How to Make Boards Work
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How to Make Boards Work
An International Overview
Edited by
Andrew Kakabadse
Henley Business School, University of Reading, UK
and
Lutgart Van den Berghe
University of Ghent, Belgium
Selection, introduction and editorial matter © Andrew Kakabadse and
Lutgart Van den Berghe 2013
Individual chapters © Respective authors 2013
Softcover reprint of the hardcover 1st edition 2006 978-1-137-27569-1
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First published 2013 by
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Contents
List of Figures
vii
List of Tables
x
Notes on Contributors
xi
Introduction
Andrew Kakabadse and Lutgart Van den Berghe
Part I
1
2
3
The ‘Outside In’ Perspective
Exposing the 20th Century Corporation: Redesigning
21st Century Boards and Board Performance
Nadeem Khan and Nada K. Kakabadse
Corporate Income Inequality and Corporate Performance:
Any Correlations?
Filipe Morais, Andrew Kakabadse, Nada K. Kakabadse and
Adrian Pryce
How Chinese Styled Executive Remuneration Works:
Evidence from Chinese Red-Chips
Jessica Hong Yang and Nada K. Kakabadse
4
The Secret to Boards in Reinventing Themselves
Ouarda Dsouli, Nadeem Khan and Nada K. Kakabadse
5
Reinventing Board Effectiveness: From Best Practice
to Best Fit
Lutgart Van den Berghe and Abigail Levrau
6
Fine-tuning Board Effectiveness Is Not Enough
Lutgart Van den Berghe and Abigail Levrau
Part II
7
1
11
44
75
95
137
153
The ‘Inside Out’ Perspective
An Effective Board Makes the Necessary Trade-offs
Lutgart Van den Berghe and Abigail Levrau
v
187
vi
8
Contents
Promoting Effective Board Decision-Making, the Essence
of Good Governance
Lutgart Van den Berghe and Abigail Levrau
9 The Appropriate Board Chair: A Reality Check
Abigail Levrau and Lutgart Van den Berghe
10 The Leadership Attributes of the Chairman of the Board:
An International Study
Andrew Kakabadse, Nada K. Kakabadse, Chris Pierce and
Frank Horwitz
11 CEO/Chairman Role Duality Desire: Resistance to
Separation Irrespective of Effect
Nada K. Kakabadse, Andrew Kakabadse and Reeves Knyght
211
268
292
311
12 High-Performing Chairmen: The Older the Better
Nada K. Kakabadse, Reeves Knyght and Andrew Kakabadse
342
13 Aligning the Board: The Chairman’s Secret
Nada K. Kakabadse, Reeves Knyght and Andrew Kakabadse
360
Index
381
List of Figures
1.1
1.2
1.3
1.4
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
4.1
4.2
5.1
5.2
5.3
6.1
6.2
Towards a new charter for the eco-corporation
Global industrial corporate change – patterns of
innovation for sustainability
Closed trust relational networks of corporations
in society (1900–2012)
Diverse open trust networks of corporations in society
(2012–2050)
Executive pay, 2007 as per the ILLS estimates based
on the annual reports of 15 of the largest corporations
in the respective countries
Percentage of all income obtained by shop floor
employees as a percentage of all employees
(Domestic Operations only)
Ratio of average executive board compensation (R6)
to average and median shop floor employee pay (R1)
(2007–2010)
Company (domestic operations) CGI** & Ratio Rank 6/
Rank 1* (2007–2010)
Investors’ performance measures: CGI, EPS & SP
(2007–2010)
Employee performance measures: CGI, TURN and ABS
(2007–2010)
Financial and accounting performance measures
(Domestic Operations): CGI, SAL, EBITDA (2007–2010)
Financial and accounting performance measures
(Group of Companies): CGI, SAL, EBITDA (2007–2010)
How to make boards work
Selection criteria
Extract from the Walker Report (2009)
Top 5 drivers for an active board of directors in unlisted
companies
(Required) evolution in board evaluation
A congruence model for board effectiveness
Board effectiveness tool
vii
21
24
27
33
46
59
61
63
64
65
66
66
117
119
141
143
149
154
155
viii
6.3
6.4
6.5
6.6
6.7
6.8
6.9
6.10
6.11
6.12
6.13
8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9
8.10
8.11
8.12
8.13
8.14
8.15
8.16
8.17
8.18
8.19
8.20
8.21
8.22
8.23
8.24
8.25
List of Figures
A systems framework for board effectiveness assessment
A congruent and best fit board role
Board typologies in function of relationship with
management
Board typologies in function of decision-making role
Reflection questions
Evaluation process of executive management
Conceptual model of the strategy cycle
Aspects of the strategic decision-making process
Reflection questions on strategy
Reflection questions on M&As
A board’s strategic role in practice
The guidance on good decision-making, given by the
Belgian Corporate Governance Code
Effective board decision-making thanks to group
dynamics (2.2)
Benefits of group decision-making
Suggestions for board decision-making
Standard flow of activities in the decision-making process
Extract from the Walker Report regarding pressure for
conformity
A recipe for constructive dissent
Extract from the Walker Report regarding the lack
of challenge
Steps for effective and constructive decision-making
Recipe for managing conflict in the boardroom
Reflection question on board dynamics
The minimum requisite behaviours
Reflection questions on altering board behaviour
Methods for individual director assessment
Attitude elements
Effective non-executive director behaviour
Director types
Flaws in board meetings
Tips for a director regarding board information
Ten key questions on the company’s business
Some business reflection questions
Recommendations for the use of outside board advisors
Extract from the Walker Report regarding director education
Elements of a board (vacancy) profile
Individual and group-oriented selection criteria
156
157
161
162
167
169
171
172
172
173
175
212
213
214
215
216
217
220
221
224
225
228
230
232
232
233
235
236
239
242
244
244
246
247
258
259
List of Figures
9.1
9.2
9.3
9.4
9.5
9.6
9.7
10.1
12.1
13.1
Extract from the OECD guidelines on board leadership
The role of the chairman
Extract from the Walker Report regarding board leadership
Decision-making styles of chairpersons of BEL-20 and
BEL MID companies
Ten tips and tricks for a non-executive chairman
Selection criteria for the chairman
Extract from the Walker Report regarding time
investment by the board chair
South African chairman performance
Performance: the chairman
Boardroom behaviour
ix
269
273
276
279
286
287
287
307
352
371
List of Tables
1.1
1.2
2.1
2.2
2.3
Internal corporate characteristics
Externalities of the corporation
Dominant theories on executive pay
Key academic contributions
Evolution of dividends, average executive compensation
and average and median shop floor employee pay
2.4 Summary of significant Pearson correlations
4.1 Females on boards across continents
4.2 Average age of boards
4.3 Boards structures across regions
4.4 Characteristics for making boards work
4.5 Sample for model testing
4.6 Results
5.1 Types of monitoring
8.1 Individual director types
8.2 Competencies in function of the nature of the company
8.3 Competencies in function of the company’s strategy
8.4 Competencies grid
9.1 Comparison of board chairperson and CEO leadership
9.2 Board structure in Belgian listed companies
9.3 Chairman nomenclature
10.1 South African response segmentation
10.2 Age and board position of respondents in South Africa
12.1 Chairman’s attributes for effective performance
x
13
15
53
54
60
67
98
100
105
118
120
121
139
236
255
255
256
270
271
271
300
301
348
Notes on Contributors
Ouarda Dsouli, PhD, Postgraduate Researcher, University of Reading,
UK.
Jessica Hong Yang, Lecturer, Henley Business School, University of
Reading, UK.
Frank Horwitz, Director of School, Cranfield School of Management,
UK.
Andrew Kakabadse, Professor of Governance and Leadership, Henley
Business School, University of Reading, UK.
Nada K. Kakabadse, Professor of Policy, Governance and Ethics, Henley
Business School, University of Reading, UK
Nadeem Khan, PhD Researcher, University of Reading, UK.
Reeves Knyght, Managing Partner, Mayfair Investment Management
Ltd, UK.
Abigail Levrau, Doctor Assistant, Member of the Management
Committee, University of Gent, Vlerick Business School/GUBERNA,
Belgium.
Filipe Morais, Postgraduate Researcher, Henley Business School, University
of Reading, UK.
Chris Pierce, CEO, Global Governance Services Ltd, UK.
Adrian Pryce, Senior Lecturer, Northampton Business School,
University of Northampton, UK.
Lutgart Van den Berghe, Professor of Corporate Governance and
Executive Director, University of Gent, Vlerick Business School/
GUBERNA, Belgium.
xi
Introduction
Andrew Kakabadse and Lutgart Van den Berghe
Corporate governance challenges have increasingly been gaining societal attention and attracting media coverage. In parallel, the academic
world as well as numerous service providers have heavily invested in
researching governance practice and subsequently have questioned
what value has been gained from such emphasis.
The upgrading of the quality of governance knowledge and insight
has undoubtedly positively impacted on the quality of governance
implementation. Yet still there remains the critique that the attention
given to governance has not sufficiently been capable of addressing
fundamental societal and corporate concerns. Business leaders in particular have criticised researchers and commentators alike for drawing
on overly simplistic assumptions of a complex reality and equally not
sufficiently understanding the inside workings of boards of directors
and the impact it has on governance practice.
To a certain extent such critique has foundation. A greater proportion
of research undertaken is based on secondary data, limited to publicly
available disclosure of issues of governance application. Indeed, most
academic researchers remain at a considerable distance from board practise and rely on governance characteristics which can easily be retrieved
and assessed from external sources.
Moreover governance publications, although robust from an academic research perspective, have a somewhat limited and narrow scope
in addressing the complex interactions between board directors. The
academic tradition of singly focusing on one or other input factor (often
due to the lack of sufficient access to board directors), such as a separation of the roles of CEO and board chair, or on the effect of number of
independent directors sitting on the board, does not provide sufficient
insight into what is happening behind ‘closed’ boardroom doors.
1
2
Andrew Kakabadse and Lutgart Van den Berghe
In reaction to such a minimalist approach, this book stands out. It
offers a distinct collection of penetrating views into boardroom practice
and governance application. The editors of this book themselves have
decades of board experience, whilst concurrently working as academics
in universities and business schools. They and the authors invited to
contribute to this collection of original works have pursued practiceoriented and doctoral research concurrently, and this has resulted in
academic publications as well as the development of numerous practical tools. In fact, this book is built upon the virtuous circle of ‘practice
inspiring theory’, emphasising that the philosophy of theory through
action improves governance application.
What this book brings is a fresh look at the ‘thinking and doing’
of governance. Although politicians and corporations increasingly ‘pay
more attention’ to corporate governance, there still remains the global
challenge of reinventing governance structures and processes in order
to cope with the breach of trust in business world over this last decade. The need for repositioning traditional governance thinking and a
reconstruction of what value boards bring to the complex corporation
of the 21st century, is here given due attention.
This book tackles the twin challenges of insightful governance thinking and board value from two different but complementary angles.
First, governance and the role of the board is examined from an ‘outside-in’ perspective. Based on international expertise and research, governance is scrutinised within a broader framework of cultural diversity
and social and political complexity. In effect, Part 1 presents a macro
and holistic framework that combines the basic questions concerning
the purpose of the corporation with the geo-political phenomena that
confront boards of directors. The authors raise existential questions on
the role of corporations in society and emphasise the need for reinventing boards.
In Part 2 the view offered is that of ‘inside-out’ with the focus on
examining the optimal functioning and interaction of boards of directors with the management, the company, the shareholders and other
relevant stakeholders. The purpose behind the exploration is to highlight ways to make governance and boards more effective in the interest
of long-term value creation. The perspective taken is that governance is
not an end in itself, but a means to an end.
The book’s path-breaking contribution is to question the belief that
governance codes and public monitoring can alone bring about the
necessary improvements to board functioning. The need emphasised
is for more granular fine tuning of board practice to the challenges at
Introduction
3
hand, rather than a cut-and-paste of international best practices. Rather
than reiterating what boards and their directors should do, the contributions to this collection take into deep consideration the processes
and qualities necessary for effective board decision-making and their
crucial impact on board effectiveness.
Chapter 1, by Nadeem Khan and Nada Korac-Kakabadse, examines
the challenge facing boards now and into the 21st century. Particular
attention is given to examining the purpose of the corporation in a
global environment where the ever greater ownership of wealth lies in
the hands of an ever diminishing minority, all this set against concerns
of sustainability and of social and human rights. The question is asked
what will the world be like in 2040 and specifically what will be the
role of boards by that same year. This chapter sets the scene for the rest
of the book by emphasising the need for board dialogue as a primary
requirement for innovation and sustainability.
Having raised such a question, Chapter 2 focuses on a particular
issue of boardroom debate, remuneration. Filipe Morais and colleagues report a study examining whether the ever greater inequality
of remuneration in corporations impacts on corporate performance.
The authors constructed a corporate GINI index (CGI), which highlights that increased sales (a measure of corporate performance) leads
to increased remuneration inequality between staff and middle management, on the one hand, and top management, on the other. The
chapter questions for how long boards can continue to ignore such
trends especially when key government agencies such as the Central
Intelligence Agency (CIA) are predicting social unrest as a result of
greater social inequality.
The theme of executive remuneration is continued but with a particular focus on China. Chapter 3, Jessica Hong Yang and Nada Kakabadse,
reports the results of a qualitative study of board influence and executive
remuneration practice in Chinese state-owned enterprises (SOEs). The
results highlight the power of the CEO in determining levels of executive remuneration. The stated position is that SOE executives should be
on a comparable scale with other state officials. In practice, however,
CEOs of SOEs are reported to be wielding substantial influence over
the board, shaping executive compensation according to their desires.
Similar to findings in other studies, this preliminary study indicates
that increased SOE executive remuneration is not linked to increased
organisational performance. Instead non-transparent, personalised and
idiosyncratic, executive-determined remuneration is the order of the
day. The recommendation made is that government has to improve the
4
Andrew Kakabadse and Lutgart Van den Berghe
Chinese legal and supervisory mechanisms, as leaving that to boards is
unlikely to address concerns of income inequality.
Having raised fundamental questions about board capability to
address sensitive governance concerns, Ouarda Dsouli, Nadeem Khan
and Nada Kakabadse in Chapter 4 explore how boards could reinvent
themselves in order to more efficiently address the governance challenges being faced. The chapter identifies four critical characteristics
determining board performance, diversity, leadership, cultural dynamics and sustainable innovation. A study of how boards fare along these
four scorecard dimensions is reported for the 100 most sustainable global companies. The findings offer interesting insights into boardroom
practice, largely determined by regulatory and cultural differences. In
particular, European firms seem more concerned with board diversity
and leadership than do their Anglo-American counterparts. However,
the key message from this chapter is that board directors need to stand
above their context and innovatively emerge with sustainable solutions
that deliver value to their firm and society at large. Regretfully few
boards are identified as being able to do just that.
The theme of value continues in Chapter 5 by posing the question of
whether board effectiveness can solely rely on attending to governance
codes. The authors Lutgart Van den Berghe and Abigail Levrau acknowledge that a plethora of governance codes have induced a box ticking
mentality amongst board directors. It is acknowledged that governance
codes are a useful first step, but the need is to move beyond that taking
account of all relevant contextual factors. The message is, adopt a holistic and systematic approach.
Chapter 6 by Lutgart Van den Berghe and Abigail Levrau further pursues that holistic perspective by identifying a systems framework that
can act as a board effectiveness assessment tool. External contrasting
factors, such as regulation and societal norms, are integrated with corporate contingency factors, where the leadership of the board is recognised as the primary influence. This highly insightful chapter uniquely
offers a balanced discussion between the twin outputs of governance,
namely monitoring and mentoring.
Having viewed governance from the outside, Part 2 analyses the main
functioning of the board and discusses how these impact on the external world. Chapter 7 by Lutgart Van den Berghe and Abigail Levrau
examines the tensions and trade-offs that occur on boards. The chapter
emphasises that reaching consensus amongst directors is fundamental
to effective board performance. However, consensus is not just about
agreement but much more about how independent, free thinking
Introduction
5
individuals meaningfully engage by challenging each other and yet still
emerge as a collective body. Working through such contrasts requires
trade-offs. Based on research and long experience, the chapter identifies the six cultural trade-offs that board directors need to consider.
Through so doing, the reader is better able to determine the difference
between negative, destructive board dynamics and positive negotiation
and trade-offs in order to emerge as a more harmonious board.
The capability to continuously lead through contrast and contradiction draws attention to the need for board leadership, particularly
through the role of Chairman. In fact, the remaining six chapters of
this book examine the role, contribution and required leadership capabilities of the Chairman of the Board. Chapter 8 by Lutgart Van den
Berghe and Abigail Levrau reports the results of an international survey examining four key propositions, namely role, responsibilities, the
nature of performance effectiveness and the need to encourage open
debate amongst board members. In terms of role and responsibilities
a fairly consistent picture emerges of chairmen across the world being
attentive to their duties. However, in terms of communication, engagement and the softer side to board functioning, a more variable picture
emerges. The overall conclusion is that the Chairman is pivotal in terms
of influencing board and organisational outcomes and the area that
most requires greatest attention is that of soft skills.
Chapter 9 by Abigail Levrau and Lutgart Van den Berghe scrutinises
the role of the Chairman differentiating between the internal facing
and the external facing aspects of the role. It is clear that the roles of
Chairman and CEO overlap and clear differentiation needs to be made
between the two, particularly from the perspective of effective decision
making. The authors offer a decision making grid contrasting the need
for decision adoption against the concern for commitment to decisions
made. The point emphasised is that board decision-making style is distinctly correlated to the Chairman’s personality, disposition and values.
Recognising the importance of the board chair, the authors conclude
the chapter by offering 10 tips for chairmen on how to enhance their
performance and in so doing, the performance of the CEO.
Chapters 10 through 13 continue with the theme of what it takes
to make the Chairman the effective leader of the board. Lutgart Van
den Berghe and Abigail Levrau have already made the point that clear
separation needs to be made between the role of the CEO and that of
Chairmen in order that the leading of the firm and leading the governance oversight process can be allowed to function. In Chapter 10, Chris
Pierce and colleagues examine the particular case of South Africa and
6
Andrew Kakabadse and Lutgart Van den Berghe
identify the Chairman of the Board as an isolated individual constantly
rating their performance much higher than their other board members.
The authors draw attention to the perceived social distance between the
chair and other board roles and emphasise this as an area of concern
that requires serious attention if boards are to be respected in South
Africa. Along the same lines, Nada and Andrew Kakabadse and Reeves
Knyght (Chapter 11) examine the particular circumstance of the USA.
To this day, 75% of corporations have the same person as Chairman/
CEO/President. The authors question why this continues to be the case
particularly in a governance climate of role separation. The qualitative
study conducted by the authors concludes that the American psyche is
Presidential. The one man making the key decisions is deeply interwoven into the fabric of the nation. Whatever governance wisdom prevails
for the rest of the world, role unity is likely to continue in corporate
America.
Chapter 12 focuses on one particular characteristic of the highperforming Chairman, age. The study reported by Nada Kakabadse,
Reeves Knyght and Andrew Kakabadse concludes the ‘older the better’. The reason? The wisdom that comes with age! The older Chairman
exhibits a high level of reasoning and intellectual discourse but combined with a native intelligence on how to work through cultural and
social dilemmas and conflicts. The outcome – ‘effective engagement’ –
as opposed to the younger who are quick, mentally sharp and display
how good they are, but in reality end up simply completing transactional deals. ‘Prophenisis’, in effect, practical wisdom, is a vital characteristic of the high performing Chairman. Bearing in mind that the
United Kingdom has about 360,000 directors who are of pensionable
age, the need to respect the particular contribution of the elderly director is now a pressing concern.
The final chapter, Chapter 13, examines the particular skills of how
high-performing Chairman align the varying interests of the board in
order that shared and meaningful decisions emerge from the debate.
The study reported highlights that the secret lies in the sharing of
both positive and negative experiences with board members. In effect
the legitimisation of boardroom encounters is fundamental to board
members gaining the confidence to enter into open dialogue. The
study emphasises that the Chairman’s balancing of powerful penetrative inquiry against nurturing a comfort of camaraderie, generates the
positive culture necessary for open conversation. The challenge lies in
surfacing inhibiting tensions, a cathartic experience, freeing up board
conversations.
Introduction
7
From an overview of governance and why have boards, to the particular value-adding skills of the Chairmen, this book offers a unique
collection of contributions that are not only intellectually insightful
but are also practically useful for board directors and chairmen. From
why boards, to what to do on boards, this original collection is the
board members guide to making boards work.
Part I
The ‘Outside In’ Perspective
1
Exposing the 20th Century
Corporation: Redesigning
21st Century Boards and Board
Performance
Nadeem Khan and Nada K. Kakabadse
Introduction
Governance oriented boards are prevalent across different economic
systems (Hall and Soskice, 2001), cultures (Hofstede et al., 2010) and
national boundaries (single/dual structure) in which they are the leading clique within private, not-for-profit, public and hybrid organisations
(Hermalin and Weisbach, 2003). Their purpose goes beyond regulation
(Aguilera and Jackson, 2003), ameliorating the agency problem (Fama
and Jensen, 1983; Berle and Means, 2009/1932) or shareholder wealth
maximisation (Friedman, 1962) to balancing society’s needs and wants
in a virtuous and accountable manner (Aristotle, 384–322 BCE; Smith,
1759). However, the emerging wider impacts of the corporation suggest deep concerns about the performance and management of boarddirected organisations with respect to market dominance (Kim, 2012),
lobbying dynamics (Child et al., 2012), board remuneration (GregorySmith and Main, 2012), financial management (Berger et al., 2012),
competitive behaviour (Porter, 2009) and political power struggle issues
(Cutting and Kouzmin, 2002).
