UPFRONT Directors don’t influence profits

Directors don’t believe they have “strong influence” over profitability. This rather astonishing finding is revealed in some new, groundbreaking research conducted by Massey University’s Albany-based department of Management and International Business.
Only nine percent of the almost 600 directors who responded to the survey think they have “strong influence” over profitability. Another 79 percent felt they had some degree of influence while almost 12 percent thought they had little or no influence over profitability at all.
The research was jointly conducted by department head and Massey’s first professor of its newly established chair of corporate governance and leadership Nick van der Walt, and senior lecturer Coral Ingley. The two have previously collaborated on governance research into director selection and performance evaluation.
“This is the largest governance research project every undertaken in New Zealand,” says van der Walt. And with the backing of database software company Oracle, van der Walt and Ingley plan to parallel the study in Australia next year. “Very little has been done in this area over there,” he adds.
By his own admission, van der Walt thinks the applied level of his research work is responsible for his academic elevation to Massey’s new governance and leadership chair. The university has been aggressively building its commitment to researching, teaching and consulting on governance, setting up Centre for Corporate and Institutional Governance at its Palmerston North Campus. The centre will focus on issues such as director training, consulting and making submissions on governance issues including regulation and legislation.
“But it is crucial to have sound research base for that work,” says van der Walt. “And we want interaction with people in the governance community – and these activities are essentially my role.”
The current research looks set to confirm Massey’s position in the increasingly important governance marketplace. And some of its findings have van der Walt thinking about the need to revisit what he calls “board architecture”. “Is board the most appropriate way for directors to have role in the organisation?” he asks.
“It certainly came across strongly that many directors are concerned about the [relatively low] level of influence they feel they have over what is going on inside their organisations,” he says.
As van der Walt points out, management is involved with the organisation on day-to-day basis. “With the best will in the world, non-executive directors are at disadvantage. For even very active directors who give maybe two or three days of involvement in addition to reading their board papers, there is no way they can pick up and influence the performance of that organisation in the same way that management does.”
So should boards be appointing more executive directors? The response to this question at the round-table sessions the researchers conducted with directors was resounding “no”. As one former executive director pointed out, when he tried to act as “proper” director he was taken to task by his CEO.
What needs to be discussed, says van der Walt, is whether there is way in which boards can be given greater “reach” down into the organisation to see what is going on. But is that desirable? “The last thing you want is directors interfering in the management process,” he says. “How can organisations put strong wall there and still give people access to information that is relevant to some of the key points.”