an indicator of a healthy board culture with strong leadership. High levels of ‘effort norms’ within the board can translate into better performance.

A further contributing factor to the quality of board interactions is influenced by the frequency and duration of board meetings, according to Silke:

“You have to understand that most directors, who are at the apex of governance of their organisation, are a team of people who only meet episodically – once a month, or quarter. A three-hour meeting four times a year is not likely to be very effective at fulfilling its tasks.”

Whilst scheduling more frequent, shorter meetings can be one solution, board members have busy schedules, so availability is a common problem. Silke’s research suggests that board development days are an alternative worth considering in order for directors to keep a focus on what they’re doing and how they’re doing it.

A board’s willingness to learn is a further benchmark for good practice. There are new things happening all the time in the form of new technologies, environmental policy, frequent organisational change, and government policy. The speed with which boards absorb and transform new information and apply this new knowledge to their organisation is an indication of their effectiveness.

Boards behaving badly

By striving to meet more of Silke’s benchmarks for good performance, perhaps more companies would avoid reaching crisis point. For those companies who collapse, the pattern of events is all too familiar:

“What you see typically in an organisation facing crises is conflict between the top management and the board. Board members resign, rather than trying to change something they don’t like. The board shrinks and is unable to recruit the calibre of candidate because word has got out. Under these circumstances how can you turn the board and organisational performance around?”

Since the collapse of Enron, the public naming and shaming of boards has become commonplace. In private, there has been some soul searching within academic circles, particularly in universities in the US and UK, where many of the disgraced directors were educated. Silke believes that universities do have a role to play in what’s been happening.

“It’s hardly surprising when you consider that on the one hand students are learning that the only thing that matters is shareholder value and you have to do everything to maximise this; and on the other that companies have a social responsibility to their stakeholders and the community. It can be hard to reconcile these.”

Silke believes that universities play a crucial role in producing the balanced business leaders of the future:

“Our biggest means of knowledge transmission from academia to business is the students who pass through our academic institutions. We need to encourage them to think critically, to challenge established assumptions and follow best practice highlighted in the latest research”.

In her role as Joint Head of the Management Research Centre (MRC) at the University of Wolverhampton, Silke leads a research cluster examining many more areas of corporate governance and ethics. To find out more about their research activities, visit: www.wlv.ac.uk/cgec . MRC has three further research clusters in Entrepreneurship and Small Business Management, HRM and Industrial Relations, and the Public Sector. You can find out more about their work at: www.wlv.ac.uk/mrc