In this regard, we know very little about boards themselves, as they
have operated largely behind closed doors (Useem, 2003) and have traditionally had little active involvement in a corporation’s daily affairs
(Scherrer, 2003). More importantly, we cannot understand boards in
isolation (Useem, 1980). We require a holistic lens to critically appreciate the historical development, ongoing selective influences (Lewin and
Volberda, 2003) and geo-political factors at play before peering into the
boardroom itself to understand the detailed processes and issues that
make a board work.
11
12
Nadeem Khan and Nada K. Kakabadse
An overview of the corporation
Take care of Fire, learn from Water, co-operate with Nature.
Motto of Hoshi Ryokan, 718 A.D.
World’s oldest currently operating company (46 generations)
The world’s oldest continuously operating family firm, Buddhist temple builder Kongo Gumi, closed in 2006 after 1,400 years. The firm
had succumbed to an excessive $314 million debt, which resulted from
the 1980s property bubble, coupled with social change in Japan (The
Economist, 2004). Takamatsu Corporation purchased the assets. Thus,
the prestige of this title has been passed to Hoshi Ryokan (718 A.D.). In
this regard, family businesses have outlasted governments, nations and
cities (O’Hara and Mandel, 2004) and contribute 70% to global GDP
(Family Firm Institute, 2012). However, only 16% survive beyond a generation (Davis, 2012). In the 20th century, some of the survivors have
emerged as corporations benefitting from financially liberal market
forces (Useem, 1980). In this regard, the world’s leading 2,000 corporations currently employ 83 million people, have $149 trillion in assets
and generate $36 trillion in revenue (Forbes, 2012). However, although
these corporations represent 46% of global GDP (Economy Watch,
2010), one-third of the Fortune 500 corporations that existed in 1970
disappeared by 1983 (Investopedia, 2011).
The term ‘corporation’ derives from corpus, the Latin word for body
or body of people, or corparoe, the Latin word for physical embodiment. The essence of body of people infers communities, shared collaborative understanding and common purpose. We can recognise the
holistic embodied form whereby the parts contribute to the whole. In
the historical business context (Hickson and Turner, 2005), Roman law
(500 B.C.) recognised a range of corporate entities which included state
and private bodies (universitas; corpus; collegium) in commenda form, or
simply stated, a form of trust in which one delivered goods to another
for a particular enterprise. We associate the modern context of the origins of the corporation (Brown, 2003) more so with feudal and monarchist governments that introduced legislation to enable shareholding.
Mercantilism was alive and well. An example is Russia. In 1557, this
nation granted monopoly rights for trade functions and risk management. The British East India Company was an English and later (from
1707) a British joint-stock company and megacorporation that pursued
trade with the East Indies, but which ended up trading mainly with
Exposing the 20th Century Corporation
13
the Indian subcontinent. The American government enacted the first
limited liability law in New York (1811). This concept eventually spread
to the UK in the form of the Limited Liability Act of 1855, and further
across much of Europe.
As such, Stora Kopparberg is one of the oldest industrial corporations. Established in a copper mining community in Sweden in 1288,
it merged with Stora Enso, the Finnish integrated group of companies,
in 1992. The historic mine has become a UNESCO World Heritage Site
in 2001. We note that Adam Smith wrote his Wealth of Nations (1776)
not long after the East Indian Company’s 1772 collapse. By the beginning of the 19th century, the US and UK governments had granted
increasing rights and progression of legislation in their charters along
with associated governance of these bodies. Interestingly, Berle and
Means published their seminal work, The Modern Corporation and
Private Property (2009/1932), not long after Black Tuesday (29 October
1929). Thus, over time, the corporate charter has developed, while
the essence of collaborative purpose and communities has degenerated, leaving the corporation to become an artificial, transferable
and immortal legal entity separate from human form along with its
accountability and regulation of behaviour. The recent 2008 Global
Financial Crisis (GFC) may provide us with an opportunity to reconsider The Wealth of Nations (Smith, 1776) and the board’s role (Berle
and Means, 2009/1932) from a new perspective as the characteristics
of the corporation (Table 1.1) appear to be at odds with its purposeful
function in society.
Table 1.1
Internal corporate characteristics
Characteristics
Purposeful function
Twentieth-century
corporation
Board structure
Human entity
Legal entity
Cultural dynamics
Collaborative within society
Monarchist/ feudal
Diversity
Stakeholders
Shareholders
Leadership
Accountability to society
Control of society
Sustainability
Beneficial trade
Risk management
Innovation
Purposeful value
Financial enhancement
Source: Designed by authors.
14
Nadeem Khan and Nada K. Kakabadse
Corporate cyclical change
Merck is the oldest chemical and pharmaceutical company which
dates back to 1668 (Germany), whilst in the United States, some of
the oldest companies include General Electric (1876), Bank of New
York (1784), Cigna Insurance (1792), JP Morgan (1799) and Dupont
(1802). Interestingly, a recent Japanese database survey by Tokyo
Shoko Research (2009) of 2 million companies determined that 21,666
companies are older than 100 years. Further, according to the Bank of
Korea, firms older than 200 years include 3,146 Japanese firms, 837
German firms, 222 Dutch firms and 196 French firms. Notable UK
firms include the Royal Mail (1516), Bank of Scotland (1695), Oxford
University Press (1586), Schweppes (1783) and Harrods (1835). This
makes today’s household corporate names such as Microsoft (1975)
and Facebook (2003), which boasts 1 billion users in 2012, the new
chariots of global cyclical technological change in society. We may
ask, had it not been for those years ago, teenagers Bill Gates or Mark
Zuckerman, would we be just replacing the names or the phenomena?
What forms will these or new emerging corporations take in a hundred years from today?
Nevertheless, our society’s corporate elders, such as the China Gas
Company (1862), Nestle (1866), Hong Kong and Eu Yan Sang (1873),
Unilever (1885), Great Eastern Life Assurance (1908), IBM (1911) and
Rolls Royce (1914) and their extended economic supply chains and networks across the globe are continuously challenged to innovate and
renew their value to society (Schumpeter, 1934) or suffer the ecological
inevitability of systemic rebalancing (Adner and Kapoor, 2010; Kapoor
and Lee, 2012). In the 21st century post-GFC era (Knyght et al., 2011),
this is evident in the nationalisation and collapse of the banking sector. Take for example, the Royal Bank of Scotland, which is now 82%
owned by the UK government, whilst Lehman Brothers became the
largest bankruptcy filing in US history and Northern Rock had a bank
run on 14 September 2007 as news spread that it was seeking emergency funding from the Tripartite Authorities. Lloyds TSB, founded in
Birmingham, UK, in 1765, and the US-based Citibank, which began
in New York in 1812, are both among the wounded. Since the financial crisis implosion from within the United States in 2008, 457 Banks
just within the United States have failed (Federal Deposit Insurance
Corporation, 2012).
Beyond the corporate institution, in highly regulated, educated and
developed 21st century societies (Table 1.2), it seems very odd that
Exposing the 20th Century Corporation
Table 1.2
15
Externalities of the corporation
Board externalities
Firm impact
Country
Political culture and nature
Industry
Competitive innovation
Source: Designed by authors.
government institutions can freely create excessive debt (The Economist,
2012) without society questioning the decision makers about where the
money is coming from and under what terms. Take for example, Greece,
Ireland, Italy and Spain, who in recent months have all sought extended
bailout funds from the European Central Bank (ECB). The United
States recently announced its third quantitative easing programme
(Katasonov, 2012) and critics have pointed to Greece’s recent bailout
as the nation continues to maintain a proportionally large defence
budget (Lendmenl, 2012; Smith, 2012). Whilst neo-liberal governments
continue to increasingly burden the next generation’s tax payers, forecasts suggest that just to reduce national debt to 60% of GDP, which
economists regard as a manageable level, will take Japan until 2084,
Italy until 2060, France until 2029 and the UK until 2028 (Ventura
and Aridas, 2012). The deeper question is whether democracy is working – considering that start-up businesses cannot obtain loans, but bank
bailouts and government debts are spiralling. Further, it appears that
the only real dialogue of value in competitive democracies takes place
just before an election.
As such, during 2008–2012, governments spent an extra $2.4 trillion
due to the GFC, of which $1.9 trillion went to developed countries (twothirds of this to banks). In contrast, the $500 billion that governments
spent in developing countries went to manufacturing, education and
health industries. In the East, although the Chinese and Indian economies have recently benefited from the extended forces of neo-liberalism
(Xu, 2011) and mass consumerism (Gerth, 2010), the concern is whether
capitalistic history is repeating itself within these highly populated
regions of the world. Is the East learning from the West’s sharing of
ecological/technological advanced lessons? What are the far-reaching
global impacts as the current growths of these economies slow down
to reveal a new reality? In 2010 the developing countries China, India,
Thailand, Indonesia and Malaysia received greatest inflows of capital
and grew by an average of 8.4% (Forbes, 2012). We note the ongoing
global economic hubs’ transition towards the East (Wolfensohn, 2010)
16
Nadeem Khan and Nada K. Kakabadse
as evident by Petro China becoming the first $1 trillion corporation
(Seattle Times, 2012) and the world’s largest global corporation in 2007
(Stainburn, 2012). In contrast, the US debt is officially at $16 trillion
(2012) and a recent report has posited that it may more realistically be
$50 trillion (Campbell et al., 2012).
The corporate geo-political phenomena
For us to have a deeper understanding of these social, natural and scientific phenomena, we must appreciate that the catalysts for 20th century
corporations to develop have been major global events such as European
feuds (World War I), emerging nationalistic tendencies (World War II)
and apartheid in South Africa (1848). Over the centuries, these events
have crystallised from within the complex Anglo-American bilateral
relationship (1607–present) and European colonial intentions towards
resources (Dutch, French, UK), among other geo-political shifts within
society (Useem, 1980). However, the associated costs have been considerable and long-lasting. We have seen 160 million war casualties in
the 20th century (Scaruffi, 2009). At the same time, renewed industries such as textiles, railways, coal mining and information technology
have spawned and expanded.
The academic literature in Western management commonly refers to
the corporation (Drucker, 1972) and its internationalisation patterns,
exemplified by the East Indian Company (1602–1778), from an economic
shareholder perspective (Friedman, 1962). In this respect, the more
open-minded and liberated scholars have appreciated and progressed
the more meaningful notion of stakeholders (Freeman et al., 2010),
whilst corporate spokespersons have adopted politically engaged terms
such as corporate social responsibility (CSR) (Carroll, 1999, 2008; Matten
and Moon, 2008) and citizenship (Palazzo and Scherer, 2008) to their
advantage. Stewardship (Davis et al., 1997; Donaldson and Davis, 1991)
has compounded the natural tension of the agency problem (Berle and
Means, 1932; Jensen and Meckling, 1976). This has resulted in an epistemological and predominantly quantitative interpretation of competition (Porter, 2009) by corporate boards and their resulting compounded
structures. Therefore, at the dawn of the 21st century, incentivisation
has become a sophisticated numbers game where targets and league
tables measure performance (Forbes 2000; Fortune 500; IMD, 2012).
More importantly, society’s capitalistic culture fosters an agenda of class
division that is based on material wealth and segregation. Although capitalistic and socialist systems offer opportunities, they are also inherently
Exposing the 20th Century Corporation
17
open to cronyism and corruption which limits life-changing and worldimpacting opportunities. Perhaps an equitable balanced system which
avoids extremes may offer an integrated way forward.
The intensification towards extreme environments coupled with
the competitive nature of corporations has contributed to the deeprooted oligopolistic practices (Akehurst, 1984) we observe. The corporation engages networks to protect her interests against societal
pressures. This is exemplified by the formation of the National Foreign
Trade Council (NFTC), founded in 1914 for the political lobbying of
American corporations. In extreme cases, or hostile environments
where lobbying may not work, corporations have engaged private
independent agents in support of their agendas. Recently, Stiglitz
and Bilmes (2007) identified that private security guards working
for Blackwater and DynCorp earn $445,000/year compared with an
American Army sergeant who receives $69,350/year. In this regard,
the Business and Human Rights Resource Centre (2012) has expressed
growing concern about human rights abuses by corporations such as
Pepsi in Honduras and Shell in Nigeria. These are only two examples
of a long list of cases. Analysts have also closely linked corporations
such as Halliburton, Chevron and Lockheed Martin to politicians
such as Dick Cheney and Condoleezza Rice. In consideration, we note
that the dominant ideologies of the 20th century have been capitalism and communism (Marr, 2012) whilst at the same time, the largest
exporters within the global arms business in 2009 were America (31%)
and Russia (20%) (Singh et al., 2011).
Thus far, throughout economic cyclical changes (Schumpeter, 1934)
and societal impacting geo-political shifts, corporations seem to emerge
ever stronger. As of 2000, 51% of the largest global economies were corporations (Anderson and Cavanagh, 2000). One of the major events in
the early 21st century was the 2008 GFC. Legislative reform beyond the
financial crisis emerged in the form of the Dodd-Frank Act (Obama,
2009/2010b), which in the United States included the Volcker Rule
(Obama, 2010a). This Act has brought significant changes to financial
regulation in America where the Volker Rule specifically aims to minimise conflict of interest between banks and their clients. In the UK,
this has translated in the ring-fencing of retail banks from investment
banking (Vickers, 2011). Ring-fencing occurs when a company financially separates a portion of its assets without necessarily operating as
a separate entity. This could occur for regulatory reasons, for creating
asset protection schemes with respect to financing arrangements or segregating separate income streams for taxation purposes.
18
Nadeem Khan and Nada K. Kakabadse
In this respect, interestingly, from the late 19th century until the
1970s, bank assets as a percentage of GDP in the UK remained steady at
around 50%. However, by 2006, this had climbed to over 500% of GDP
(Prieg, 2011). Therefore, UK financial sector assets in relation to GDP
were and are higher than most other countries. Further, in 2009, the
UK pledged 101% of GDP in support of the banking sector, which is the
dominant service sector fiscal contributor, whereas other nations such
as the United States (42%), Germany (27%) and Japan (21%) contributed less. Simultaneously, over 50% of donations to the Conservative
Party during 2009 and 2010 came from the City (Watt et al., 2011).
Irrespective of financial restructuring in Anglo-American capitalistic
environments (Hall and Soskice, 2001), corporations have extended
their dominance whereby 95 out of the top 150 economies (63%) are
corporations (Butler, 2005) and the question arises, ‘Are corporations
more powerful than countries’ (Faroohar, 2012)? More worryingly, it
seems as though corporate scandals such as Enron (2000) and News
Corp (2011) are more a costly media justification of unaccounted
events, whereas politicians seem to be embroiled in the web themselves
(Expenses scandal; Watt and Newall, 2012), which is extending to new
money markets (Bo Xilai scandal, 2012). In this regard, the corporate
elites’ or business aristocracies’ interlocked networks are passing to the
next generation (Useem, 1980).
Thus, in 2012, the language of corporations is transitioning into
renewed notions of sustainability (IMD, 2012), the green agenda (United
Nations, 2012) and globalisation (Hopkins, 2011) as the Davos dilemma
of whether nations can bridge the divide of the world’s political and
economic forces unfolds (Khan et al., 2012). In this respect, the current
geo-political forces (World Economic Forum, 2012) have emerged in the
so-called democratisation of Iraq (Selim, 2012), Egypt (Harvey, 2012)
and Libya (Van Genugten, 2011), which was encapsulated within the
Arab Spring (Peters, 2012). As the conflict of Afghanistan is in demise
(Pierce, 2011), an increasingly intensified conflict is unfolding and
escalating within Syria (Brown, 2012; Ryan, 2012). Within Europe, a
forced integration of countries, as a result of the Eurozone, is seeking
to protect the Euro from collapsing (Moravcsik and Sangiovanni, 2003;
Ryvkin, 2012) as disorientated societies such as Greece remain frustrated
(Krugman, 2011). Further, the divide between the richest (Qatar) and
poorest (Democratic Republic of Congo) nations on earth remains high
(Pasquali and Aridas, 2012). Simultaneously, ecological natural phenomena continue to impact larger pockets of humanity. Most recently
we have seen the 2011 Tohuku earthquake and tsunami in Japan, the
Exposing the 20th Century Corporation
19
2010 Canterbury earthquake in England and the 2012 Hurricane Sandy,
which hit the United States’ East coast with significant destruction in
New York and New Jersey.
The purpose of the corporation
The global challenges in the second decade of the 21st century include
rebalancing the corporate firm within society (McKelvey, 1997) where
we ask, ‘What really is the corporation’s purpose within our society?’
At a global level, current unemployment has reached 200 million
(International Labour Organisation, 2012), of which 75 million are
youth (under 24). The International Labour Organisation forecasts the
necessity of 600 million jobs in the next decade. The risk is that each
corporate giant employs hundreds of thousands of people. The global
retailer, Walmart, employs 2 million in the United States alone, whilst
the largest employers in the world are currently the US Department of
Defence with 3.2 million employees and the Chinese Army with 2.3
million. Seven out of the top ten employers are state companies and
half of them are from China. There are also one in three workers who
live on less than $2 a day (International Labour Organisation, 2012),
in comparison with the six-figure salaries that board executives of corporations enjoy (FTSE 100; Dow Jones 30). The deeper concern here is
that this is not restricted to developing / developed nations as 1.5 million American families with 2.8 million children are among the $2 a
day bracket (Luhby, 2012). In contrast, the largest corporate salary in
2011 was $137 million for the CEO of Simon Property Group (Business
Insider, 2012b). Looking through a wider lens further indicates that
resources such as water will become scarce in parts of the world if we do
not urgently take action (Scheffran and Battaglini, 2011). Our destruction of the planet has reduced tropical rainforests by 50% and increasingly urbanised cities are consuming 75% of global energy and 80%
of CO2 emissions, which we can attribute to just 19 countries (Earth
Observation Handbook, 2012). Presently, only 2 billion people have
access to adequate energy and 1.3 billion have no electricity (Schnieder
Electric, 2012).
Scholars cite the 1920s depression in an attempt to explain the phenomena of dwindling resources and financial collapses (Thirwell, 2010;
Skidelsky, 2011). Whilst the Gates Foundation points to population control (MacAskill, 2012), other organisations and bodies focus on environmental costing such as carbon taxes or competitive indices, such
as the Yale based Environmental Performance Index (EPI), American
20
Nadeem Khan and Nada K. Kakabadse
DowJones sustainability index or UK FTSE4Good index, to rebalance
human life on planet Earth. However, systemic failure is apparent, as
most recently the techno-giant Apple paid less than 2% taxes on its
profits outside the United States despite an earnings surge of 50% to
$37 billion in 2012 (BBC News, 2012). Thus, the current fiscal structure
oddly continues to favour corporation against society. Therefore, the
fundamental question for us is, ‘What is the corporate firm’s purpose?’
To achieve a more holistic understanding of the social phenomena
which we call the corporation in the 21st century (McKelvey, 1997), we
propose an alternative and innovative lens through which we should
view it. This must include all global societies where we reverse the pyramid and give the base priority. In this way, our planet’s weakest societies benefit from the most investment. Second, we need to understand
the corporation substantively (Kakabadse and Steane, 2010), whereby
rationality includes ethics (MacIntyre, 1981; Dsouli et al., 2012) and the
corporation is a work entity that consists of humans (Heidegger, 1927). In
this respect human communities have a responsibility to other human
societies and to the well-being of the planet itself. Therefore, people
conducting business activities have virtuous purpose (Malloch, 2008)
in supporting ecological and human flourishing (Karn, 2011). Third,
history is situational (Irwin and Winterton, 2011) and offers insight
into understanding experiences as social phenomena (qualitative) in
a predictive capacity whereby developing history will be the judge of
actions. Pivotal to this is the notion of public trust within relational
exchange environments (between corporations and society), which has
deteriorated to low levels globally (Bolton et al., 2009; Edelman Trust
Barometer, 2012). This is a timely opportunity for societies to renew
their charters and trust with corporations with respect to the practice
and the conduct of business.
In Figure 1.1, the left side represents tangible physical and economic
forms which we can attribute to the corporation. The right side represents intangible values such as morals, ethics and well-being. The
board has responsibility to the development of the firm along with a
wider commitment to societal obligations. In this respect, the board
of directors of the eco-corporation must provide sustainable solutions
for which they are accountable to society. There also is opportunity to
reconstruct how corporations create boards’ incentives based on a combination of performance measuring factors which will drive eco-competition. Societal corporate governance may foster better transparency
and planning of the renewal process where the existing corporation
may fulfil its purpose as a cash cow for innovation. The benefit for
Exposing the 20th Century Corporation
Eco-Form
21
Eco-Value
Board of Directors
Resources
Population
Distribution of Wealth
Employment
What is the Purpose of the
Eco-Corporation?
Globally Inclusive
Ethical Behaviour
Collaboration
Societal Value
Eco-Sustainability
Trust
Substantively Rational
Human Entity
History as Value
Figure 1.1
Towards a new charter for the eco-corporation
Source: Designed by authors.
society is a structured transition of existing networks towards improved
resilient environments that support infrastructure and employment /
talent skills management for firm and societal value creation. Thus, the
combination of form and value offers the board structured life-cycle
renewal pathways towards achieving the longer term corporate vision.
