Corporate Governance and Boards: what good governance codes fail to tell you about board effectiveness

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Corporate Governance and Boards what good
governance codes fail to tell you about board
effectiveness

• Dr Silke Machold
• Reader in Governance and Ethics

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The problem
Anglo-Irish Bank 'a cosiness' around the
boardroom table no formal plan in place
reactions are instinctive when crisis strikes,
(Hague in Carswell, 2011)
RBS There were people in that boardroom during
the ABN Amro takeover who must have thought 'this
is madness', but no-one was prepared to stand up
to Sir Fred. I know people who worked for him,
and it was a case of 'yes Sir, no Sir, three bags
full, Sir. (Buik, 2009)
Mace, 1971
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Boards and good governance codes

• Board structure composition
• CEO/Chair duality
• non-executive directors
• Sub-committees
• Unitary/two-tiered board
• Multiple directorships
• Board diversity

Firm Performance
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The usual suspects(Finkelstein Mooney, 2003)
Company Outsiders directors with shares Board size CEO duality
A 86 100 14 No
B 75 100 12 No
C 73 100 11 Yes
D 67 100 18 No
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The problem with the usual suspects
Company Outsiders directors with shares Board size CEO duality
Enron 86 100 14 No
WorldCom 75 100 12 No
Tyco 73 100 11 Yes
RBS 67 100 18 No
Meta-analyses show that there is no conclusive
empirical evidence linking board structure to
performance (Dalton et al., 1998).
Great inferential leaps are made from board
composition to board performance with no direct
evidence on the processes and mechanisms
which presumably link the inputs to the outputs.
(Pettigrew, 1992171)
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What do boards do?
Board structure composition
Firm Performance
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What boards (should) do
Board Task Performance Monitoring control
task Service (resource provision, advice,
networking) Strategy involvement
Board structure composition
Firm Performance
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The board as a team
Board Processes Behaviours Use of knowledge
skills Pluralistic ignorance Effort norms Trust
cohesiveness Social distancing
Conflict Leadership
Firm Performance
Board Task Performance
Board structure composition
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Board leadership study (Machold et al., 2011)

• structure vs. process behaviours
• Leadership as multi-dimensional construct
  ensuring right knowledge skills and use of
  these, initiatives to improve board work, and
  effective leadership
• behaviours
• Leadership in small firm
• boards

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Results
H1 There is a positive relationship between board members knowledge and strategy involvement. Supported ß .20 ß .31 ß .21 Adj R2 .27 F change 15.19
H2 There is a positive relationship between board development and board strategy involvement. Supported ß .20 ß .31 ß .21 Adj R2 .27 F change 15.19
H3 There is a positive relationship between chairperson leadership efficacy and board strategy involvement. Supported ß .20 ß .31 ß .21 Adj R2 .27 F change 15.19
H4 In firms with CEO duality, positive relationship between leadership efficacy and board strategy involvement will be strengthened. Supported ß .15 Adj R2 .29
H5 The negative relationship between recent changes in board composition and board strategy involvement is positively moderated by leadership efficacy of board chairperson. Supported ß -.19 ß .17 Adj R2 .36
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Implications for practice

• Board member selection firm-relevant knowledge
• Board development initiatives away days,
  training, board evaluations
• Effective leadership behaviours establishment
  of process-
• oriented board climate

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• Cognitive conflict
• Task-oriented disagreement
• Differences in viewpoints, opinions, ideas
• Associated with positive team outcomes (Jehn,
  1995 Pelled et al. 1999, Zona Zattoni, 2007
  Minichilli et al. 2009)

• Affective conflict
• Personality or relationship conflicts
• Clash in emotions and feelings, search for blame
• Associated with negative team outcomes (deDreu
  Weingart, 2003 Runde Flanaghan, 2008

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Some initial results (Walker Machold, 2011)
H1 Personality trait diversity is positively related to CC. Not supported significantly negative ß-.21 Adj.R2 .34
H2 Personality trait diversity is positively related to AC. Not supported (ns) ß.02
H3 Age and gender diversity are positively related to CC, but less significantly than personality trait diversity. Partial support Age ß-.15 Gender ß.24
H4 Age and gender diversity are positively related to AC, but less significantly than personality trait diversity. Not supported Age ß.00 Gender ß.12
H5 Tenure diversity is positive related to CC. Supported ß.35 Adj.R2 .30
H6 Tenure diversity is positive related to AC. Supported ß.68 Adj.R2 .60
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Other findings

• non-executive directors has strong negative
  relationship to both cognitive and affective
  conflict (ß-.44 and -.75 respectively)
  failure to challenge executive team
• Also significant negative relations between
  company size turnover large companies and
  growing companies have less conflict in boards
• Board size matters for affective conflict
  (ß.27)

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Implications for practice

• Diversity matters but not quite as we thought!
• having different tenure cycles may be
  double-edged sword
• Structural prescriptions of codes (non-execs)
  unlikely to stimulate effective board processes
  and behaviours

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Concluding remarks

• Dont get pre-occupied with the usual suspects
• Develop effective board processes behaviours,
  and focus on board task performance
• Collaborative research win-win scenario

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Thank you

• This presentation is available online at
  http//www.wlv.ac.uk/uwbs80years