We know very little about governance. To be fair, establishing causality between governance and subsequent performance is fraught with difficulty. Between these two constructs lies the entire process of management, its performance and outcomes, all of the organisation’s internal processes, core competencies and resources – while external to the organisation is the entire external environment, at both industry and societal levels, all of which impact to greater or lesser degree on performance.
This is not to suggest that governance should be absolved of organisational performance if it is, in fact, responsible for strategic decision-making. It is simply that establishing any form of causality is problematic.
To be sure, these approaches have resulted in remarkably precise answers. However, there ought to be considerable debate over the attribution of these answers to the various impacts of gender, age, tenure, independence, composition, experience and so forth on boards, to say nothing about organisational performance. Simply put, while some relationships have been observed, causation is yet to be established. Many governance researchers have identified what appear to be correlations between various concepts – an essential first step in the development of theory of governance. We should be wary of the urgent translation of those first steps into recommendations for best practice.
Several potential relationships exist between an organisation’s governance, an organisation’s management and subsequent performance. At the extremes, boards are described as being either phantoms on the one hand or catalysts on the other.
Phantom boards are reported as never knowing what to do, and have been observed to have no degree of involvement in an organisation’s performance. Catalysts, by way of contrast, are boards described as taking the lead role in establishing and modifying the organisation’s purpose and strategy. These latter boards are likely to have very active strategy committee.
While one of these extreme positions appears unpalatable the same could well apply to management. range of ability is likely to exist between high levels of competence on the one hand and relative incompetence on the other.
Organisational performance then results from some combination of board and management competencies. For instance, an organisation could be endowed with combinations of good/poor boards and good/poor management. Some of these states are expected to be stable, while others ought to result in failure, in either the short or long term. For example, poor board when combined with poor management ought to result in failure.
However, failure could well be prevented by monopoly or near-monopoly like conditions. This position may not be as uncommon as first thought, especially if we include geographical monopolies, public sector, and local body monopolies, and resource dependent monopolies. An organisation could have exemplary management, under poor (phantom) board. While management is likely to be severely frustrated, the organisation could well succeed in spite of the lack of effective governance.
The sublime position sought after is an exemplary board, with exemplary management. Surely state required for exemplary performance? Yet, we have still not considered whether the external environment has mitigating or ameliorating consequences on performance. The last position for discussion is one where an exemplary board confronts poor management. Under these circumstances management’s tenure is likely to be remarkably short lived.
So, not only does range of board competence exist, but it is expected to mostly coincide with range of management competence. In some circumstances subsequent organisational performance could be masked by environmental conditions, while in others performance could be enhanced. Into this cauldron of circumstance have marched generation of researchers who have attempted to correlate various board input phenomena (age, tenure, sex, education, independence) with various, somewhat arbitrary, measures of organisational performance.
While much of that research has been conducted with real precision, it fails to establish whether or not causality actually exists. In this research theoretical drivers are mostly confined to agency, sometimes power, and on occasion demography. Why passion, commitment, decision making, knowledge and technical ability have been ignored is sad indictment on current research, and adequate reason why results should be treated with circumspection. Now if only we could get into the black box – the board room.
By Dr James Lockhart, head of school, Graduate School of Business, Massey University.