Importantly, in Figure 1.1, the term ‘eco’ seeks the longer term
(30 years) and inclusive benefits for a global society. This consists of
diverse market environments of many local societies. The corporation
will thus be contracted by national charters where it engages in activities. More importantly, local societies may attract or disapprove of trading activities within their communities through unique governance
mechanisms (Judge, 2010).
Re-aligning the role of global governance structures
The upper echelons of global governance come into play when re-aligning
governance structures. The post-World War II global bodies such as the
World Bank (WB), World Health Organisation (WHO) and International
Monetary Fund (IMF) need to develop sustainable fair and pro-active
policies and governance mechanisms that foster collaborative and beneficial partnerships at a global level. Currently, the fractured approach
and political nature of these beasts does not allow this as exemplified by
the recent ongoing instability in Syria. Instead, we see innocent populations suffer and politicians pursuing their own agendas. Interestingly,
22
Nadeem Khan and Nada K. Kakabadse
Castells (2011) cites recent events of social change such as the Arab
Spring or London riots that have lead to a crisis of trust between politics
and finance and a restructuring of society. The technology-supported
pockets of resistance consist of younger like-minded individuals who
find common purpose in opposing dominance. Scholarly contributions
also provide limited insight and understanding of these phenomena as
many datasets are Western influenced and more importantly, dataset
infrastructure and availability from the poorest nations remains elusive
or vague at best.
Exposing board structures and corporate cultures
In order to expose board structures and corporate cultures, the longitudinal and globally encompassing lens must extend beyond the 21st
century and modern colonial understandings of the corporation (e.g.
Dutch, French and British) whereby patterns recognise that the inherent human appetite for control and power includes the rise and fall of
empires such as the Spanish (1740), the Ottoman (1683), the Mongol
(1309), the Roman (65 A.D.), the Greek (150 B.C.), the Egyptian (1450
B.C.) and the Chinese Zhou Dynasty (1122 B.C.). Dominant elites and
their personal desires for change (Kakabadse and Kakabadse, 2012) have
empowered largely the transcending and deeper interpretation of global trade’s cyclical development and its associated industries. In this
regard, the West African 14th century king Mansa Musa I (1280–1331
A.D.), ruler of the Malian Empire (Ghana, Mali, Timbuktu), tops the
list of the richest people in history, adjusted for inflation. Further, the
top 25 people on the list are worth $4.317 trillion (Fleming, 2012), of
which three are alive today. In 2012, this has translated into the elite
corporate boards within our societal structures that determine human
progression. Most recently, the Swiss Federal Institute (SFI) has posited that 147 international corporations control 40% of global wealth
(Vitali et al., 2011). Thus, the boards of these corporations comprise no
more than a few hundred people within a global population of 7 billion
(WorldOmeter, 2012). More worryingly, these elites maintain their class
stratum (Mills, 1956) and inter-personal relationships (Useem, 1980).
The global lens further shows us that the eco-development of different
industries varies geographically and globally. For example, the market
research report for Global Retailing (Deloitte, 2012b) notes that the food
industry has grown steadily over the century, supported by a growing
global population. In this respect, no more than 140 people (Welch,
2012) within the UK control the top five food company boards. This
Exposing the 20th Century Corporation
23
represents a 70% market share (Institute of Grocery and Distribution,
2010). Comparatively, the mobile communication or technological
industries experience much more dramatic cyclical development over
shorter timeframes as innovation impacts progress. Take, for example,
the digital music industry. Another example is Nokia’s 92% fall in market share since the launch of Apple’s iPhone in 2007 (Moritz and Aaron,
2012). Back in 1997, Apple was facing bankruptcy and has since then
increased its value 80-fold in the last decade (Moritz and Aaron, 2012).
We have seen also the corporate cases of Google in China (Thompson,
2006) and the legal battle between Apple and Samsung over intellectual property (Albanesius, 2012; BBC News, 2012), which involve ever
increasing amounts of US dollars where national regulation and corporate global values collide (Heineman, 2010).
Within this web, critics are increasingly questioning the role of media
(Bailey, 2004) and technology. Examples include the Leveson Inquiry
(2011) where the culture, practice and ethics of the British press were
called into question and victims included politicians, sportspersons
and public figures (Tsaliki et al., 2011; Rojek, 2012). In 2011, we saw
the News of the World scandal in which the newspaper’s editor and a
private investigator were charged for hacking the phone of members
of the Royal Family (Carney, 2012). The combination of these information streams has compounded where technological regulation and
surveillance is fast replacing older mobile and web monitoring systems.
Privacy International’s survey (2007) identifies China, Malaysia, Russia,
the UK and the United States as endemic surveillance societies, with
monitoring bodies such as the 1994 US Communications Assistance for
Law Enforcement Act and the 2005 European Data Retention Directive.
There is also growing concern that governments across the globe have
introduced a raft of new legislation for monitoring following 9/11. For
example, the UK has 1.85 million surveillance cameras (Thompson and
Gerrard, 2011), most of which are privately owned (92%). Here, the grey
area between private and public information has become an uncomfortable balance of risk and safety. The point remains that technology ownership and the control that drives multimedia outlets still lie in a few
hands (Leys, 2003): ones that are, therefore, in a position to utilise media
as a central instrument for advancing private, as opposed to public, interests. Therefore, those who control the opinion-moulding media, which
includes television, radio, newspapers, magazines, books and film, speak
with a single voice, each reinforcing the other and, in turn, eroding
democracy, individual liberty, educational and personal freedoms for a
diverse society (Bagdikian, 2004; Kakabadse et al., 2007, 2010).
24
Nadeem Khan and Nada K. Kakabadse
However, this collision of state and corporation or public and private is
not new and has previously occurred where American corporations such
as GE, IBM, Dupont and Kodak had interests in Hitler’s Germany during 1933–1939, or in South Africa during apartheid. In the 21st century,
scholarly contribution posits that national governance mechanisms
(Aguilera and Jackson, 2003) which have traditionally protected industries like the Indian retail sector are being challenged by global corporations. We may better understand the relationship of country governance
and corporate governance in new ways such as national governance bundles (Zattoni and Judge, 2012). However, regardless of how one interprets
this relationship, the corporate behaviour of firms remains individualistic and profit-biased. This is exemplified by Suncor Energy, which is one
of Canada’s largest resource companies and dominates in the Global 100
clean capitalism sustainable companies list (Global 100 List, 2012). Yet it
has production fields in both Syria and Libya (Suncor, 2012).
Thus, at a global level, industry innovation patterns (Figure 1.3) are
deeply connected across nations and transformation in one part of the
world triggers change on a large scale. In the current climate, it is the
financial, technologically driven media and food industries that are at
the forefront of social structures (see Figure 1.2).
In the context of the increasingly interconnected and highly populated global environment, the connection between capital and innovation within the legal corporation (Morck, 2012) does not appear to be
fulfilling societal needs-creating value as performance. In the 20th century scholars have theorised, explained and analysed the firm (Coase,
1937) in terms of behaviour (Cyert and March, 1963), transaction costs
10
8
6
4
2
0
1960
1970
Food
1980
Technology
1990
Financial
2000
Media
2010
Population
Figure 1.2 Global industrial corporate change – patterns of innovation for
sustainability
Source: Compiled by authors.
Exposing the 20th Century Corporation
25
(Williamson, 1975) and more recently as resources and capabilities
(Wernfelt, 1984). However, the range of alternative approaches concludes
no clear holistic understanding of the firm. We assume the reason to
understand the firm has been to enhance contribution of positive value
through innovation (Pitelis and Teece, 2009) in some way. However,
underlying corporate concerns have persisted into the 21st century.
Take for example, the audit fraud of Enron in United States, the accusations of bribery against Walmart in Mexico, the exposure to sub-prime
lending which caused the international collapse of Lehman Brothers,
the phone hacking scandal of Newscorp and most recently the conduct
of employees within the BBC in the UK which has led to the resignation of the Director General. More so, in today’s dynamic (Mintzberg
et al., 2009), chaotic global environment, politicians are constantly at
odds with (Halliday, 2011) or in the pockets of financially incentivised
corporate boards (Peltz, 1995). These observed behaviours indicate lack
of trust, inadequate transparency and self-motivated purpose at a time
when there is an urgent need for firms to deliver value.
One of the ways to restore trust is through improving the skills and
talents of potential future board members. The role of educational
establishments is critical and a wider diversification of talent selection
processes by corporations is warranted. The grooming of future board
members is not just about having knowledge, but more so about the
application of knowledge to change behaviour. Higher level academic
institutions also collaborate with industry on research projects, but
many critics argue that scholarly research is disengaged in bridging the
gaps between society and firm (McKelvey, 1997). The volatile changes
to school curricula (BBC, 2012), pressures of league tables (The Guardian,
2012), systemic standard teaching models and tiered grading criteria
seem focused on the detail, but not on the broader understanding in
bridging industry needs and innovation (Etzkowitz and Leydesdorff,
2000). More concerning are lower educational standards (Hurt, 2012)
and increased student plagiarism. Most recently, 125 students at Harvard
in a class of 250 are facing joint disciplinary action in a cheating scandal (Business Insider, 2012a). Meanwhile, African countries including
Mali, Niger and Ethiopia have some of the lowest global literacy rates
(Rehman, 2011). Among the scholarly circles, many of the corporate
board elites seem to be honorary graduates or involved in some capacity
with high-fee institutions (Harvard, Oxford). Consequently, instead of
focusing on teaching agendas and behaviour of students, the universities are treating students as consumers (Kuchler, 2012) or increasingly
fostering private finance which raises the potential for a conflict of
26
Nadeem Khan and Nada K. Kakabadse
interests within research output. Educational establishments need to
foster innovation for social reform and boards need to adopt diversified
open networks.
Within the current closed networks, passing political legislation
(Vickers, 2011) and industry regulations such as the Cadbury Code and
its revisions (1992, 2010) or the Sarbanes Oxley Act of 2002 fosters corporate cultures to anticipate, pre-empt and manipulate practices such
as protectionism, oligopolistic behaviour and ethical reporting more
effectively and efficiently. Most recently, US corporations are rising once
again to new levels with the top 14 companies earning $248 billion
in the last 12 months and their market value is more than Germany’s
GDP (Moritz and Aaron, 2012). Thus, the corporation’s purpose in productive utilisation of capital has deteriorated to that of hoarding and
building capital (Apple has more than $100 billion cash; banks are not
lending capital) in riskier environments and within more complex and
digitally disguised network structures. As a result, the notion of innovation becomes diluted to profit maximisation (Friedman, 1962) rather
than societal value (Morck, 2012) and the corporation fosters a culture
of self-worth rather than societal benefit in which the innovators are
more likely to lose out or be exploited.
When capital and innovation meet, the outcomes are global. Look
at consumer goods such as cars, electricity, mobile phones, Internet
and nanotechnology. In this regard, the innovators have a purposeful
approach to providing a solution to a problem. Did Henry Ford (1863–
1947) or Thomas Edison (1847–1931) know the impact of their innovations on society and were they motivated by profit? What would they
say if they were in the world today and most importantly, what skill
sets and behaviours would enable them to successfully contribute?
Corporate boards today appear concerned with self-interest as they
work in an environment that must cater to agency and shareholder
mindsets. This can be observed in the recent News of the World scandal
in 2011 and the Barclays interest rate scandal of 2012. Consequently,
the flow of trust between these interlocking groups of relational
exchange networks has fractured and requires urgent restructuring
(Figure 1.3).
Further, the political, corporate, media and scholarly board members’
teleological engagement within society has exacerbated existing tensions to an extent whereby lack of trust has alienated society (Figure
1.3). Consequently, outsider stakeholders across individual and regional
societies such as Egypt, Greece, Libya, Ireland and Spain are calling for
reform within and beyond the highly urbanised megacities. Over 50%
Exposing the 20th Century Corporation
Private and PPP
Corporations
1
Industrialists
2
Financial
Structures
Governments
National Society
4
Scholarly
Research
Techno-Media
Journalists and
Broadcasters
3
Academic
Institutions
TRUST
1) Lobbying and
Regulation
27
Geo-Political Competitive
Global Environment
2) Production and
Consumerism
3) Propaganda
4) Justification and
Planning
Flow of Broken
Trust
TOP DOWN STRUCTURE
Figure 1.3 Closed trust relational networks of corporations in society (1900–2012)
Source: Designed by authors.
of the global population lives in cities. Human life spans are increasing,
with the average age rising to 44 globally and resources are becoming
scarce, with 40% of land used for food production. We require new technological or scientific solutions to support basic human and ecological
survival (United Nations Millennium Declaration, 2000). The increasing divergence of wealth and its protectionism suggests that incentives
such as salaries, bonuses and shares for corporate board members are
failing to deliver for societies which suggests that eco-pressures including NGOs, global warming, poverty and war may implode further. This
culminates in a scenario where the politicians understand their nation
or region as a non-human, corporate legal entity which the governing
boards will allow to collapse. We have witnessed this recently in Ireland
and Greece.
Making boards respect diversity
At the heart of this dialogue is that society has progressed through
global cycles over the ages (Schularick and Taylor, 2009). Yoshikawa’s
(2012) analysis of director behaviour and institutional effect suggests
that Eastern societies have longer, culturally richer, but slow moving
traditional environments driven by personal human relations and informal institutional logic, whereas Western innovation and technological
advancement has impacted society more in the 20th century driven by
organised structured systems and formal institutional logic. Therefore,
it has been the dominance and expansion of Western capitalistic forces
28
Nadeem Khan and Nada K. Kakabadse
over the last century that have enabled the Anglo-American corporate
model to grow.
We also see that the global human population increased from 275
million in 600 A.D. to 1 billion by 1900, followed by a drastic rise to 7
billion in 2012 (WorldOmeter, 2012). East Asia has most of the population (India/China), whilst the West maintains its status quo. Thus, stable systems have allowed boards to make the link between capital and
innovation, but more so to induce economic activity (Friedman, 1962).
As a result, where companies once took pride in manufacturing products
‘to last a lifetime’, in the 21st century products and services are more a
commodity of the day as the pace of renewal is so fast. More concerning
is that it seems as though life itself is fast becoming a commodity.
To speak to someone on the other side of the world in 600 A.D. was
unthinkable, whilst in 2012, we can communicate globally within seconds. Thus, it is intelligence (Gardener, 1993) and self-awareness (behaviour) that allows humanity to survive and adapt. In the 21st century
there is scope for a shared vision of the future that respects diversity of
nations within a collaborative balanced global environment. However,
for this to become a fruitful reality, corporations must restructure their
compounding globalisation agendas so that diverse societies are able
to determine their position through each society’s governance of trade
and corporate structures, starting at the grassroots level. Therefore,
social reform innovators may better link themselves to productive capital (Morck, 2012).
The current development cycle posits weakened governmental control
against increasingly economically dominant corporations (Kakabadse
et al., 2006). It is therefore no surprise that Walmart’s global revenue is
greater than the GDP of 174 nations (Forbes, 2012) and each of the top
corporations is highly networked based on employment, suppliers and
customers. When renewal occurs the impact is beyond any geographic
or economic border, making the collapse of a corporation uncontrolled
by regulatory pressure. Similar to the 1920s, pre-colonial empires and
individualistic cultures are seeing that the time for change is once again
pressing. It is paramount that boards, in an attempt to create social
well-being, globally respect others and call for urgent corporate reform
to enable 200 nations to rebalance and harmonise society. We cannot
allow history to repeat itself. We have endured enough wars. Instead,
we must foster behavioural change for the future. The difficult task is
to respectfully change corporate boards’ mindsets in the currently competitive geo-political environment in which humanity may face risk
(World Economic Forum, 2012).
Exposing the 20th Century Corporation
29
Confucius (551–479 BCE) emphasised personal and governmental
morality, the correctness of social relationships and justice within his
philosophical teachings (Quiyum and Salimullah, 2005). More so, it
was the patient and persistent route to bringing change to China’s existing feudal aristocratic system towards a governed and legalised state
system which history acknowledges and appreciates today (Cheung,
2012). Thus, China stands as a collective populous and geographically
large single country (Zheng, 2012). Where Western societies are close to
self-destruction, it is the Chinese (communist), Indian (democratic) and
emerging economies that are the engine rooms of current growth and
economic activity (World Economic Outlook, 2012). In the post-GFC
era, it is the emerging markets that represent a rising contribution to
GDP (30%) (Prasad and Prasad, 2006; Evans, 2010).
The headquarters of many of the largest global corporations remain
within the developed countries, where procedures and practices of
boards are to some extent regulated. Within these societies individuals
are more knowledgeable about their rights and their ability to protest or
complain. The corporate board’s behaviour has to react and respond to
society. Unfortunately, when weaker or poorer communities oppose the
board the economically stronger stakeholder wins. This is exemplified
by cases where the indigenous populations in Queensland (Australia),
Chaco (Bolivia) and Chad face adversity as a result of resource extraction (Le Billion, 2001; Sawyer and Gomez, 2012). What will become
of the Aborigines, African tribes and American Indians? Rather than
being reactive and protectionist, the board should behave proactively
and in collaboration with local societies. The rights and freedoms of
knowledgeable societies have to extend to unregulated environments
if they are to achieve collective balance. Instead, there is a distinct lack
of diversity in corporate elite representation and an increased pounding of geo-political forces in the quest for resources such as energy
and food. Thus, Adam Smith’s (1776) call for ethical/moral substantive
understanding resonates in Stiglitz’s (2010) discomfort between rich
and poor.
We sometimes forget that the East Indian Company was governmentbacked (The Economist, 2011). Similarly, 80% of China’s, 60% of Russia’s
and 35% of Brazil’s stock markets consist of state-backed companies
today. State-backed enterprises have thrived in the post-GFC climate
(2008–2012) and represent 20% of the top global companies and 28%
of emerging market economies. China Mobile has 600 million customers. Saudi Arabia’s SABIC, founded in 1976, is the world’s most profitable
chemical company. Russia’s Gazprom is the world’s largest natural gas
30
Nadeem Khan and Nada K. Kakabadse
company. Russia has proposed a new super state-backed corporation for
the development of Siberia’s natural resources and many of the listed
corporations in the Middle East (Forbes, 2012) are government/kingdom
supported, such as Emirates Airlines. Many of the more recently established emerging markets from the 1960s onwards, even in neo-liberal
markets, have established flourishing public private partnerships (PPPs)
(Deloitte, 2012a).
Under austerity programmes, the UK government has cut drastically
public sector expenditure in areas such as health, education and city
councils. Experts forecast economic growth at 1–2% at best, whereas
emerging markets forecast 5–6% as an average (The Economist, 2012).
The advantage of the PPP model is that the corporation benefits from
limited liability as opposed to unlimited liability and further has political support in entrepreneurial activities. If there is trust and dialogue
(Shaoul et al., 2012), innovation drives the politicians to change and
govern in the company’s favour. Looking back on history, the East
Indian Company is responsible for much innovation in the UK (Bowen
et al., 2002). Furthermore, one-third of foreign direct investment in
emerging markets from 2003 to 2010 has come from hybrid statebacked corporations.
The risk or downside of this approach is that these national hybrid
corporations can be too big and can monopolise the marketplace
unfairly (Hwang et al., 2012). Deloitte (2012a) further identified maintaining political support and structuring finance for development
projects as current challenges to this corporate format. Thus, corporations require a critically balanced strategic approach to regulate and
incentivise trade in favour of sustainable innovation, as we see in
Singapore (Hwang et al., 2012; Shaoul et al., 2012).
What will the world be like in 2040?
The ice has melted in the Poles (Lemke, 2012), sea levels have risen
(Schaeffer et al., 2012), global population has increased towards 9 billion (United Nations, 2004), the Chinese Communist Party becomes a
two-tiered structure (Lee, 2012), BRIC (Brazil, Russia, India and China)
nations are economically strong and the average age of the global citizen will be 44 (United Nations, 2012). New industries will have emerged
such as space travel with Virgin, and we will use water-based petrol as
fuel for transport (Trott, 2012). There will be applications of technohuman integrated chips within robotics and virtual environments.
Scientists will harness new forms of energy such as ethanol, hydrogen
Exposing the 20th Century Corporation
31
and mobile power units. Alternative fiscal structures will have emerged
such as carbon taxing, virtual taxes and individual residence taxes
rather than household taxation. At the forefront of societal renewal will
be underwater cities and holidays on floating pods at sea.
The alternative scenario may also be one of mass migrations of
society around the globe based on age rather than family structures.
Thus, employment will be mechanistic and fixed based on life cycles.
De-humanisation will foster new hybrid digital forms, which may
inhibit or enhance freedom and understanding within birth-implanted
neuro-networks. The fall of China and India will have replenished the
rise of Africa as the capitalistic corporate dominant continent in the
world making Europe the less developed continent. Humanity may realise the reality of world peace or alternatively, humanity may be recovering from global disease, another war or ecological catastrophe.
In this regard, the optimistic lens provides a hybrid ecologically balanced utopia, which may actually offer less stressful and more enriched
lives for humanity. It becomes clear that critical to behaviour is education and innovation which have historically, naturally, scientifically
and socially benefitted humanity throughout the ages. Thus, the social
unique selling point (USP) will be value-based knowledge systems. A
reinvigorated form of competition for good and fair aspirations will
support and inform this hybrid sustainable holistic system. At the command centre of this social phenomena will be the highly respected role
of boards.
What will be the role of boards in the
corporations of 2040?
