COVER STORY: BOARD EFFECTIVENESS Do Boards Work? – And why directors don’t deliver profits

Is board the most appropriate way for directors to have role in an organisation? That’s pretty fundamental question and it is asked by one of New Zealand’s leading experts on corporate governance, Massey University’s newly appointed professor of corporate governance and leadership, Nick van der Walt. He and senior lecturer and co-researcher Coral Ingley, have completed major research study on board effectiveness. The findings provide some substantial food for thought about the future of boards.
“There are some very good directors out there,” says van der Walt. “But what came across strongly is the (low) level of influence they feel they have over what is going on inside their organisations.” For instance, only 9.3 percent of the roughly 600 directors who responded to the nationwide survey, felt they could “strongly influence” their organisation’s profitability.
“Maybe we need to revisit board architecture,” wonders van der Walt as he poses his fundamental question about the appropriateness of boards. Directors are increasingly liable for both their personal and collective organisational actions but, as van der Walt points out; “With the best will in the world, non-executive directors are at disadvantage.”
The drive to make boards and directors more legislatively and legally accountable is back-wash reaction to the spate of global corporate fraud scandals which, touch wood, haven’t happened here. But because New Zealand wants to play in the world capital markets the pressure is on to tighten up the local rules of the corporate governance game, whether they are relevant or not.
What the Massey research, the largest governance survey of its kind ever undertaken in New Zealand, suggests is that rules aside, boards may not be effective because directors, now increasingly aware of their personal and collective risk exposure, think management holds all the power. They are, of course, right. Director willingness to accept this situation could change in direct relation to the severity of the legislation that holds them increasingly accountable for corporate misdemeanours.
Van der Walt and Ingley’s research credentials are impeccable enough. They successfully collaborated on governance research into director selection and performance evaluation four years ago. They now plan to parallel this latest study in Australia next year. Similar finds there would probably provide them with more evidence to support the contention that the role or “architecture” of boards needs re-think. The existing board-executive corporate model may, after hundred and something years, have reached its use-by date.
Levels of board influence on other key corporate activities delivered equally revealing insights into director perceptions of their contribution and how it stacks up alongside management’s. They felt, understandably enough, in control of the appointment of the chief executive – at least almost 80 percent of them did. Only 2.2 percent felt they had no influence.
But van der Walt says he can understand why less than 10 percent of directors believe they have “strong influence” over profitability. “Let’s say they are very active directors, giving maybe three or four days to being involved with the company in various ways in addition to reading their board papers. There is still no way they can enhance or influence the performance of that organisation in the same way management does.”
So, should boards appoint more executive directors? The research answer is resounding no, call that echoes the demands of governance legislators. And as one executive, who found himself on the board of company, explained to research discussion group: “I was taken to task by my CEO when I tried to act as ‘proper’ director.” What, asks van der Walt, “are the practical politics of that situation?”
The point of departure for discussion, suggests van der Walt, is that instead of having boards and management separated by church and state approach to their respective roles, is there any way directors can have greater “reach down into” the organisation to see what is going on without undermining or interfering with the management process? “How can you put up strong wall and still give people access to information that is relevant to the key performance issues,” he asks. It is the sort of finding that begs more thought about future structures.
But there were other key corporate activities where the researchers found low levels, or at least perceptions of low level board influence. Directors did not, for instance, feel they could strongly influence their organisation’s ability to meet all its compliance requirements “as contained in all the relevant legislation and regulatory regimes”. Well, that’s what 17.5 percent of them believed. At less than 20 percent that is light-handed influence over their involvement in fundamental governance requirement.
They felt similarly about exposure to risk. Just 16.6 percent of them said they strongly influenced their organisation’s exposure to risk. Only 8.4 percent of them felt they strongly influenced economic value added (EVA) measures and, surprisingly, just tad over 16 percent of directors think they effectively influence shareholder value. These are all hard core governance activities or priorities. The fact that only 5.7 percent of directors feel they can influence media perception of their organisations is, however, perfectly understandable.
The research was designed to look at four key aspects of board effectiveness. The researchers want to understand the nature of board and management interaction. “This is where the director is most at risk,” says van der Walt. They want to know about the risks boards face and how directors think strategically. The area of interest that delivered perhaps the most surprising findings, involves board control over key measures of organisational performance. And finally, they wanted to understand the dynamics of board interaction and get some insight into the effectiveness of board meetings.
Boards appear to spend more time discussing CEO leadership performance than the researchers expected. Nearly one in five boards “often” discuss CEO leadership. That could be either positive or negative so van der Walt and Ingley plan to explore the issue. They are also surprised by the high incidence of board discussion about operational and management issues. Nearly 41 percent of directors “often” discuss issues at board meetings which, on the face of it, appear to be management fodder. “I can understand them talking about these things sometimes,” says van der Walt, “ but it seems many of them spend significant amount of time talking operations.”
And almost 40 percent of directors meet informally and without the CEO to discuss the organisation. That’s positive, according to van der Walt, but directors must be careful not to destroy the dynamic that exists between the board and the CEO. “Management shouldn’t feel threatened by too much collegial discussion without the CEO present,” he warns. “But that is the job of an effective chairman.”
Directors seem clear about their strategic role and priorities, but the extent to which they leave managers to monitor the implementation of strategy without board involvement surprised the researchers. Less than three percent of directors identified monitoring strategy as the board’s main strategic role. On the other hand, almost 25 percent of directors believe the board’s principle role is to define the strategic framework. tad over 20 percent think helping to formulate strategy is their main role. Almost 63 percent of respondents said management and board shared the role of strategy development while 20 percent said management developed the strategy and then obtained board approval.
And what about the relationship between board and the CEO? little over 40 percent of directors would encourage their CEO to sit on (external) board as non-executive director. They would do it to develop the CEO’