What type of corporation do we want in 2040? What types of people
do we want running our corporations? How should we conduct trade?
Which will be the lead industries? How can we best connect innovation and productive capital? How do we understand the well-being of
society and the function of the corporation within it? Is competition
healthy? What will be the geo-political and regulatory frameworks of
tomorrow? Will we see a single corporation in the future or will preservation of culture, diversity and freedom remain important to humanity? Is the media’s portrayal of society transparent and trustworthy?
What will be family, moral and social norms in 2040? These are some
of the legitimate questions that emerge and central to these questions is
the function and role of boards of corporations in directing and leading
firms as guardians and propagators of change in society.
32
Nadeem Khan and Nada K. Kakabadse
A recent in-depth American study of boards as interlocking inner
circles (Useem, 1984) with multi-board directorships amongst friends
(Chu, 2012) may suggest an unravelling of elitism or it may posit a shift
in economic base from the United States to new markets such as China
and India. However, looking through a wider lens, we can appreciate
that beyond Anglo-American capitalism (Hall and Soskice, 2001) there
are alternative single- and dual-tier structures and modes of governance, for example in China, Malaysia or Europe, that may offer insight
into the role of boards, their governance and interaction with society
in a more balanced way. In this transitory phase, another study has
identified that the role of chairman (or chairperson) within the board
should adopt a more vocal and visible role within and beyond the corporation (Grant Thornton, 2012). There also appears to be an emerging trend towards a more ethical basis in directing the firm (Grant
Thornton, 2012). With this in mind, we may adopt a global exploratory
lens to investigate the patterns, practices and issues of making boards
work within the globally diverse context with a view to establishing
attributes that may offer eco-balanced and cohesive societal transformation in the 21st century.
We spend much of our lives learning and then contributing to society. However, in 100 years from today what will the history books
report about the legacy that this generation left on planet Earth? More
so, will the next generation of elites renew the 20th century economic
war in a virtual context or are they prepared to take a risk and legitimise
broader control? This insatiable appetite for competitive control is odd
as history suggests that we do not take our worldly possessions with us
beyond the end of life and what we leave behind was never actually
in the destiny of the individual to have or use. After all, what use and
value is a large bank balance to a dead man? The legacy that will remain
will be embedded in the lessons of history and in the trust and character of the behaviours of the next generation.
Reflecting on history and understanding the current social phenomena, corporate boardrooms may offer opportunities to renew charters
and rebuild trust with society beyond the 20th century’s divide-andrule hierarchical syndrome towards an inclusive and innovative respectful future for all to share. In society’s globally diverse strata, let us open
the doors to the boardrooms and rebuild transparency through open
networks and trust with society (Figure 1.4).
In Figure 1.4, we may redesign the current Charters of Corporation
(Figure 1.3) and reflect a new social solidarity (Useem, 1980) in directing corporate structures based on common ideology. Consequently,
Exposing the 20th Century Corporation
Private and PPP
Corporations
Financial
Structures
Industrialists
Governments
2
1
2) Globally Unique
Industries
4
3) Informative and High
Quality News
National Society
3
Techno-Media
Scholarly
Research
Journalists and
Broadcasters
Academic
Institutions
TRUST
1) Diverse regulation and
transparent structures
for capital/innovator
33
Globally Collaborative
Interdependent Societies
4) Innovative and
Sustainable Research.
Trusted Transparency
SOCIETAL DRIVEN
STRUCTURE
Figure 1.4 Diverse open trust networks of corporations in society (2012–2050)
Source: Designed by authors.
ownership, directorship and management strata align within the triple innovative helix (Etzkowitz and Leydesdorff, 2000) as society shifts
from centralised closed networks (Mills, 1956) to diverse open board
structures and cultures with purposefully operating boards. Therefore,
we will base the way in which boards work and in which we understand
them on the renewable talent and skill structures consisting of human
and social capital (Yoshikawa, 2012), which will engage resources and
values (Figure 1.1) for tomorrow’s diverse and self-sustainable societies.
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2
Corporate Income Inequality and
Corporate Performance:
Any Correlations?
Filipe Morais, Andrew Kakabadse, Nada K. Kakabadse
and Adrian Pryce
Introduction
Income inequality has been an important concern for scholars and practitioners alike. Concerns about income inequality contributed to both the
Magna Carta of 1215 and the Bill of Rights in 1689. Despite steady progress
over the centuries towards the equality ideal, which has continued to be
elusive, income inequality has increased significantly in the past 30 years.
Shareholder dominance through the encroachment of Anglo-American
style globalisation and its corresponding model of corporate governance
has led to a meteoric rise of executive compensation as well as the 2008
global financial meltdown, resulting in economic depression affecting billions of ordinary citizens around the globe (Kakabadse et al., 2004; Clarke,
2009; Pryce et al., 2011; Tse, 2011). At the centre of the global financial
crisis (GFC) spawned by the prevalence of the Anglo-Saxon shareholder
model is the explosion of executive compensation, which in addition to
generating debate in both academic and political circles has triggered public anger as exemplified by the Occupy Wall Street (OWS) rallies during the
last quarter of 2011 and the associated citizens’ ‘actions’ in over 600 cities
across the Americas, Africa, Europe, Asia and Australia (Rushe, 2011).
Over the past three decades or so, executive pay has been rising,
particularly in the United States, but also in Europe and elsewhere.
Several studies and authors show that in the United States the rewards
of enterprise have been to capital as well as to labour, but in the case
of employees, income gains have been skewed to the very top levels of
organisations (IPS and UFE, 2006; Jacoby, 2007). A critical examination
of the theories underpinning executive pay arrangements (Festinger,
1957 Jensen and Meckling, 1976; Lazear and Rosen, 1981; and Westphal,
44
Corporate Income Inequality and Corporate Performance
45
1994; Bebchuk and Fried, 2006; Clarke, 2009; Fulmer, 2009) shows the
inability to explain current trends and practice.
This chapter starts by reviewing current trends on executive compensation and by critically discussing the main theories underpinning executive pay. It also discusses the relationship between
executive compensation and corporate performance along with the
contribution of mainstream academics and the regulatory response
to the GFC. It follows a discussion of inequality trends from both a
macro and microeconomic perspective and suggests how a corporate
Gini index (CGI) can be a useful measure to understand how corporate income inequality affects company performance and macroeconomic inequality.
The chapter then presents a description of the study methodology
along with presentation and analysis of the findings. The chapter ends
with conclusions and indicates future avenues of research.
The explosion of executive pay
Executive pay has been rising rapidly across the globe in past decades,
with more velocity in the United States, but increasingly in the UK
and Europe (Pryce et al., 2011). In 2007, the EPI reported that US CEOs
earned more in one working day than the average worker earned in a
year (Mishel et al., 2007).
Executive pay in the United States took off in the 1990s and between
1990 and 2005 increased 298% on average, whereas corporate profits
went up for the same period at less than half (+141%). Over the same
period, the average production worker’s pay had a real increase of 4.3%
and the Federal minimum wage saw a real decrease of 9.3% (IPS and
UFE, 2006).
According to a more recent IPS study ‘after adjusting for inflation,
CEO pay in 2009 more than doubled the CEO pay average for the decade of the 1990s, more than quadrupled the CEO pay average for the
1980s, and ran approximately eight times the CEO average for all the
decades of the mid-20th century’ (IPS, 2010, p. 3). IDS (2010) reports
that the UK pay gap between shop floor and executive directors almost
doubled in the past decade, whilst the average total compensation of
FTSE100 chiefs soared from 69 to 145 times the average worker earnings
(High Pay Commission, 2011).
Another study shows that executive pay varies between 71 and 183
the income of the average worker and between 103 and 523 times if
share-based payments are included (ILO, 2008).
46
Filipe Morais, Andrew Kakabadse, Nada K. Kakabadse and Adrian Pryce
200
150
100
148
135
10,3
104
2,7
71 3,6
Germany
Hong kong
Netherlands
6
4
1,4
Australia
10
8
6,8
6
50
0
12
183
160
South Africa United States
2
0
CEO pay/Average employee pay
Average executive/Average employee pay
CEO pay (1)
Average executive pay (1)
Figure 2.1 Executive pay, 2007 as per the ILLS estimates based on the annual
reports of 15 of the largest corporations in the respective countries
Source: Adapted from ILLS (2008). Figures in millions of US dollars.
The growth in executive compensation is not uniformly distributed
globally and further this phenomenon is viewed differently in the varying parts of the world. In July 2010, The Washington Post emphasised
the case of Japan, reporting that despite Japanese Securities Exchange
authorities on the 30 June 2010 ‘requiring Japanese companies to disclose pay for executives making more $1.1 million … the (Japanese) government said that “fewer than 300 people at Japan’s 3,813 plc’s earned
enough in 2009 to require disclosure”’ (Klein, 2010). It concluded that
‘(…) CEOs aren’t just paid what the market will bear; they’re paid what
the culture will accept’ (Klein, 2010).
Think Progress (2009) questions CEO pay levels in 2008 and inquires
why Carl-Henric Svanberg, the CEO of the Swedish firm Ericsson (289th
position on Fortune 500) took home in 2008 a total of just over US$2.5
million and Leif Johansson CEO of Volvo (the largest Swedish firm) just
US$1.9 million, whilst the CEO of US company Aetna ranked (300th
position on Fortune 500) took home US$38.12 million.
It is evident that US CEOs are remunerated considerably more when
compared to Swedish and Japanese executives managing similar or
even larger firms (Klein, 2010; Think Progress, 2009). The question that
remains unanswered is whether US CEOs are overrated. Most members
of the society perceive executive compensation as excessive. Certainly
in the absence of any rationale for the levels whether they are economic
or any other kind, this leaves executive pay vulnerable to accusations
of being flawed, profoundly unfair and contributing directly to the
widening income inequality within corporations and, in turn, within
Corporate Income Inequality and Corporate Performance
47
societies, with all the associated negative consequences for health and
social well-being.
Theories of pay: any reasonable explanation?
According to Kakabadse et al. (2004, p. 561) ‘the question as to where
fair pay ends and over-compensation begins – and what that means
for the community – is rarely raised’. For others, little has been done
in ‘explaining the remuneration’s magnitude, structure and sensitivity
to the long-term impact on stakeholders and the wider community’
(Bowen, 1953, cited in Kakabadse et al., 2004, p. 561) and theoretical
frameworks do not provide much of an explanation for these current
trends. In this chapter we explore contrasting models of governance,
all of which capture distinct but contrasting notions of executive remuneration. These are agency theory, the power perspective approach,
tournament theory, economics-based theories and socio-comparative
theories (Table 2.1).
The agency theory
Agency theory is based on the assumption that executive actions are
more effective if they are aligned with shareholders’ interests. It is
under this rationale that companies justify remuneration packages as
the mechanism to forge that alignment (Berle and Means, 1932; Jensen
and Meckling, 1976; Kakabadse et al., 2004, Fulmer, 2009).
Interestingly, agency costs have been increasing rapidly over the past
three decades or so, whilst shareholder value has been following the
opposite trend (Martin, 2010). Given the average share ownership of US
CEOs and their immediate relatives, Clarke (2010, p. 16) goes as far as
to consider that ‘separation between ownership and control is now in
reverse’. These are only some of the growing body of voices that claim
that executive elite has been able to claim an ever increasing share of
wealth of the enterprise and have been awarded inordinate power at the
expense of shareholders and the workforce. In this sense, scholars also
have criticised agency theory for being too narrow and outdated and
that it does not account for changing contextual and/or environmental
forces (Teubner, 1996; Kakabadse and Kakabadse, 2003; Aguilera et al.,
2008; Christopher, 2010; Rowe and Liu, 2010).
The power perspective approach
Clarke (2009) argues that ‘out of control CEO power and reward concentrated in Anglo-American firms is correlated closely with the recent
48
Filipe Morais, Andrew Kakabadse, Nada K. Kakabadse and Adrian Pryce
Table 2.1
Dominant theories on executive pay
Author(s)
Theory
Assumption
Explanation
Berle and
Means (1932);
Jensen and
Meckling
(1976)
Agency
Theory
Executive actions
are more effective
if aligned with
shareholder interests
through generous
compensation
packages (especially
equity-based).
Explains CEO size and
structure by the need
to align executive and
shareholder interests,
defending that stockbased payments are
the most effective
in forging such
alignment.
Lazear and
Rosen (1981);
Rosen (1986);
Huang and
Sharma (2010)
Tournament Sufficiently large
Theory
pay gaps between
consecutive
executive ranks
create competition
amongst managers
for higher financial
rewards, which leads
to better corporate
performance. The
market defines the
‘price’ of a CEO.
Explains size of pay
by the fact that the
CEO is the ultimate
position to strive for,
thus pay needs to be
substantially greater
so as to encourage
managers below to
compete for this role.
Bebchuk and
Fried (2006);
Clarke (2010);
Wiseman and
Severance
(2007)
SocioPolitical
Perspective
(Power)
CEO power over
boards induces
limitations of an
economic, social
and psychological
nature on other board
directors.
Executive
compensation size and
structure is explained
by the inordinate
power awarded to the
CEO over the board,
resulting in “structural
defects” that allow
CEOs to define their
own remuneration
packages with little
opposition.
Khurana
(2002); Kroll
(2005);
Bebchuk and
Fried (2006)
Economics
Based
Executive
compensation is a
supply and demand
phenomenon, where
the CEO should
receive compensation
according to his/her
marginal revenue
product.
Executive
compensation is
determined by the
limited talent pool of
CEO’s, informed sellers
and difficulties in
calculating the CEO’s
marginal revenue
product.
Continued
Corporate Income Inequality and Corporate Performance
Table 2.1
49
Continued
Author(s)
Theory
Assumption
Festinger
(1957);
Hosseini and
Brenner (1992)
SocioExternal peer
comparative comparison
(of director’s
performance) in a
variety of industries
determines executive
compensation size
and structure.
Explanation
The prevalence
of external peer
comparison
explains executive
compensation.
Source: Compiled by the authors.
financial crisis’ and states that the increasing share of wealth going to
CEOs ‘impacts upon relationships with other employees, shareholders
and wider community’ (Clarke, 2010, p. 2). The point that Clarke challenges is the convergence theory of Anglo-American corporate governance. He contends that this Anglo-Saxon model produces far higher
levels of inequality, and yet is this same model of governance that is
gaining ground across the globe promoted by executives, institutional
investors and international bodies such the OECD and the IMF (Clarke,
2009).
Bebchuk and Fried (2006) highlight that executive compensation
‘has strayed far from the arm’s length model’ in publicly traded companies (Bebchuk and Fried, 2006, p. 5). They argue that the dominance
of CEOs over boards, due to a number of ‘underlying governance structural defects’, has allowed distorted pay arrangements to continue and
there have been ‘perverse consequences to investors by reducing firms’
long-term value, ultimately to the whole of the economy’ (Bebchuk and
Fried, 2006, p. 6).
In fact, numerous authors recognise that there are psychological
and social factors that impede efficiency in executive pay setting processes (Bebchuk and Fried, 2006; Wiseman and Severance, 2007; Clarke,
2009).
The tournament theory
The central assumption of tournament theory concerns its internal
focus in that managers will exert extra effort if the firm allows them
to compete for higher financial rewards than that they obtain through
promotion (Lazear and Rosen, 1981; Rosen, 1986). The presumption is
50
Filipe Morais, Andrew Kakabadse, Nada K. Kakabadse and Adrian Pryce
that pay gap differences in the corporate hierarchy improves corporate
performance (Huang and Sharma, 2010).
Hayward and Hambrick (1997) pointed to the large pay gaps that
exist between the CEO and the next highest executive ranks, averaging 30–50%, and sometimes reaching 100% of a difference. In support,
Huang and Sharma (2011) have argued that pay spreads between executive ranks have a negative impact on firm performance, concluding
that ‘the greater the pay spreads the more likely firm value is damaged’
(Huang and Sharma, 2001, p. 7). Further, Professor Bloom from the
University of Notre Dame concluded that from 29 US baseball teams,
those with the narrowest pay spreads yielded the best results in terms of
overall team performance (Bloom, 1999). In contrast to Bloom’s (1999)
work, most studies have concentrated on examining pay differentials
between executive ranks and between these and shareholders (Bender
and Moir, 2005), whilst simultaneously paying little attention to the
consequences of inequality.
The economics-based theories
Alternatively, economic theory explains executive pay levels in terms
of supply and demand. The marginal revenue product theory assumes
that well-functioning labour markets have informed buyers and sellers, whose negotiations lead to rationally determined competitive
prices prevailing in the market (Kroll, 2005). On this basis, the company should pay the CEO his/her marginal revenue product. However,
a CEO’s marginal product is hard to calculate as many factors affecting the company’s performance are outside the CEO’s control. Thus,
identifying what is and what is not a consequence of CEO actions
remains the challenge with economics-based theories of remuneration (Khurana, 2002; Wiseman and Severance, 2007). Within this
line of thought, Lloyd (2009) rejects the cult of the CEO superman,
arguing that there is no link between shareholder value and executive
pay. He goes as far as to question whether corporations really need
the traditional figure of CEO. He argues that the CEO market is imperfect and that ‘the market rate for a CEO is very far from clear’ (Lloyd,
2009, 2012).
The socio-comparative theories
Socio-comparative theory holds that the dynamics of external peer
comparison mainly influence executive pay (Festinger, 1957; Hosseini
and Brenner, 1992). Hence, comparison of directors’ performance
across a variety of industries determines executive compensation size
Corporate Income Inequality and Corporate Performance
51
and structure. Building on these theories, Bizjaka et al. (2011, p. 538)
found that peer groups are constructed ‘in a manner that biases compensation upwards, particularly in firms outside the Standard and
Poor’s (SandP) 500’.
Executive pay and corporate performance:
any correlation?
The relationship between executive pay and corporate performance
gained considerable academic and media attention after the GFC. A
growing number of investigations concur that there is little relation
between corporate performance and executive compensation (BIS,
2011; EU Commission, 2011), and that board evaluation practices are
far from desirable (Heidrick and Struggles, 2011). Recent regulations on
governance practices both for private and public sectors highlight the
need to increase the transparency between executive pay and company
performance (CMVM, 2010a, b; Coffee, 2010; FCR, 2010; AFG, 2011;
EU Commission, 2011; Hutton, 2011; SEV, 2011). This is because several
commentators highlight that a number of factors impact on company
performance that are not the result of CEO action (Khurana, 2002;
Wiseman and Severance, 2007). Khurana (2002) emphasises that we can
attribute 10–20% of firm performance to economic climate, 30–45% to
industry performance and 35–60% to management, of which the CEO
is just one player.
Wiseman and Severance (2007) question the value of the uncontrolled used of share-based payments. They argue that four main causes
for the rise in the prices of stocks exist:
●
●
●
●
a general increase in demand for all products in the prosperity phase
of the business cycle;
a rise in world demand for a particular industry’s products causing a
concomitant increase in the market price of the stock of all companies in that industry;
private-equity firm’s purchase or offer to buy all of a company’s stock
which can cause a 15% or more share price increase overnight; and
the buyback of shares by the company. None of these options are
related to CEO performance.
A study conducted by Supanvanij (2008) for the period 1994–2005
across 191 firms revealed that EVA (economic value added), a short-run
performance measure, was related to some forms of CEO compensation
52
Filipe Morais, Andrew Kakabadse, Nada K. Kakabadse and Adrian Pryce
increase for both the short-term and long-term. However, MVA (market value added), a long-run performance measure, showed no significant relation to long-term compensation. Further, McGuire et al. (2003)
showed that a negative correlation exists between executive incentives
and social performance, particularly that salary and long-term incentives induce weak social performance.
Mainstream perspective
Academics have long addressed the contentious issue of governance and
executive pay, but the most influential papers seem to have remained
within the principal–agent framework which has demonstrated an
inability to recognise changing contextual, and particularly, social and
environmental forces.
Writing in 1990, well before the 2008 GFC, Jensen and Murphy (1990)
published a large longitudinal study in Harvard Business Review, favourably concluding for increase in the size of CEO rewards and a revision
of the structure of compensation packages. Displaying a dogmatic belief
in the shareholder value mantra and of principal–agent theory, Jensen
and Murphy (1990) suggested an increase in stock options as a mean to
reward talent and increase shareholder value. They believed that more
aggressive pay for performance systems and meaningful penalties for
poor performance would mean that in time more able and motivated
individuals who would perform better would replace less able CEOs,
successfully engage in high-risk–high-gain activities and thus increase
corporate value. Not only Jensen and Murphy (1990) championed
such options. Scandals concerning companies such as Apple, Mercury,
Interactive Corp and others over employee stock options (ESOs) had
companies taking actions such as firing top executives, taking charges
against earnings amounting to billions of dollars, paying fines and
civil damages and sending written confessions to outside shareholders
admitting that they has misrepresented exactly how and when ‘grant
dates’ were fixed by the board in its annual proxy statement. (Wiseman
and Severance, 2007, p. 13). The 2008 GFC showed the extent to which
stock-based payments provided incentives for short-term action at the
expense of long-term sustainability and value, as well as at the expense
of shareholders, employees and the wider society (Wiseman and
Severance, 2007; Clarke, 2010; Pryce et al., 2011).
Bebchuk and Fried (2006) argued that there was an evident decoupling between pay and performance, especially in the form of equity
Corporate Income Inequality and Corporate Performance
53
but also non-equity pay such as bonuses, further aggravated by poor
board monitoring of the drivers of executive performance. They do
not view the use of subjective criteria, ‘golden parachutes’, more than
normal severance payments (which provide incentives to bear the
risk of failure), pension arrangements and post-retirement consulting
Table 2.2
Key academic contributions
Authors
Contribution
Issues
Jensen and Murphy
(1990)
Introduces the idea of
meaningful penalties for
poor performing CEOs
for strengthening the
pay-for-performance.
Does not depart from
the narrow agency
theory or consider
other stakeholders into
the equation. Openly
defended the rise on
stock-based pay and the
engagement of executives
on high-risk–high-gain
activities with a view of
increasing shareholder
value.
Bebchuk and Fried
(2006)
Introduces several
measures to weaken CEO
power in appointing
NEDs, setting their pay
package and suggests
the revision and/or
elimination of several
pay components not
related to performance
as condition for a better
application of the arms
length contracting
model.
Remains fixed within
the agency theory and
the idea of maximising
shareholder value. It
does recognises that CEO
power over board is the
main driver of inordinate
CEO compensation,
but by remaining fixed
within principal–agency
does not provide a
geopolitical perspective
to balance-out CEO
power with other
stakeholders.
Wiseman and Severance These authors show that
(2007); Clarke (2010)
the Anglo-American
model of governance
produce more inequality
primarily driven by CEO
power over board.
Do not depart from the
idea of shareholder value
maximisation nor from
the principal–agent
framework.
Source: Compiled by the authors.
54
Filipe Morais, Andrew Kakabadse, Nada K. Kakabadse and Adrian Pryce
contracts and perks, as not related to performance (Bebchuk and Fried,
2006). The authors also recommended improvements in transparency
requiring all firms to disclose in a comprehensive way pay amounts
and structure (Bebchuk and Fried, 2006). They further recommended
reducing the incentives for expansion via acquisitions, a dividendneutral approach to executive pay and a rethink of pension plans
(Bebchuk and Fried, 2006).
In effect, an increasing number of commentators highlight that the
whole structure of executive pay is not related to performance which,
in conjunction with poor corporate performance measurement systems
and relaxed board oversight, lead to executives engaging in short-term
strategies, some broaching the unethical and criminal, in pursuit of selfinterest. The possible solutions still remain concentrated on principal–
agent theory fundamentals and ignore geopolitical perspectives applied
to governance and pay concerning adopting sustainable, long-term
measures.
Regulatory action
The UK corporate governance code (FCR, 2010) issued in June 2010
has set the standard for adjustments on corporate governance codes
around the globe. New regulations suggest a better link between pay
and performance by recommending or enforcing board evaluations
by independent parties every 1 and 3 years; enhancing the independence of remuneration committees; the introduction of the shareholder
‘more-or-less binding vote’ on remuneration policy and the transparency of that vote; and, remuneration policies with appropriate incentives to foster long-term growth (CMVM, 2010a, b; Coffee, 2010;
FCR, 2010; AFG, 2011; BIS, 2011; EU Commission, 2011; Hutton, 2011;
SEV, 2011).
The code also suggests or enforces the increase of transparency via disclosure of multiples of CEO pay to median employee earnings (Coffee,
2010; Hutton, 2011). There is, however, little discussion on how employees will benefit from a fairer governance of corporations, through a
more equitable, fairer distribution of the rewards of the enterprise. The
code briefly mentions the importance of ‘employee share ownership’ or
‘gain-sharing’, but with little attention on how a firm is to implement it
(EU, 2011; Hutton, 2011).
The question we must raise is how can governance protocol and ruling continue to remain within the existing narrow principal–agent
framework (Teubner, 1996; Kakabadse and Kakabadse, 2003; Aguilera
Corporate Income Inequality and Corporate Performance
55
et al., 2008) without changing the actual root of the problem – the
framework itself ?
Measuring corporate income inequality: the
corporate Gini index
Multiples of CEO pay to median pay has been the officially proposed
measure to monitor executive pay and pay differentials (Dodd-Frank
Act, 2010; AFG, 2011; Hutton, 2011). However, some consider this insufficient and propose that an additional, more comprehensive and holistic
measure is required to take account of income differential impacts on
wider society (Pryce et al., 2011). Outside of the boundaries of the corporation, the Gini index is the most popular measure of income inequality (De Maio, 2007; Pryce et al., 2011) and has been the measure which
the International Labour Organisation (ILO) has used in the most recent
study on income inequality (2008). The Gini index is derived from the
Lorenz curve of cumulative income distribution (Gini, 1921). A Gini coefficient of zero indicates perfect equality, where everyone has the same
income; whereas, a Gini coefficient of one is perfect inequality, where
one person has all the income. Thus, the Gini index measures the extent
to which income distribution deviates from a perfectly equal distribution
(Bellú and Liberati, 2006, p. 4). Kawachi and Kennedy (1997) conducted
a study in the United States which compared six different indicators of
income inequality including the Gini coefficient (Gini, 1921). They concluded that the results of the health effects of income inequality were not
significantly influenced by the choice of income inequality measure.
Researchers have identified certain limitations to the Gini index,
namely that this measure is differentiating between income inequalities in the middle part of the distribution (De Maio, 2007). Thus, some
view the Gini Index as ‘not neutral’ or value free (Atkinson, 1975; De
Maio, 2007). Despite these concerns, many have used the Gini index
widely as the statistic to generate a single measure of whole income distribution. Supported in Litchfield (1999) and Cowell and Jenkins (1995),
Pryce et al. (2011) summarise the five criteria for ‘the appropriateness of
any given measure of income inequality’, arguing that the Gini index
meets at least four of five stated requirements:
●
The transfer principle: the measurement in question should fall (rise)
with the redistribution of income from (to) a richer to (from) a poorer
person, or at least should remain unchanged.
56
●
●
●
●
Filipe Morais, Andrew Kakabadse, Nada K. Kakabadse and Adrian Pryce
Income scale independence: when all income changes proportionally,
there is no change in the measurement of inequality.
Population principle: merging two distributions will not alter the
measure of inequality.
Anonymity or symmetry: only individual incomes are taken into
account in the construction of the measure.
Decomposability: the overall measure and changes are consistent with
changes at every level, so that increases in inequality within population subgroups will result in overall increases in inequality.
Thus, we can cross-reference a corporate Gini index (CGI) to the ‘macroeconomic Gini’ which the vast majority of countries and NGOs use.
Overall, income inequality trends as measured by the Gini index
reveal a steady increase in incomes across Europe in the last 14 years,
even in historically more equally distributed income countries. An
analysis of the average Gini index for selected European countries
shows that the Portuguese average for the period 1995–2009 was 0.367,
the highest in the EU, closely followed by the UK and Spain with 0.329
and 0.324 respectively (PORDATA, 2011). On the opposite side are the
Scandinavian countries, such as Denmark at 0.214, Sweden at 0.233 and
Finland at 0.249. Whilst Portugal and Spain remained highly unequal,
the Scandinavian countries have seen their inequality rising to unprecedented levels. For example, in Denmark, the Gini index increased from
0.200 in 1995 to 0.270 in 2009.
There are signs that income inequalities may increase even further
as government austerity measures impact on households’ disposable
income in several countries. For example, an IFS Report (2011) predicted
that the UK household income will have a 3% drop, not seen since
1981, thus taking UK households to 2004–2005 income levels. The latest internal report from the Banco de Portugal (2011) predicts a permanent staggering 11% drop of Portuguese household income between
2011 and 2013.
The World Economic Forum (WEF) Global Risks Report 2012, surveying 469 experts in various fields from all five continents (academia,
business, NGOs, etc.), placed income inequality as one of the top risks
that societies face over the next 10 years which, if unattended, will
result in devastating consequences (WEF, 2012). Providing a supporting
argument, Hsing (2005) emphasises that high Gini index scores hurt
economic growth. Other studies have linked higher income inequality
to higher rates of obesity in Israel and the United States (Kahn et al.,
1998; Gross et al., 2008), infant mortality and mortality rates in general
Corporate Income Inequality and Corporate Performance
57
(Kaplan et al., 1996; Schell et al., 2007) and violent crime (Fajnzylber
et al., 2002). Further, Wilkinson and Pickett’s (2009b) recent review,
for example, compared the ratio of incomes of the poorest to the richer
20% of the population for each of the 50 richest countries with at least
3 million inhabitants, through an Index of Health and Social Problems1
and concluded that the lower the income differentials the better countries performed. The most unequal countries, such as the United States,
UK and Portugal, rated very poorly in most of the key indices, with
greater health and social problems strongly correlating with income
inequality (Wilkinson and Pickett, 2009a).
The study
The study in this chapter is as an exploratory case study (Ghauri and
Gronhaug, 2002) on ‘Income Inequality and Corporate Performance’.
The motivation for the study emanates from the fact that limited
enquiry has considered Gini-type variables at the corporate level. We
have selected a predominantly ‘quantitative’ method, drawing on a
holistic single case study (Yin, 2003). In particular, this study uses
real data, both quantitative and qualitative, from a multinational
retail listed company. The study further draws on secondary data
relating to:
●
●
●
income distributions for the food retail company in domestic operations;
corporate performance indicators for the domestic operations and
for the companies within the group’s structure; and
data from semi-structured interviews with the Chairman, majority
controlling shareholder and the HR Corporate Director.
We collected income distribution data from the company’s IT systems with the support of the corporate HR department. The study uses
the concept of total compensation defined as ‘the monetary and nonmonetary rewards offered to employees’, including ‘(…) all forms of
financial payments and a variety of employee benefits’ (Jackson et al.,
2008, p. 356) and includes only full-time employees (FTEs) and any
other equivalent under an employment contract.
Following Pryce et al.’s suggestion (2011), we collected income distribution for six generic pay bands for the domestic company over the
period of study: Executive Board, Top Management, Regional Directors/
Deputy Directors, District Managers, Store Managers and equivalent
58
Filipe Morais, Andrew Kakabadse, Nada K. Kakabadse and Adrian Pryce
and shop floor employees. For each generic pay band we used headcount and average income to calculate the CGI.
Additionally, we used three categories of corporate performance:
Shareholders, Accounting and Financial and Employees in this study.
For Shareholder and Accounting/Financial categories we used Share
Price (SP), Earnings per Share (EPS), Sales (SAL) and Earnings Before
Interest, Taxes, Depreciation and Amortisation EBIDTA, with agreed
and consistent calculation formulas (where applicable) for each year of
the study (Watson and Head, 1998; Brigham and Houston, 2009). For
‘Employees’, the chosen indicators were absenteeism (ABS) and turnover (TURN) relating to the domestic operations. We measured turnover and absenteeism as per the Chartered Institute of Personnel and
Development Annual Survey Reports (CIPD, 2007a,b).
The study gathers qualitative information on key themes such as
income inequality, executive compensation and governance. We conducted two semi-structured interviews with the Chairman and the HR
Corporate Director (chosen for convenience given the research background) with the purpose of understanding the underpinning thinking and perceptions of key actors within the company regarding pay
inequality and perhaps establishing a relation of whether our quantitative results are a by-product of such thinking.
We devised a more comprehensive measure of inequality that
accounts for the wider workforce and society and correlated it with corporate performance. We computed a standard Gini index using Bellú
and Liberati’s covariance formula (2006) as follows:
G = cov(y, f(y))*2/y–
where
cov is the covariance between income level y and the cumulative distribution of the same income f(y) and y– the average income.
We used average incomes for each income level and then correlated
CGI results with corporate performance measures as we described above
using SPSS 20.0.
We performed and controlled one- and two-tailed Pearson correlations for size using the ratio of total executive compensation expenditure to total assets (TECETASS). We did not use any particular content
analysis technique for the interviews as the interviewees’ full statements have, in the authors’ view, a research value per se. Interviews
allowed us to position the company’s management thinking within the
Corporate Income Inequality and Corporate Performance
59
main theories of reference helping to better understand the quantitative results.
Results and discussion
A preliminary analysis of the 2007–2010 income distributions for the
company’s domestic operations shows that overall, the income distribution is quite equal due mainly to the large base of shop floor employees
(Figure 2.2).
Absolute trends on wealth distribution show that the wealth generated by the company is clearly oriented to the remuneration of the
shareholder with year-on-year increases from 2007–2010.
Shareholders have been enjoying increases on dividends paid of 8.3%
in 2008, 12.7% in 2009 and 23.1% in 2010, whilst executives have seen
their total compensation increasing at a slower rate with 17.8% in 2008,
5.1% in 2009 and 11.7% in 2010. As to the average pay of shop floor
employees, we can see a decrease of 4.8% in 2008, an increase of 20.1%
in 2009 and a decline of 55.5% in 2010. We observe a similar trend for
the median shop floor employee pay (Table 2.3).
We could not find an answer for the sudden 20.1% for average
pay and 43.2% for the median shop floor employee pay increases in
2009. Our analysis indicates that (i) changes on the company’s remuneration policy or results; (ii) increases of headcount for shop floor
employees starting on the lowest pay grade; (iii) employee turnover
where replacements would start on lowest pay grade, do not vary
100%
88.9
87.9
88.9
88.3
96.9
95.9
96.0
96.4
2007
2008
2009
2010
50%
0%
% Total employees
% Total income
Figure 2.2 Percentage of all income obtained by shop floor employees as a percentage of all employees (Domestic Operations only)
Source: Income distributions collected directly from the company’s IT systems.
11.732
8.966
Average worker comp.
Median worker comp.
–4.8
–10.1
8.144
17.8
8.3
11.196
791.767
60.330.000
% Change
2008
Value (€)
Source: HRIS Company Data and Governance Reports.
650.937
55.302.000
Value (€)
2007
Average exec. comp.
Dividends paid
Wealth
distribution
14.348
14.008
834.470
69.128.000
Value (€)
43.2
20.1
5.1
12.7
% Change
2009
8.419
9.011
944.919
89.866.000
Value (€)
–70.4
–55.5
11.7
23.1
% Change
2010
Table 2.3 Evolution of dividends, average executive compensation and average and median shop floor employee pay
Corporate Income Inequality and Corporate Performance
61
so significantly as to provide an explanation for the 2009 and 2010
values.
Data suggests that the company had definitely distributed its increased
wealth to shareholders and executives, whereas average and median
employee pay has decreased. Comparing average and median employee
earnings from 2007 to 2010, we can observe that average earnings went
from €11,732 to just €9,011 (a decrease of 23.2%) whereas, median pay
went from €8,966 to €8,419 (a decrease of 6.1%).
These trends in wealth distribution at the company are partially in
line with the findings for the United States, where between 1990 and
2005, executive compensation increased on average over 298%, whilst
the average production worker’s pay had a real compound increase of
4.3% and the Federal minimum wage saw a real compound decrease of
9.3% (IPS and UFE, 2006).
Analysis for the domestic operations shows that except for 2007–
2008, the growth in average executive compensation was below the
growth on dividends and company stock performance. However, analysis does display a similar trend for growth in executive compensation
and a decrease for the average and median shop floor employee earnings over the period. In effect, the ratio for the average board executive
compensation in comparison to the average shop floor employee nearly
doubled when comparing 2007 with 2010 (Figure 2.3).
The ratios indicate a growth of 55 times the average worker in 2007 to
104 times in 2010 and nearly 73 times the median shop floor employee
150.0
104.9
97.2
100.0
72.6
55.5
70.7
112.2
59.6
58.2
50.0
0.0
2007
2008
R6/R1 Average
2009
2010
R6/R1 Median
Figure 2.3 Ratio of average executive board compensation (R6) to average and
median shop floor employee pay (R1) (2007–2010)
Source: Income distributions collected directly from the company IT systems.
62
Filipe Morais, Andrew Kakabadse, Nada K. Kakabadse and Adrian Pryce
to 112 times in 2010, to CEO pay. According to the Chairman of the
Portuguese company:
If you say you are comparing the compensation of the General
Director of the domestic Operations to the minimum salary paid in
our units in the country, I accept the comparison. But comparing
the compensation of a Senior Manager, say, the HR Director of the
Group, I cannot. It’s false. It is distorting the truth. The HR Director
is responsible for three countries, more than 60,000 people and 10
billion euros of sales! On the other hand, the average salary of our
manufacturing firm is a lot higher than retail because the operating
margins are greater.
The group’s HR Director expressed a similar idea:
I believe that these kinds of ratios can cause a lot of controversy,
many times unjustified because (the ratio) compares things that are
not comparable. I consider that if we don’t introduce clear criteria in
relation to these ratios such as sector of activity, company size, type
and profile of the workforce, we incur the risk of creating significant
deviations to these ratios without adding any value.
These statements are in line with the idea that companies perceived
‘fairness between different hierarchical levels as less significant as fairness to executives and shareholders (Bender and Moir, 2005, p. 19). It is
on this basis that certain commentators (Hosseini and Brenner, 1992;
Bizjaka et al., 2011) argue that peer group pressure ratchets pay upwards.
Studies have linked pay differentials to a deterioration of company
performance (Huang and Sharma, 2010), and also team performance
(Bloom, 1999). Equally, other studies have linked low pay differentials
with improved corporate performance (Hutton, 2011). However, the
company under scrutiny in this chapter has enjoyed continued accelerated growth and thus does not fall into the category of growing pay
differentials and deterioration of company performance.
Corporate Gini index and corporate performance
The results for the CGI and the ratio R6/R1 in Figure 2.4 indicate that
both measures have a similar behaviour which seems to suggest that
the R6/R1 ratio may be a predictor of a growth or fall on the CGI. This
is explained largely by the weight of shop floor employee base as a percentage of total population and total income and to a lesser extent by
Corporate Income Inequality and Corporate Performance
63
31.5
24.9
20.1
16.45
62.2
2007
104.9
70.7
58.2
2008
Ratio R6/R1*
2009
2010
CGI
Figure 2.4 Company (Domestic Operations) CGI** and Ratio Rank 6/ Rank 1*
(2007–2010)
Source: Company data and corporate governance reports. * Rank 6 = Average Executive
Board Compensation; Rank 1 = Average Shop Floor Employee Earnings. ** CGI is expressed
between 0–100 to facilitate comparison.
the observed growth on executive compensation. In fact, both measures are equally affected by changes on average (median) incomes of the
large shop floor employee base.
Overall, the CGI for the company’s domestic operations shows
an increase almost doubling between 2007 and 2010, soaring from
0.1645 to 0.315 (Figure 2.4). We can explain the CGI decline for 2009
through an increase of 43.2% on average shop floor employee earnings
to €14,008, when compared to 2008. To a lesser extent the CGI was
also influenced in 2009 by an increase of 5.1% on average executive
compensation. However, this layer of total payroll accounts for only
approximately 0.00017 % of the total. Interestingly, the company’s
corporate governance model changed from a Latin model (concentration of ownership) in operation until 2006, to an Anglo-Saxon model
(dispersed ownership) of governance since 2007. Differences of ownership structure determine the nature of these two models of governance
(Van Hulle, 1997). We can characterise the Latin model, a variation
of the continental model by greater shareholder power through an
extensive concentration of ownership, conflicts of interests between
shareholders and executives due to the concentration of the voting
power. Limited financial resources also play a role as shareholders tend
to offer less equity than management needs and there is a movement of
cash flows between well performing and badly performing companies
(Van Hulle, 1997). On the contrary, the Anglo-Saxon model, with a
64
Filipe Morais, Andrew Kakabadse, Nada K. Kakabadse and Adrian Pryce
dispersed ownership structure, awards greater power to the management team which encourages free riding, but that reflects in the shortterm orientation of the management in their striving to meet quarterly
targets (Van Hulle, 1997).
Commentators argue that the Anglo-Saxon governance model is
linked to increased inequality (Clarke, 2010). Our results are consistent with this view, particularly when accounting for the changes of
ownership structure. There were no changes on ownership structure.
Whilst the company claims to have changed to an Anglo-American
governance model since 2007, the fact is that shareholder structure
did not change. More than 50% is concentrated in the hands of the
Chairman and his family, hence ownership concentration is not consistent with the Anglo-American model. Figure 2.5 plots the CGI
results for selected corporate performance measures for the period of
the study.
Investors’ measures for Earnings per Share (EPS) do follow a similar trend as we observed for the CGI. The CGI increases when the EPS
increases, except for the year 2009 for the unknown reasons which we
already discussed, that impacted the CGI. Overall, whilst Share Price
(SP) decreased for 2007–2009, CGI increased, but we cannot observe
the same for 2010. However, we can clearly attribute the decline in SP
0.9000
12.00
11.40
0.4472
0.8000
10.00
0.7000
0.6000
8.00
6.99
0.3188
0.5000
0.2089
0.2597
0.4000
5.40
6.00
3.97
0.3000
4.00
0.3150
0.2000
0.1000
0.2490
2.00
0.2010
0.1645
0.0000
0.00
2007
2008
CGI
Figure 2.5
2009
EPS(€ )
2010
SP(€ )
Investors’ performance measures: CGI, EPS and SP (2007–2010)
Corporate Income Inequality and Corporate Performance
65
to the impact of the 2008 financial meltdown which stock markets felt
worldwide, as the sovereign debt crisis unfolded.
Data for employee performance measures show that absenteeism
(ABS) has been growing steadily from 6.4% in 2007 to 7.5% in 2010,
whereas turnover (TURN) increased from 44.8% in 2007 to reach
54.8% by 2009, but then declined sharply in 2010 to 37.72% (Figure
2.6). The general trend for the CGI is steady year-on-year growth,
discounting for the 2009 unexplained growth of average shop floor
employee earnings. One possible explanation offered for the decline
in TURN in 2010 was that people, conscious of the difficult situation
in the employment market, tried harder to keep their jobs. However,
the overall trend is that ABS and TURN increase as CGI increases.
According to the CIPD (2009) Recruitment, Retention and Turnover
Report, UK-based turnover figures for retail are 17.4% and voluntary
leavers 9.7%. In comparison, the retailer on study displays much
higher rates. This raises the question of whether this is due to the
large pay disparity.
Accounting and financial measures for both the domestic operations
and for the whole group (Figure 2.8) display similar behaviour concerning CGI (Figure 2.7). Overall, discounting for 2009, the trend seems
to be that a growth in CGI is accompanied by a growth in Sales and
EBITDA. In particular, it is evident that between 2007 and 2010, whilst
0.3500
0.3000
54.76%
0.3150
48.96%
60.00%
50.00%
44.82%
0.2500
37.72%
0.2490
40.00%
0.2000
0.2010
0.1500
0.1000
30.00%
0.1645
7.16%
6.54%
6.40%
7.55%
10.00%
0.0500
0.00%
0.0000
2007
2008
CGI
Figure 2.6
20.00%
2009
ABS(%)
2010
TURN (%)
Employee performance measures: CGI, TURN and ABS (2007–2010)
66
Filipe Morais, Andrew Kakabadse, Nada K. Kakabadse and Adrian Pryce
0.3500
3,500,000
0.3000
3,000,000
0.2500
2,500,000
0.2000
2,000,000
0.1500
1,500,000
0.1000
1,000,000
0.0500
500,000
0.0000
0
2007
2008
CGI
2009
Sales (€ billions)
2010
EBITDA (€ millions)
Figure 2.7 Financial and accounting performance measures (Domestic
Operations): CGI, SAL, EBITDA (2007–2010)
10,000,000
0.3500
9,000,000
0.3000
8,000,000
0.2500
7,000,000
6,000,000
0.2000
5,000,000
0.1500
4,000,000
0.1000
3,000,000
0.0500
2,000,000
1,000,000
0.0000
2007
CGI
2008
2009
Sales (€ billions)
2010
EBITDA (€ millions)
Figure 2.8 Financial and accounting performance measures (Group of
Companies): CGI, SAL, EBITDA (2007–2010)
group sales doubled to nearly €10 billion, the CGI nearly doubled from
0.1645 to 0.3150 (Figure 2.8).
We undertook Pearson partial correlation analysis between CGI and
corporate performance, controlling for size and using the ratio of total
executive compensation expenditure to group total assets. We also
included the R6/R1 ratio, a further measure of inequality, to test for
Corporate Income Inequality and Corporate Performance
67
effects similar to that of CGI. Table 2.4 presents the Pearson correlations
between CGI, R6/R1 and corporate performance measures.
Results show that after controlling for size, there was no statistically
significant correlation between the CGI and the performance measures.
We found a significant correlation at the 0.05 level (2-tailed; p = .35)
for the R6/R1 ratio and the EBITDA for the domestic operations, which
indicates that the ratio of average executive compensation to average
employee earnings depends on EBITDA. In effect, when the domestic
operation’s EBITDA grows so does R6/R1 grow, indicating that a growth
in EBITDA increases top to bottom inequality.
We also found significant correlations at the 0.05 level (1-tailed)
between the CGI and R6/R1 ratio (p = .026), EPS (p = .048), Group
EBITDA (p = .048) and Group Sales (p = .044). The correlation between
CGI and R6/R1 adds weight to the perspective that a higher R6/R1 may
be a predictor of an increase in company CGI. The correlations between
EPS, Group EBITDA and Group Sales with the CGI are contrary to our
research hypothesis that a higher CGI will have a negative impact on
corporate performance. However, note that we conducted the study for
Table 2.4 Summary of significant Pearson
correlations
CGI
CGI
1
R6R1
.947*
.026
R6R1
.947*
1
.026
EPS
EBITDA_DOM
EBITDA_GR
SAL_GR
.904*
.835
.048
.083
–,.842
–.965*
.079
.017
.903*
.767
.048
.116
.912*
.765
.044
.118
Notes: * Correlation is significant at the 0.05
level (1-tailed); ** Correlation is significant at
the 0.01 level (1-tailed).
Source: Compiled by authors.
R6R1
–.965*
EBITDA_DOM
.035
* Correlation is significant at the 0.05
level (2-tailed).
** Correlation is significant at the 0.01
level (2-tailed).
68
Filipe Morais, Andrew Kakabadse, Nada K. Kakabadse and Adrian Pryce
only four years when the company was experiencing strong growth.
Therefore, it is not possible to comment on whether growth in the CGI
will have any lagged effects, and whether a different pattern would have
emerged had we examined the company for a longer time period.
Conclusion and further research
The emerging logic from this study for paying executives and worker
suggests that ‘fairness’ for executives is more important than ‘fairness’
for the average employee. Whilst average executive compensation
saw an aggregate increase of 31% from €650.937 in 2007 to €944.919
in 2010, average worker earnings showed a decrease of 23.2% from
€11.732 to just €9.011 whereas median shop floor decreased by 6.1%
to €8.419 in 2010. This has had an impact on both the rationale of
executive board compensation to average and median worker pay and
on the CGI. The increase of CGI for the company nearly doubled from
2007 to 2010 from 0.1645 to 0.315. We found a correlation between
the R6/R1 ratio and the CGI, which suggests that R6/R1 is a predictor
of the company CGI behaviour (p = .026). Both measures are useful to track inequality and excessive executive compensation within
companies.
The wealth distribution within the company is unbalanced, with
the highest share going to shareholders, followed by executive board
members, whereas the average employee earnings remain stagnant
or have tended to decrease, which is in line with US trends and
elsewhere.
Correlations between CGI and EPS, Group Sales and Group EBITDA
suggest that a growth in company performance and shareholder value is
accompanied by a growth on the CGI. This, however, does not seem to
have had a negative effect on company performance when we observed
it at the macroeconomic level. The four years between 2007 and 2010
that we used in our analysis corresponds to probably the ‘golden years’
of the company in terms of performance and should the CGI continue
to rise, the company may feel the effects in the future. It may be that
there is an inflexion point after which continued and increased inequality and pay dispersion harms performance, as is the case with the
Central Intelligence Agency (CIA), which draws on a 0.45 Gini coefficient or above as a predictor of social unrest (CIA, 2010).
Future research needs to focus on extending the study of income
inequality and corporate performance to a wider range of companies
from different industries and governance traditions and for a longer
Corporate Income Inequality and Corporate Performance
69
period in order to establish clearer trends and relationships between the
variables. We could consider other soft performance indicators such as
number of hours lost for sick leave (proxy for health effects at the macroeconomic level), number of disciplinary and grievance events, labour
disputes, strikes (proxy for social unrest, crime, violence), unionisation
of employees, employee participation, engagement and satisfaction
(proxies for social capital and quality of community life).
Note
1. The authors developed the index from several official sources and included:
life expectancy; maths and literacy scores; infant mortality; homicides;
imprisonment; teenage births; trust; obesity; mental illness, including drug
and alcohol abuse; and social mobility.
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3
How Chinese Styled Executive
Remuneration Works: Evidence
from Chinese Red-Chips
Jessica Hong Yang and Nada K. Kakabadse
Introduction
Executive remuneration has attracted much attention from both
academics and practitioners in the past two decades (Murphy, 1985;
Bebchuk and Fried, 2003). A well-designed executive remuneration is
significant to a firm’s performance, especially during financial crisis
(Bebchuk and Weisbach, 2010). An astonishing survey shows that the
average executive pay of Standard & Poor 500 firms increased more
than four times from $3.5 million to $14.7 million and the granted
stock options to CEOs increased nearly nine-fold from 1992 to 2000
(Bebchuk and Fried, 2003). The design of executive remuneration therefore attracts a great attention in the world. Issues of concern, especially
in the banking field, include poor remuneration packages, enormous
executive salaries and excessive short-term risk-taking. An unprecedented number of financial firms suffered extensive collapse during
the 2008 global financial crisis.
When companies struggle during a financial crisis, corporate governance plays a vital role to save firms, particularly with regard to adjusting
executive remuneration (Erkens et al., 2012). Each company has its own
remuneration package for executives in accordance with the company’s
objective and risk tolerance (Bebchuk and Fried, 2005). Bebchuk and
Spamann (2010) contend that reasonably designed executive remuneration not only prevents executives from excessive risk-taking, but also
provides top executives with incentives to focus on shareholders’ longterm value.
China has been less affected by the global crisis due to its ‘closed’ capital account and insulated banking sector, primarily relying on deposits with no exposure to risky Western financial instruments (Schmidt,
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Jessica Hong Yang and Nada K. Kakabadse
2009). As a result, the unique characteristics of the Chinese corporate
governance system provide an interesting point for the study on how to
make the boards work via the design of executive remuneration. There
are a number of reasons. First, studies on executive remuneration have
concentrated on a few developed countries such as the United States
and the UK, due to the data availability (Rampling et al., 2011). Second,
China has undergone a series of state-owned enterprise (SOE) reforms.
Efficient managerial incentives and market-oriented corporate governance institutions effectively facilitate China’s sustainable economic
growth. Finally, in China, the culture, including egalitarianism, heavily influences the remuneration system (Shen and Edwards, 2006). This
distinguishes it from the pay and performance link, which most developed economies practice.
In contrast to previous studies on the relationship between pay and
performance based on quantitative study, this chapter provides new
evidence that is relevant to this debate. It investigates whether and how
Chinese styled remuneration provides incentives for the top executives
in large SOEs based in Mainland China that are incorporated internationally and listed on the Hong Kong Stock Exchange (also referred to as
red-chips) through examining board member and regulator perceptions
in China. In particular, the chapter addresses the following questions:
1. What does executive remuneration look like in red-chips?
2. Why does executive remuneration look the way it does?
This chapter makes a number of contributions to the recent executive remuneration research. First, in response to the policy and media
debate on excessive board director remuneration in Chinese red-chips,
we examine this perception. We also discuss the relationship between
remuneration committees and the State-Owned Assets Supervision and
Administration Commission of the State Council (SASAC). Second,
unlike in the UK and United States, equity-based pay is rare in China.
This is an interesting institutional difference between China and
the United States or UK. We detail the pay elements and the incentive schemes that firms implement in China. Finally, we address the
disclosure issue and pay attention to the performance criteria that
firms use in linking executive remuneration more closely to company
performance.
The rest of the chapter is organised as follows: we provide a review of
theoretical perspectives and empirical studies on executive remuneration.
A discussion of the study sample and data collection follows. The data
How Chinese Styled Executive Remuneration Works
77
allows us to address the unexplored remuneration issues in red-chips.
Next we summarise the key findings in three themes. Finally, we offer
some concluding remarks.
Theories of executive remuneration
The primary reason for the agency problem is due to the separation
of ownership and management in the modern enterprise mechanism
(Berle and Means, 1932). How to effectively align the manager’s interests with those of the shareholders has become a hot topic in executive remuneration. Theoretically, scholars divide the study of executive
compensation into two competing views: the optimal contracting view
and the managerial power view (Bebchuk and Fried, 2005; Weisbach,
2007; Choe et al., 2009; Bebchuk and Weisbach, 2010; Bebchuk et al.,
2010; Sun et al., 2010). Optimal contracting anticipates that remuneration committees have sufficient incentives to determine executive
compensation that optimises on behalf of shareholders (Mirrlees, 1976;
Holmstrom, 1979). Structural variables such as board composition and
characteristics are insignificant or irrelevant.
In contrast, the managerial power perspective holds that optimal
contracting helps remedy agency problems. This may actually contribute to the difficulties because board structure is inefficient due to
unresolved agency issues. This leads to sub-optimal outcomes (Bebchuk
and Fried, 2003). Executives may exert enormous influence over the
board of directors to make such pay arrangements in favour of themselves instead of the shareholders. Bebchuk and Fried (2003) point out
that managerial power and rent extraction seem to have great impact
on executive remuneration design. Therefore, ‘outrage’ cost will occur
easily. In order to minimise outrage cost, some executives have the
incentive to obscure their rent extraction; however, excessive outrage
may easily to trigger conflict between managers and shareholders. The
managers may even lose shareholder support. Lee (2006) expresses
considerable concern about the contractual terms of compensating
top executives, particularly in the form of profit-related bonuses, share
options and termination payments which often transpire with poor
company performance.
Johnson et al. (1997) provide evidence that outside perception influences and affects remuneration package design. Because of shareholder
and public concern over high compensation packages, some managers hide and minimise outrage cost through camouflage. Bebchuk and
Fried (2003) further emphasise that strong camouflage can result in a
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firm adopting inefficient remuneration structures, which will directly
impair the firm’s performance. Therefore, under this situation, transparency becomes more important to the company.
Structure of executive remuneration
Michael (1997) points out that a reasonable executive remuneration
structure could benefit an entire company’s operation. This is because
the executive managers are always the key players to lead the company.
They have a large stake in a company’s success. Bebchuk and Fried (2005)
further contend that appropriate remuneration can effectively motivate
executives to generate value for the company and shareholders. It is
important to guarantee that the remuneration package has aligned
managers’ interest with shareholders’ interest. A reasonable executive
remuneration structure may determine executive and employee contributions to the company.
Conyon et al. (2000) state that every company has its own and unique
remuneration package for executives, which each company’s remuneration committee usually determines. Executive remuneration design and
structure is according to the company’s objectives and strategies and it
changes from year to year (Mehran, 1995). More specifically, companies
account for short-term and long-term objectives. In addition, external
factors impact (e.g. financial crisis, currency crisis, market bubble, credit
crisis) and play important roles in determining the executive remuneration structure.
Bebchuk and Fried (2005) emphasise that when managers receive
a high proportion of short-term bonus remuneration without tying
long-term value on a manager’s wealth, they may tend to ignore the
company’s long-term performance and only concern themselves with
short-term profit. Therefore, a good remuneration package should allocate the short-term and long-term incentives properly. Bebchuk and
Spamann (2010) claim that executive pay also must consider the longterm shareholder interests and sound risk management principles. The
short-term incentive is indispensable. Otherwise, the executives do not
have enough motivation to increase the company’s performance with
short-term objectives (Beltratti and Stulz, 2009).
Currently, for most executives, normal remuneration in the Chinese
SOEs generally includes four parts: annual base salary, performance,
long-term incentives and various social insurance benefits (Kato and
Long, 2006a). John and John (1993) state that in order to attract and
retain top-notch senior management, some companies will continue
How Chinese Styled Executive Remuneration Works
79
to push executives’ total remuneration levels higher in order to remain
competitive in the talent market. Key remuneration package elements
to attract and retain excellent executives include long-term incentives
and pensions. However, as Chinese executive pay levels rapidly climb,
critics are starting to realise that some executives are overpaid and that
the salary and performance are not well matched (Tung, 2010). How
to build a reasonable executive remuneration structure and associate
properly with the company’s value draws considerable attention from
both the public and academia.
Evolution of executive remuneration in China
We can divide the research on Chinese-styled executive remuneration
into two phases: the planned economy and the transitional economy.
The Chinese planned economy bases the remuneration system on grade
with significant characteristics of infrequent dismissals, egalitarian- and
group-based pay and reward and welfare from cradle to grave (Goodall
and Warner, 1997). The wage system that companies most commonly
adopt is national wages scales (Wang, 1990). Employee income differentials in assorted job positions are at the minimal level (Nelson and
Reeder, 1985). There are rarely pay increases, except for grade promotions for entire staff which the government unifies (Dowling and Welch,
2004). The old Chinese iron-rice-bowl approach which guaranteed job
security also stressed that corporate management should provide social
welfare programmes such as housing funds, education and medical
insurance (Glover and Siu, 2000). This system does not provide any
financial incentives for employees to seek promotions.
When reformist leader Deng Xioping began to implement reforms
towards a market economy in the mid-1980s, Chinese companies were
given the autonomy to establish their own reward and compensation
systems, whilst the nation still controlled the payroll’s total amount
and size (Shen and Edwards, 2006). Since the 1990s, companies placed
increasing importance on hiring a young, educated work force that could
embrace work responsibilities and be motivated by levels of reward and
pay (Child, 1994). Under the transitional economy, Chinese remuneration transferred from a grade- to a performance-related system (Shen
and Edwards, 2006). This system is primarily based on post-plus-skills,
referring to basic salary and efficiency-related bonuses. The basic wage
mainly rests on age, job position, qualifications and salary category.
Whilst seniority still has significant influence on pay, the egalitarian culture offsets the increases of reward and remuneration interests,
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which consequently gives rise to the narrow range of wage and salary.
Companies commonly distribute the bonus through group-based pay
and managerial positions in spite of individual performance (Zhu and
Dowling, 1994; Easterby-Smith et al., 1995; Huo and Von Glinow, 1995;
Mitsuhashi et al., 2000).
Nowadays, the remuneration system which Chinese companies most
widely adopt is performance-related compensation systems (Reynolds,
1988; Hamill, 1989; Anderson, 1990; Dowling and Schuler, 1990; Logger
et al., 1995; Dowling and Welch, 2004). The growing decentralisation
in remuneration results in rewards and compensations that are increasingly subject to firms’ specific requirements rather than government
and sector-specific criteria (Shen and Edwards, 2006). Therefore, most
Chinese enterprises have increasingly paid attention to the performance-related pay system due to the growing awareness of fair and egalitarian remuneration packages. In the financial service sector, companies
adopt the post-based pay approach which takes hierarchy into account
(Reynolds, 1988; Hamill, 1989; Anderson, 1990; Dowling and Schuler,
1990; Logger et al., 1995; Dowling and Welch, 2004). This remuneration package contains a fixed position-based wage, performance-related
bonuses and other relevant compensations. Compared with western
firms, Chinese firms provide relatively less long-term rewards for staff,
but more immediate cash rewards.
The present study
Considering the paucity of studies on the relationship between executive
pay and firm performance in Chinese SOEs, we adopted an exploratory
qualitative study to explore whether and how executive remuneration
works in red-chips. This approach allowed us to explore complex issues
that have human interaction at their core (Culpepper and Gilbert, 1999)
by seeking views from board insiders. Our principal objective was to
learn what impact, if any, that these respondents thought that executive
remuneration might have on corporate governance and, consequently,
firm performance. We purposefully targeted the top 20 red-chips to
investigate the remuneration issue. Seven companies agreed to participate in this study. These companies are in strategic areas such as financial service, oil and mining sectors.
We encountered practical difficulties in reaching potential participants who are few in number and often require higher levels of trust to
initiate contact with them or to break the barrier to discuss sensitive topics (Faugier and Sargeant, 1997; Atkinson and Flint, 2001, 2004; Rhodes
How Chinese Styled Executive Remuneration Works
81
et al., 2004). We used a ‘snowballing’ sampling method, a link-tracing
technique that relies on a series of referrals within a circle of people who
know each other or are loosely connected (Atkinson and Flint, 2001), to
obtain a wider range of research contacts within a particular group’s culture in order to provide an account of meanings and activities from inside
the unknown (Atkinson and Flint, 2004). As such, we based the selection
of samples on insider knowledge and referral chains among subjects who
possess common traits that are of research interest (Kaplan et al., 1987).
The snowballing method also prevents problems of sample bias because
of the non-random selection (Atkinson and Flint, 2001).
Our sample consisted of 19 board members from seven boards and
three government officials from SASAC. We began by contacting and
interviewing government officials in SASAC, with whom we had direct
or indirect personal or professional contacts. A chain referral technique
improved our access as the officials referred us to the board members
from some of the companies under their control such as those in the
financial and energy sectors. At the end of each interview, we asked the
participant to name other potential interview participants or to contact them on our behalf, which most of them did. This was especially
important in our study when we asked respondents to comment on sensitive topics ranging from board colleague remuneration to their own
and views on their remuneration arrangement. We conducted semistructured, open-ended interviews. The interviews varied from 1.5 to
3.5 hours, with the average interview lasting 2.5 hours. We conducted
the interviews in Chinese. Most of the study participants were uneasy
with the use of a tape recorder, so we captured the context through
shorthand later transcribed the interviews. The study participants did
not sign a formal confidentiality agreement, but we assured them of
confidentiality and they were okay with this.
We used a conversational analysis approach to interpret our data
(Atkinson and Heritage, 1984). The interview collection and transcription process was on-going, with regular meetings between inquiring
co-authors to discuss individual interviews with transcript in hand.
We discussed whatever issues any of us noticed. Our analysis sessions
were open-ended, with themes emerging as outcomes of our agreement
during these sessions. Thus, our approach is interpretive data analysis
where every inference is rooted in specific textual evidence of collected
narratives whether they are transcripts or interview notes (Denzin,
1989). As Ewick and Silbey (1998: 29) observed, what ‘people tell about
themselves and their lives, both constitutes and interprets those lives,
as the stories describe the world as it is lived and understood by the
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storyteller.’ Our approach was a bottom-up analysis in order to discover
their meanings. This chapter focuses on the stories that board insiders
and key stakeholders told us about their perceptions on the arrangement of top executives’ remuneration. The quotations only present
views of our sample and offer ‘native’ insights for subsequent testing.
Due to the commercial sensitivity of the information, we guaranteed
the respondents’ anonymity.
Results
Following the analysis of the theoretical framework and earlier empirical studies, three dominant themes emerged from the narrative analysis:
‘perception on current remuneration strategy’, ‘process of setting executive remuneration’ and ‘disclosure of executive remuneration’. We provide
illustrative examples for each theme, which we abstracted from the original participants’ narratives. This study’s findings reveal the board insiders’
perceptions on the design of top executives’ remuneration and its effects
on reducing agency problems and linkage with firm performance.
The perception on current remuneration strategy
An issue surrounding executive remuneration is the directors’ perception on how the company sets the pay. When asked whether seniority
and the culture of egalitarianism still influence the Chinese remuneration system, one director in our interviews believed that:
An executive’s basic salary is based on age, job position, qualifications and salary category. For example, the chairman has the highest
pay due to the position, which is followed by the CEO. Some retired
executives have the qualification and age advantages so they also
receive high remuneration. Overall, there is small income differentiation among the executives on the same level.
As clearly stated above, management within the firms use seniority
and the egalitarian culture to determine the basic pay. The bonus distribution is group-based regardless of individual performance. Often
the firm awards the bonus to all executive directors on the same level
depending on the firm’s performance. However, another director
explains how his company has moved away from the old styled pay
scheme towards a market-based scheme.
Market-oriented American styled pay has generally replaced the culture of egalitarianism and seniority.
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As top executives in SOEs discharge their role in government services,
the public can hardly accept high-level salaries for them. When asked
about public criticisms regarding the extremely high remuneration to
executives in high profile red-chips, an SASAC officer commented:
The gap between the average pay of the executives and employees
has shrunk 13.6 times from 2003 to 12 times in 2011.
In fact, China adopts a semi-market-oriented approach to set the
executive pay in SOEs. The pay is significantly lower than that in a
private company. However, as companies need to participate in the
market competition, the pay must also reflect and recognise the market value of this post. But at the same time the management are not
just the professional managers. They also have a government role. So,
a semi-market-oriented approach is a good compromise.
A number of directors said that the remuneration in red-chips is relatively lower than that in the same private sector industry. For example,
two directors commented that:
Yes, the executive pay in the strategic sectors, for example, financial services and oil and petrol sectors, has increased significantly
in the past few years. According to the statistics by SASAC, from
2004 to 2007, the average annual salary of the executives of the
centrally owned enterprises under SASAC supervision is 350,000
yuan (£35,000), 430,000 yuan (£43,000), 478,000 yuan (£47,800)
and 550,000 yuan (£55,000) respectively. The annual increase rate
is around 14 per cent. In 2009 and 2010, the average remuneration is
600,000 yuan (£60,000). It is not that high when comparing it with
the pay for the executives in a similar industry in the private sector.
Compared with the executive salary in the same industry in
Chinese private sectors and developed countries, the pay in SOEs is
still very low.
If this is the case, it is worthwhile to investigate the recruitment and
retention issues in red chips since the relatively low group-based pay
restricts the company’s abilities to align the compensation with its
strategy. One director claimed:
We benefit from the pension and other benefits. This includes basic
pension insurance, medical insurance, unemployment insurance and
housing fund schemes and so on. The local government authorities
give us a lot of support. The benefits will be invested in individual
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accounts and could be gained after retirement. Although the bonus
has been reduced due to the economic downturn worldwide, the pension and other benefits have increased accordingly and they become
the main incentive except for base salary.
One possible reason is that the government owns the majority of
red-chip shares and the board does not have enough power to allocate
shares. Directors, however, would have a better pension after retirement
than those in private enterprises. Furthermore, in Chinese culture,
loyalty plays an important part. It is the citizen’s duty to be loyal to
the government, the company and family all the time. Once directors
obtain a good job, they will be reluctant to change. Therefore, red-chips
usually do not have to worry about retention of directors.
The process of setting executive remuneration
The directors from our study describe the information sources and processes that companies use to set directors’ pay. Two officers discussed the
key stages in pay-setting.
How to determine the pay for executives is a complex task and we
need to consider all aspects of factors and balance the efficiency and
fairness. The biggest problem encountered is in the formulation of
the remuneration. From a practical point of view, the goal is to move
towards a market-based remuneration system and to avoid a return
to the era of the ‘iron rice bowl’. At the same time, we need to put a
cap on the remuneration to avoid paying out too much.
The basic annual salary is linked with the previous year’s average wage and paid monthly. Performance-based bonuses are based
on the annual performance evaluation results in accordance with
determined criteria. The total amount will be paid out to the SOEs.
But the executives will initially be paid 60% and the rest 40% will be
held until the end of the tenure.
In fact, SASAC plays a more important role than the remuneration
committee in setting the pay. Two directors stated that:
Prior to the establishment of the SASAC, the remuneration was set by
us, SOEs themselves. In September 2009, the SASAC issued the guidance to further standardise the remuneration of top executives in
the largest SOEs. Currently, the salary structure of the executives is
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85
composed of three parts: basic annual salary, the performance-based
annual salary and medium-and long-term incentives. In actual operation, the basic annual salary and performance-based pay are relatively standardised. But I think that SASAC still lacks effective ideas
and ways of setting medium-and long-term incentives.
At present, our company has a remuneration committee, but they
don’t know how to design a professional executive pay structure.
Hence, the remuneration system’s efficiency is well dependent on
SASAC’s efficacy. One director commented:
I don’t think SASAC has sufficient information about the
individual company. They also don’t have that much time to take
part in the board meetings and to understand the company’s performance metrics. They only can provide very general guidance
on the pay.
This comment indicates that there is an unsound external supervision
system when it comes to making salary recommendations. In China,
SASAC is the agent and client of the state-owned properties. SASAC does
not have the claim for firms’ residual profits and has no real responsibility for the state-owned properties. The unbalance between power
of control and the infrastructure provides insufficient incentives for
SASAC to evaluate and supervise CEOs seriously. Moreover, the severe
information asymmetry prevents the government from other institution supervision (Zhao, 2011).
Given the importance of linking rewards to performance, we sought
to explore in our interviews with directors what standards and targets that their companies set for directors’ pay. A number of directors
claimed that the company’s culture and characteristics, as well as their
own performance, determine the pay levels. For example:
The pay levels of executives in SOEs are determined by the size and
industry of the enterprises, the pay of the national counterparts and
the local economic and social development. We also consider the balance between personal and business interests, economic efficiency,
enterprise development and social responsibility. This balance is also
in line with the level of compensation culture in East Asia.
The compensation design tends to be based on the consideration
of fairness, incentives, economic development and corporate social
responsibility.
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Our company has established the economic value added (EVA)
assessment indicators. I guess it will be used to set the pay … it will
motivate SOEs to go bigger and achieve sustainable development and
innovation. And it will facilitate better risk management.
However, the directors in our interviews noted that the variable pay is
still a very low proportion of the whole package.
International experience shows that the key to a good pay system is
to be built on the basis of the performance evaluation and the results
of the firm performance must be linked with incentive pay. At the
same time, the proportion of variable pay should be appropriately
increased, which is both easy to linking pay and performance, but
also can reduce the risk of the enterprise.
In developed countries, a large proportion of the remuneration is
equity based. But we don’t have equities of the company. We only
have basic salary, social welfare, supplementary retirement benefits,
termination benefits, enterprise annuity scheme and bonus plans.
Our company doesn’t implement share incentives or share options.
There are no executives holding or trading shares. This is common
in Chinese listed firms, which means that most Chinese companies
have no share options scheme in the remuneration system, therefore, there are few disclosures in reports.
Conyon et al. (2000) indicate that share incentives are essential to
retain and motivate employees for long-term development. Excessive
short-term salaries and welfare benefits could cause executives to lap
up the comfort, thus putting a damper on their incentive to remain
innovative and competitive in today’s global business environment.
Interestingly, in most of these companies’ annual reports, they claimed
that they have applied performance-oriented incentive evaluation
results to decide director appointments and dismissals, rewards and
penalties, promotions and remunerations. However, the respondents
could not articulate how they receive their incentive pay and whether
the company links it to its performance.
Another issue regarding executive remuneration is the perception
that CEOs are able to set their own pay. One director noted:
The CEO is very powerful and important in the company. The CEO
typically has a say on his own remuneration and the remuneration for the group. It is not too difficult to change the criteria to get
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87
the rewards. Who cares about the performance of the company?
Nobody!
This comment indicates that the CEO duality leads to serious insider
control and corporate governance becomes a mere formality. On the
surface, specialist consultants propose executive remuneration which
the SASAC and shareholders approve. However, in reality, executives design their remuneration package themselves. Based on Zhao’s
research (2011), executives always change the performance assessment
index advantage in their favour, using their power on the board. They
assess their work performance and create their own remuneration package. Zhao (2011) points out that under the influence of a high degree
of uniformity between senior management and board of directors, the
independent non-executive directors have lost equitable and logical
judgement regarding executive remuneration.
Disclosure of executives’ remuneration
We are interested in the disclosure issue of executives’ remuneration as
red-chips are publicly listed companies on the Hong Kong exchange.
The China Securities Regulatory Commission (CSRC) has emphasised
the requirement to establish a transparent, timely, accurate and full
information disclosure system. When asked if it is possible to disclose
an executive’s remuneration, the officer noted:
In fact, for SASAC, the income of the leaders of SOEs is transparent. Red-chips have already disclosed the executive remuneration in
the annual report. The problem is the requirements for disclosure
have not yet been institutionalised. Not all SOEs choose to make the
remuneration transparent to the public. People might question that
they do not see the money in the end and how the money has been
allocated. However, the disclosure of the executive pay is the trend
and it is not difficult to operate.
The UK and United States pay more attention to information disclosure, especially in annual reports. The various detailed information about
executive remuneration provide important information for stakeholders, the public and the authority to make scientific judgements on the
remuneration system (Cheng, 2009). However, in China, one can find
only general payment information in annual reports, without personal
information, schemes or responses from the remuneration committee
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(Ye, 2012). Additionally, the lack of transparency and disclosure lead to
a high cost for the public to gain detailed information and executive
remuneration does not have extensive supervision and control (Ju, 2012).
Thus, the absence of a detailed information disclosure system does not
protect stakeholders’ rights properly.
Discussion and conclusions
Since the 1990s, China has reformed its SOEs and has listed them in
domestic and foreign stock exchanges (Chen et al., 2010). This reform
is an innovative attempt to diversify SOE ownership and increase SOE
independence. However, it adds a series of problems in executive remuneration, in particular, the lack of detailed regulation and disclosure of
executive remuneration, which increases financial risk (Ju, 2012). SOEs
must engage in duties other than profit seeking, such as reducing the
unemployment rate and maintaining social stability (Megginson and
Netter, 2001). According to the findings, to maintain the stability of the
polity, the Communist Party of China (CPC) would like to appoint government servants as CEOs. The political motivation of top executives
refers to the stable position and the promotion of political rank (Cao
et al., 2011; Liu et al., 2011). In the current circumstances, jobs in SOEs
are more stable than in the private sector. Executives do not need to
worry about performance targets. At the same time they have the right
to be promoted as government civil servants. The findings also conclude that SOE executives gain more welfare benefits and other privileges. These usually include a housing allowance, supplemental medical
insurance and a transportation allowance. These provide a secure and
comforting guarantee for executives after retirement.
In order to maintain consistency at the executive level and the safety
of state-owned property, CEO duality is common in SOEs. CEOs are
very powerful from both political and financial perspectives. This leads
to high inside control. Our findings are consistent with Chen et al.’s
(2010) study. They analysed the statistics for 502 Chinese listed SOEs
from 2001 to 2006 and concluded that CEOs use their excessive board
power to push executive compensation to a high level, which leads to
the loss of state-owned properties. CEO duality is in a dominant position in smoothing business; however, it needs a sound legal system and
mature financial markets, which are currently absent in China (Chen
et al., 2010).
As a special appointment system, executives in red-chips are government servants. On the one hand, SOE executives should have the same
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89
wage scale with other officials in the same rank. On the other hand, in
order to attract talent, SOE executive remuneration should be higher
than or equal to the relevant industry. In fact, SOEs’ pay is lower that in
relevant industries, which leads to talent migrating to better opportunities. The current state is that despite the relatively low pay, SOE executives might have unserviceable managerial abilities because of their
excessive power. Since most SOEs are in monopolised industries, top
executives could use this advantage to exchange inside information for
grey income easily despite disobeying professional ethics. According to
Liu et al.’s (2011) study, executives in large banks could gain more post
relevant consumption and this consumption amount shows no direct
connection with the firm’s operating performance.
Our findings suggest that executive remuneration is increasing synchronously with the global benchmark of pay. Chen et al. (2010), however, argue that this rise is unreasonable, because it shows no link with
the firm’s performance (Chen et al., 2010). Ye (2012) suggests that SOE
executive remuneration system should suit its selection and appointment system. Since CEO appointments contain political elements, it
is unreasonable to apply their payment with the market price. Firms
should separate their remuneration packages into three kinds: ‘administrative price’ for government appointed CEOs, ‘semi-market price’ for
those gaining jobs through competition and ‘market price’ for the professional managers without official capacities (Ye, 2012).
The CSRC emphasised that listed companies should disclose timely,
correct and transparent information to shareholders and other investors (Mallin, 2007). The transparency disclosure principles aim to
offer shareholders full information in making investment decisions,
which has influence on many areas of the corporation such as companies’ objectives, board information and financial results, especially
the executives’ compensation policies (Madera and Sun, 2005). OECD
Principles outlined the principles on executive compensation in 1999,
and the CSRC also stated the requirement of providing executive remuneration measures within annual reports (Kato and Long, 2006b). Since
1998, Chinese publicly listed companies began to disclose top executive
remuneration in annual reports, including the total size and amount of
compensation to directors, supervisors and senior managers, and the
aggregate cash remuneration such as basic wage, bonus and commission (Firth et al., 2005; Buck et al., 2008). Firms should submit disclosed
information within annual reports to the stock exchange and accountancy firms should audit them (Liu, 2005). Despite the requirements, the
findings suggest that until now, most Chinese listed companies did not
90
Jessica Hong Yang and Nada K. Kakabadse
disclose precise executive compensation information or merely publish
aggregate remuneration to executives or key staff members. Very few
Chinese companies have a share options scheme in the remuneration
package, which causes limited and inadequate disclosures in the annual
report.
The lack of transparent executive remuneration information disclosure has many influences on the company. A company merely discloses
total salaries and executive bonuses, which may cause limited disclosures of the complicated relationship between executives’ remuneration
and performance. Additionally, firms cannot guarantee the quality of
performance from those executives and whether they have earned these
fees. The unreported pay may lead to an undervaluation of incentives’
influence on performance. More importantly, the incomplete disclosure affects shareholders’ decision-making because they do not have
access to full information.
We suggest that it is important to improve SOE executive remuneration systems, especially in monopolised red-chips where it is important, to make the boards work. First, these companies should adopt an
equity-based mechanism. For instance, in the UK and United States,
since share price and corporate performance are important, stock and
stock options are two popular components in executive remuneration
(Cheng, 2009). Management has the priority to buy a certain number
of stocks with a contractual price in the prescribed period. In this way,
management could share the risks and profits together with shareholders. According to Cen’s (2011) study, appropriate shareholding ratios for
executives, normally from 5% to 20%, can help improve operating performance and corporate value. Notably, the low-level shareholding ratio
does not promote motivation, whilst a high-level ratio could reduce
shareholders’ interests and control power.
Second, it is important to establish a series of remuneration standards
by considering companies’ relative profitability and absolute profitability to increase SOE’s asset utilisation efficiency and regulate the board
director performance. Firms should separate the remuneration standards into several modules such as the customer growth module, surplus
capability module and sustainable growth module (Chen, 2011). The
government should make an appropriate balance by referencing global
pay benchmarks and ensuring that the remuneration level is consistent
with an individual’s performance. Additionally, despite that the government appoints directors, it is not appropriate to pay all executives
at the same level. The executive remuneration system should be suitable for its selection and appointment system. Ye (2012) suggests three
How Chinese Styled Executive Remuneration Works
91
packages: ‘administrative price’ for government appointed CEOs, ‘semimarket price’ for those who gain jobs through competition, and ‘market
price’ for the professional managers without official capacities.
Finally, the government must improve the Chinese legal and supervision system to keep pace with its economic growth. Executives in SOEs
illustrate that the unsound regulation and supervision in SOEs conveniently provide ways for executives to seek grey income. To maintain
long-term SOE development and keep state-owned properties safe, the
government should set more restrictions on certain incentives, such as
management buyouts (MBO) and executive shareholding. Remuneration
committees and SASAC should work together to supervise and regulate
directors’ pay.
Overall, this chapter has added to the debate on executive remuneration in Chinese red-chips. We have highlighted the current remuneration structure, which is fixed pay and benefits predominate. We have
shown that there is no correlation between pay and performance. It
indicates that as one of the key control mechanisms, the remuneration policy does not contribute to board effectiveness. We have also
used interview data from individuals in Chinese red-chips to show the
diverse option on directors’ pay, current remuneration policy and its
implementation. Undeniably, the current executive remuneration system in SOEs has certain advantages, such as protecting inside information from competitor plagiarism, which is sufficient encouragement for
top executives. However, from the view of fairness and justice, the system requires more transparency to ensure that the stakeholders’ legitimate interests are protected.
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4
The Secret to Boards in Reinventing
Themselves
Ouarda Dsouli, Nadeem Khan and Nada K. Kakabadse
We almost invariably spend more time living with the consequences of our decisions than we do in making them.
Pfeffer (1992: 19)
After centuries of established corporate governance practice and a
variety of national (Sarbanes-Oxley Act, 2002; UK Codes of Corporate
Governance, 1992–2010; Viénot Reports, 1995–99, 2000) and international codes of good corporate governance practices (Organisation for
Economic Co-operation and Development, 1999, 2004) it seems that
either the regulations are not working or that simply a few powerful
elites, such as the Bilderberg group, define corporate faith and the
parameters of corporate governance design and debate (Richardson et
al., 2011). Thus, it appears that we are back to where we started as captured by Argenti’s (1976) six principal symptoms for corporate collapses:
one-man rule; non-participative board; imbalanced management top
team; lack of management depth; a weak financial function; and a combined chairperson/CEO role.
Modern transnational corporation (TNC) power ranks effectively
alongside national governments (Anderson and Cavanagh, 2000).
Unregulated and unaccountable behaviour of players within these
TNCs, as well as non-democratically elected leaders, continue to have
an enormous impact on people’s lives worldwide. This is exemplified
by unprecedented events such as the sub-prime mortgage crisis which
imploded into the global financial crisis and the long-term recession.
Efforts to restore corporate trust such as the Dodd–Frank Wall Street
Reform and the Consumer Protection Act of 2010 in the United States,
and revisions to the UK Code of Corporate Governance in 2010 are not
new. Since the early 1970s stakeholders’ such as employees, suppliers,
95
96
Ouarda Dsouli et al.
customers and local communities in the United States and UK started
respectively questioning the large corporation’s influence on society
(Tricker, 2012). What is often questionable these days is the government
response to cope with the sovereign debt crisis in Europe, increasing
unemployment rates across Western developed nations, among other
concerns (Castells, 2012). Hence, the root cause lies beyond any one
TNC and country’s capabilities to that of a massively complex network
of TNCs (Vitali et al., 2011) and local governments with cross-holding shares, multiple directorships and excessive cross-leveraged funding, where the dynamics and ever-changing operational context is far
beyond single control. In the face of globalisation, TNC boards that
operate in multiple cultures, jurisdictions and currencies, are faced
with various challenges and increasing responsibilities, but at the same
time they are wielding enormous power (Tricker, 2012). This brings the
board responsibilities and effectiveness to the forefront of the governance debate.
Whilst the world economy is readjusting itself, new economic powers are emerging (Global Competiveness Report, 2012) and business
executives still perceive globalisation as positive (IMD, 2012). Boards,
on the other hand, are very resistant to becoming more global (Gillies
and Dickinson, 1999; Staples, 2007). Boards hardily appoint non-nationals (Staples, 2007) and females (Zahidi, 2012), which suggests a lack
of board diversity and integrity (Jensen, 2012).
The issue of leadership misbehaviours persistently occupies the front
pages of media outlets. The debate for the separation of board leaderships in the United States and the issue of compensation remain unresolved (Conyon et al., 2011; Pedersen & Partners, 2012; Tonello, 2012).
In the current economic situation where there is increasing pressure for
sustainable firms, boards are in need of leaders with a long-term vision
and innovative skills. This could bring confidence back to the system
and make the corporate sector of the economy more sustainable, widely
respected, integrated with society and less interrupted.
The rich and complex environment in which the corporation operates today and the challenges that boards face suggests that there is
the need for a new framework. This framework should guide the power
of the board towards reinventing itself in order to support the corporate firm’s ability to be competitively renewable for the longer term.
The holistic framework will need to include board diversity, leadership,
cultural dynamics and its capability to be sustainably innovative for
the future. Therefore, this chapter examines each of these constituents
and present a new conceptual and practically applicable framework in
The Secret to Boards in Reinventing Themselves
97
support of making the board work effectively. We will test the proposed
framework among the most sustainably recognised firms in the world
to examine to what extent the boards of these corporations are and will
be effective in reinventing themselves for the next 20–40 years.
Board diversity
Scholarly contributions to the composition of board diversity have
explored visible factors (gender; age; ethnicity) and invisible characteristics (education; values; personality; skills) over the years (Milliken and
Martins, 1996; Petersen, 2000; Watson et al., 1998). At a time when corporate openness is fast becoming a necessity (Rivas, 2012) rather than
a competitive advantage (Porter, 1985), the endogenous institution of
boards (Hermalin and Weisbach, 2003) remains reluctant to diversify
(Harvey Nash, 2012).
Gender balance
Demographically, the most noticeable change in Western corporations
has been the introduction of legislation in countries such as Norway
(2004), Spain (2008) and France (2011), inducing quotas for female representation within boards (Ahern and Dittmar, 2012; Davies Report,
2011). However, Zahidi (2012) maintains that corporate gender equality
remains a myth. This is not a global phenomenon and varies significantly from country to country as Table 4.1 indicates.
The extant literature on positive effects of female representation support the motive for legislation (Carter et al., 2003; Erkut et al., 2008;
Schwartz-Ziv, 2012; Shrader et al., 1997), whereby there may be better
strategic input, leadership style and balanced decision making (Catalyst,
1995). However, we should recognise this as distinct from role modelling and stakeholder satisfaction motives, which infer a token gesture
in social representation (Scherer, 1997). In Table 4.1, the Scandinavian
boards lead followed by European and American boards, whilst South
Africa reflects greater gender diverse than Germany and France. The
rest of the world has yet to advance gender balance representation.
Importantly, we reinforce that in a merit-based democracy culture
should not dictate gender.
The impact of gender representation within boards has been positive
in America (Erhardt et al., 2003) whilst studies in Denmark suggest no
correlation to firm performance (Rose, 2007). It may be that the resource
employment pool (Erhardt et al., 2003) is different in Denmark or that
the invisible required attributes of females, which include education and
7.7%
7.5%
Belgium
Austria
Denmark
Finland
Sweden
Norway
13.9%
24.5%
27.3%
40.1%
Scandinavia
Source: Catalyst (2012); GMI Ratings (2012a).
9.3%
11.2%
Germany
8.7%
12.7%
France
Switzerland
14.0%
Netherland
Spain
27%
UK
Central Europe
Canada
US
10.3%
16.1%
North America
Table 4.1 Females on boards across continents
Brazil
Mexico
5.1%
6.8%
South America
Asia
Japan
Indonesia
India
China
South Africa 15.8% Hong Kong
Africa
9%
8.5%
5.3%
4.5%
0.9%
Australia 8.4%
Australia
The Secret to Boards in Reinventing Themselves
99
appropriate experience, are already embedded within the Scandinavian
education systems. Another factor in this case, may be the positive influence of female-friendly governance systems within Norway, Sweden
and Denmark that offer higher order social benefits and employment
regulation for family life planning. The ongoing legal issue in Europe
of whether appointment based on gender is fair (BBC, 2012), argues for
merit-based appointments that recognise skill sets and professional experience. The research suggests that whilst gender equality may be positive,
there is a need for highly skilled and educated females before quotas are
legislatively imposed. At the same time, the imposition (Reding, 2011)
may over time foster more highly educated female role models and stakeholders (Catalyst, 1995) for the next generation. An earlier adopter of
legislation in 2004, Norway is recognised in board circles for the phenomenon of ‘golden skirts’. This refers to a group of 70 female board
members who are sitting on multiple boards to meet the quota requirements (Vinnicombe and Sealy, 2012). Beyond Norway, Kaczmarek et al.
(2012) note that multiple directorships typically attract regulators’ attention in the UK as the Walker Report (2009) outlines. In this respect, the
US Securities Exchange Commission requirement Regulation S-K, Item
407 (c) advocates increased transparency as part of ethical board recruitment processes (Schwartz-Ziv, 2012).
In contrast to the mainstream literature which links board composition to firm performance (Ahern and Dittmar, 2012; Erhardt et al.,
2003), the alternative perspective (Hermalin and Weisbach, 2003) posits that we should understand boards based on their actions and the
situation that the firm faces. In this regard, Schwartz-Ziv’s unique lens
(2012) to inside-the-black box of the boardroom (Daily et al., 2003;
Leblanc, 2004) indicates that men and women have different management and supervisory qualities. Women are more communicative,
active participants and prefer small networks, whereas men are more
likely to take action individually and decisively. In this respect, maledominated boardrooms lack the necessary holistic qualities to promote
high-performing board teams (Payne et al., 2009; Sonnenfeld, 2002).
Age
Another aspect of diversity is age. The average age of board members
is over 60 (Table 4.2). This may reflect a need for life experience inadvance of a major responsible role or alternatively, it may suggest that
following retirement, directorships offer better work–life balance and
flexibility to members. The board re-election process offers short-term
contracts (three mandates of three years each in the UK; eight years in
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Ouarda Dsouli et al.
Table 4.2
Average age of boards
EU
UK
Spain
France
Italy
Average age of
board members 63
59
59
60
61
United
States Canada
64
66
India
65
Source: Compiled by the authors from Spencer Stuart (2011b,c, 2012a,c).
the United States; and four years in France) where in some cases, retirement age policies for directors are beyond 70 (72 in the United States;
70 in Spain). Thus, the old boys’ network (Edling et al., 2012) may be
looking after each other and constraining diversity.
In Table 4.2, the remarkably close range across the countries implies
that this may be a global phenomenon. It is the advanced nations such
as the UK and France that seem to have slightly lower average ages by a
small margin. Some scholarly research suggests that age brings experiential benefits that translate into firm performance (Faleye, 2007). Other
studies highlight beneficial advantages of external networks and multidirectorships in support of firm performance (Boyd, 1990; McDonald
et al., 2008; Mizruchi, 1996). These factors become more prominent in
crisis situations (Platt and Platt, 2012). The question arises that within
the boardroom, should individual members be exploiting these networks in this way, rather than engaging transparent official channels
for project management or skill enhancement for the firm? The end
outcome seems to be that society suffers the longer-term consequences
of inadequate knowledge or deficient structures (Enron, Newscorp, BP,
BBC). Further, it seems odd that the older generation are making decisions without the input of the generation that will witness the longerterm impact of these decisions. Thus, the holistic lens questions this
barrier where age should offer benefit of guidance and smooth transition to wider stakeholders. If a system of governance allows a young
adult to form a company and operate it as an entrepreneur, then why is
the boardroom also not open to these skill sets?
Ethnicity
Erhardt et al. (2003) find a positive correlation between ethnicity and
firm performance in America. However, the majority of directors are
white males (Harvard Business Review, 2011; Rhode and Packel, 2010).
Similarly, Brammer et al.’s study (2007) of 463 UK-based firms found
only 0.2% non-white board representation. Whilst scholars have given
The Secret to Boards in Reinventing Themselves
101
attention to gender equality from a female perspective (Terjesen et al.,
2009), limited studies have pursued ethnicity as the leading gender
issue (Marimuthu, 2008; Roberson and Park, 2007; Westphal and
Milton, 2000), making it more so part of the wider diversity dialogue
(age, gender, ethnicity). Ethnic minorities have been under represented
on boards for years; however, change started taking place in the 1990s
(Farrell and Hersch, 2005). In the 21st century, ethnic composition is
influenced by the growth of developing countries TNCs competing
with developed countries TNCs; home and host country factors; and
an increasingly informed and mobile global talent pool. Therefore, ethnic diversity and minority representation have different meanings and
interpretations in different societal contexts.
The research reaffirms the school tie network social phenomenon
(Brammer et al., 2007) where the corporate elites accept minorities with
the right background and connections into the boardroom. The critical
lens appreciates that American history is more open to the ‘American
Dream’ (Obama, Oprah, Powell) in contrast to the older nations such as
the UK, Germany, France, India, China and Russia. Beyond the West,
the global lens must appreciate that an increasing number of the emerging corporations are from BRIC nations. For example, Indian-based
multinational automotive manufacturing company Tata operates in 80
countries. The environments of Brazil, Russia, India and China are less
capitalistic and are both population- and resource-rich (Global Sherpa,
2012). More importantly emerges the cultural context (Hofstede et al.,
2010) where conducting business in informal networked environments
requires a different approach to conducting business in advanced systemised environments (Yoshikawa, 2012). The systemisation of developing societies has to some extent been restricted and controlled due to
political instability (Pakistan, Egypt, Syria, North Korea) or deeper cultural differences (Saudi Arabia, Iran, America, Russia) whereas governance systems remain diverse across global markets, impacting the values
and skills of the overall talent pool. Generally, it is the elite classes of
developing nations that eventually emerge into the talent pool of western corporate society. The pattern of rising emerging market corporations (EMCs) indicates that ethnic or cultural backgrounds have little
or no influence on board performance. More interestingly we observe
a reverse phenomenon where Chinese and Indian companies (Huawei,
Mittal) are extending beyond borders into the European talent pool
(Kanungo, 2012).
In contrast, Western society uses the term ethnicity in the minority
context to represent the dispersed or displaced communities. In this
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Ouarda Dsouli et al.
regard, it seems odd that the new generation of ethnic minorities in
countries such as the UK, United States, France or Germany are becoming majorities. For example, in 2011, over 50% of secondary school
pupils in Birmingham, England, are of ethnic origin. As a result, the
talent pool is forced to reconsider its glass ceiling of ethnic diversity.
Mattis (2000) identifies that boards need to represent the labour force
and customers in order to best utilise human capital (Gregoric et al.,
2009). Research suggests that ethnic representation contributes to creativity, ethical behaviour (Macfarlane et al., 2010) and internationalisation (Wang and Cliff, 2009). More importantly, homogenous boards can
be harmful (Wellalage et al., 2012). In an interconnected environment,
the patterns suggest that cross-cultural backgrounds are fast becoming
a necessity for corporate survival of boards (Wellalage et al., 2012). Sri
Lanka has for many years had 40% ethnic representation on boards
compared with S&P 500, which had an ethnic representation of 9% in
2010 and 11% in 2009 (Wallalage et al., 2012). Similar to female representation, the diversity of corporate boardrooms diversity inclusive
structures are likely to ethnically broaden in the near future.
Internationalisation
Advances in technology and transportation globally have enhanced the
interconnected environment in which we live. Internationalisation of
trade is impacting the boardroom. Staples’ study (2007) reports that in
2005, 75% of TNCs had at least one non-national board member, indicating a considerable improvement over the previous 11 years (36.3% in
1993) (Gillies and Dickinson, 1999). However, only 10% of these corporations are governed by a majority of non-national members (Staples,
2007). More interestingly, in the post global financial crisis (Knyght et al.,
2011), European boards averaged 23% non-national directors, which is
an increase of 11% from 2008 (Heidrick and Struggles, 2009). In 2012,
CAC 40 French firms have 27% foreigners. Whilst the 106 Spanish firms,
including the IBEX 35 firms, have 11.4% foreigners, the UK FTSE 150
companies had 33% foreigners in 2011 (Spencer Stuart, 2011a, 2012 a,b).
Within the European Union (EU) cross-border trade will be relatively
more common compared with larger single nation trading blocs such as
the United States and China. The EU talent pool (human capital) will also
be more open to travelling abroad. At the same time, the Indian BSE 100
has 7.3% and the US S&P 200 has 53% foreign directors (Spencer Stuart,
2011b, 2012c). However, boards’ national diversification remains an issue
as appointed members remain largely European or North American in
mutually beneficial capacities (Spencer Stuart, 2012b).
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The results of a larger cross-sectional study of 20,000 plus firms operating in 98 countries (Miletkov et al., 2012) concludes that younger
firms with larger international shareholders and significant foreign
operations are more likely to have foreigners on their board than their
counterparts. In addition, companies operating in countries with relatively lower human capital are more likely to have foreigners on their
boards (Miletkov et al., 2012). However, interestingly, the results do not
support a relationship between foreign director and firm performance.
This seems to suggest that the new generation of corporations are looking beyond geographic borders for financing and market opportunities,
whilst at the same time, the global talent pool is open for recruitment.
Where talent is restricted, a corporation can import it to add value to
the firm. Interestingly, there is a negative correlation between financial
performance and internationalisation of boards for firms operating in
developed market equity, higher educated and legislatively strong institutions (Miletkov et al., 2012).
Board structures and invisible relationships
The internationalisation of boards’ members is not randomly distributed, as the choice to recruit independent foreign board member
depends on the firm size, its shareholders structure and the potential
costs and benefits associated to this diversification (Rivas, 2010). Most
recently, a longitudinal investigation of individual director attributes
and degree of internationalisation of firms (US, European) suggests that
a broader invisible backgrounds of CEOs’ education, experience and values facilitates internationalisation of the firm (Rivas, 2012). However, at
the same time, many chairpersons are from within the firm’s home
country. This may be a natural phenomenon or it may more likely be
a political choice to maintain corporate control with home country
advantage (Rivas, 2012) whilst gaining access to overseas markets.
Whilst board independency has received much attention (84% S&P
500, 82% French CAC 40 and 93% FTSE 150 UK) (Spencer Stuart,
2011a, 2012b,c), skills diversification remains critical to board diversity. The fact that board appointments among males and females is to
some extent influenced by the conscious or unconscious biases of the
eminent board member’s individual (CEO, chairperson or simply independent director) political and/or academic experience (The Diversity
Summit, 2012) does not necessarily mean that there is a penury of skills,
but the appointment process is rather supportive of the informal elite
networks (Davies Report, 2011). This is still, to some extent, influenced
by whom you know rather than what you know (Kakabadse, 2011).
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Besides, board recruitment is to some extent an exercise of box ticking
the skills matrix, which consists of demographics (age, race, gender). As
such, with the passage of time, knowledge and board expertise (operational knowledge such as industry expertise, specialised knowledge of
areas such as marketing, international business, technology, finance)
become core competencies (vision, strategic thinking, accountability)
(Gifford, 2012). The deeper issue arises that progressive board structures
(in terms of new appointments) become director interlocking relationships (Chu, 2012) where board size can also vary from a few members
up to larger boards with 30 plus members.
Known for its benefits, namely increasing openness, innovation and
board effectiveness, board diversity is currently a category in the skills
matrix (Spencer Stuart, 2012d) to which companies need to conform
in order to meet regulation. Board diversity needs to be an end in
itself, rather than a criterion for appointment.
To achieve board diversity, the board requires a rich complementarity
of personal and professional skills, backgrounds and inclusion of male
and females equally based on their merits regardless of their demographics and nationalities. Developing diversity requires the adoption
of both a top-down and bottom-up approach to lead diversity at all
levels and at all times.
Board leadership
Concerns about the separation of the CEO and chairperson role have
been ongoing for the last two decades (Tonello, 2012). The combination
of the two roles entails the CEO putting into practice their expertise
and acting with all autonomy and determination (Davis et al., 1997).
However, this unitary structure could be detrimental for business transparency. CEO/chairperson actions might go unmonitored which may
further pave the way for scandal and corruption as exemplified by
bankruptcies such as Enron, Bank Credit and Commercial International
(BCCI), Polly Peck, Coloroll and Maxwell Publishing.
As a remedy to the conflicts of interests, the separation of the role
of chairman and CEO emerged (Brickley et al., 1997) and is supported
by corporate governance codes in the UK (Cadbury Committee, 1992),
Netherlands (Dutch Corporate Governance Code, 2008), Finland
(Companies Act, 2006), Australia (IFSA Guidance Note No. 2.00, 1999)
and South Africa (King III, 2009). Other countries also favour role segregation. Yet, the separation of the two roles remains a subject of preference as Table 4.3 illustrates.
Two-tier
Unitary
Unitarya
Two- tiera
Germany
Spain
Belgium
Austria
Unitary
Denmark Two-tier
Finland
a
a
Other structures possible.
Source: Compiled by the authors from Pierce (2010) and Mallin (2010).
Unitarya
Netherland Two-tier
structure
a
France
UK
Board
South America
Africa
Brazil
Two-tier Unitary
Australia
Australia
Unitary Unitary
Dual
Asia
Indonesia Dual
Japan
Dual
India
Unitarya Mexico Two-Tier South Africa China
America
Unitary US
Scandinavia
Unitarya Sweden
Central Europe
Table 4.3 Boards structures across regions
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The practice of splitting the two top corporate positions is widespread
among most developed countries. For instance, in the UK, a number of
firms have introduced the separation of CEO and chairperson positions.
Only 11 out of the FTSE 350 firms have combined the role of CEO/chairperson (Grant Thornton, 2011). In France, although legislation allows
for the split of roles (Viénot, 1999), 62.5% of the French companies
still opt for unitary leadership where the ‘président directeur-général’
(PDG) runs both the board and the company (Spencer Stuart, 2012b).
In contrast, within the United States, strong single corporate leadership has prevailed over the longer term (Brickley et al., 1997; Coombes
and Wong, 2004). Currently 43% of the S&P 500 firms have separated
the two roles. This is considerably high compared to 25% a decade ago
(Spencer Stuart, 2012c). This percentage increases to 51% among the
largest 1743 US firms (Forbes, 2012a). Thus, it seems that beyond the
2008 global financial crisis, the United States may be changing its corporate structures endogenously via choice towards a duality.
Further to the reduction of the conflicts of interests (Brickley et al.,
1997), GMI Ratings’ data for 180 North American mega corporations
(2012) suggests that the separation of the two roles leads to the reduction of costs and reduction of the risk associated to the ESG (environmental, social and governance). This facilitates improved accountability,
greater investor protection and transparency (GMI Ratings, 2012b).
The arguments for and against role separation vary with respect to the
increase of checks and balances, board independence, long-term vision
and accountability (Coombes and Wong, 2004; DGA, 2004; Kakabadse
et al., 2006) and yet the literature findings remain inconclusive. Dalton
et al.’s (1998) and Dalton and Dalton’s (2011) studies find no influence
of duality on firm performance. However, boards continue to adopt the
recommendations and revisions of the UK Cadbury Committee Report
(1992, 2010). It currently extends to 60 countries. The influence of
deeper regulatory or cultural influences may be at play at national levels in unitary or dual preferences. However, the Global Competitiveness
Report 2012–2013 (World Economic Forum, 2012) also ranks countries
with unitary board structure as very effective (South Africa, Australia,
Sweden and Finland).
Aligned to the role separation, duality approach, the independence
of leadership has received much importance (Katz, 2012). Subject to
legislative regulations (Corporate Governance Code, A2.1, 2012), all UK
chairpersons are preferred to have an independent role, whilst within
the US S&P 500, 23% of firms maintain a dual board structure with
independent chairpersons (Spencer Stuart, 2012c). The reliance on
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independent board directors (chairperson) may provide a different or
external perspective and a wider lens of industry or it may lead to a lack
of experience and expertise at the top of the board (Lorsch, 2009). In
this regard, the issue of multiple directorships further supports a closed
networking culture.
One the one hand, the CEO plays a very important role as the mediator between the management and the board, whilst also managing the
business on a day-to-day basis. On the other hand, the chairperson’s
role is more of a moderator between shareholders, other board committees’ members and the CEO, hence their skilfulness in managing
board-sensitive relationships, individual egos and mitigating interpersonal collision in a complex and subtle way is crucial for effective boardroom dynamics (Kakabadse and Kakabadse, 2001). What transpires is
the complementary nature of these roles, which is vital for realising
full potential board performance. In this regard, what becomes more
important is the trust and integrity of the people in these roles, which
extends to independence of role; knowledge of industry; synergy with
other board members (NEDs) within the formative context of boardroom politics (Kakabadse and Kakabadse, 2004). Similarly, an in-depth
study of state-owned enterprises (SOEs) and public limited companies
(PLCs) in New Zealand recommends focusing on human relationships
and behaviours beyond structural set-ups. The key findings identify the
chairperson as a crucial role and more interestingly, poor information
diversity and poor director behaviour as detrimental to board effectiveness (Smith, 2010).
President of the Eurogroup of euro zone finance ministers, JeanClaude Juncker has described the critical issue of board leadership
compensation/incentivisation as ‘a social scourge’ (Hay Group, 2008).
CEO compensation has continued to rise within the recessionary time
period (Fernandes et al., 2010). Notwithstanding that the majority of
people have lost their jobs, the top executive compensation of the largest 100 firms in the United States and Europe enjoyed an average rise
of 6.5% per year during the last five years (Pedersen & Partners, 2012).
Similarly, the banking bonuses scandals have continued in the UK,
France, Germany and the United States (Fernandes et al., 2010; Treanor,
2012) where many private shareholders have lost huge amounts due to
poor performance of firms (RBS, Barclays, Northern Rock). It seems odd
that top executive pay increases on average twice as fast in comparison
with managers and employees within the firm in both the short and
long term, which research suggests is likely to continue into the future
(Pedersen & Partners, 2012).
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The US executive pay is higher than it is in Europe. This is
mainly due to the structuring of stock options as benefits (Conyon
and Murphy, 2000; Fernandes et al., 2009). The difference in cash
plus bonus compensation is only around 5% where the average
is €1,294,000 in Europe compared with €1,352,000 in America.
However, the stock options granted in Europe are lower at 1 million, whereas, in the United States one-third of the US 100 largest
firms top executives were granted more than €1 million (Pedersen &
Partners, 2012). Increasingly wider market competitiveness and limited availability of talent have contributed to European corporations’
adoption of an American-style bonus incentivised structure. In the
United States, the evaluation of compensation packages is heavily
linked to firm performance, whilst in Europe it extends to include
benchmarking against industry peer groups (The Economist, 2008).
There are also differences within Europe itself. Scandinavian and
Netherland executives are paid less compared with counterparts in
France, Belgium and UK (Fernandes et al., 2010).
Most recently there have been regulatory and interventionist efforts
to keep board compensations at a reasonable level in austerity-directed
environments. However, globally, the trend among prosperous Asian
and Gulf countries is to offer higher packages. The Asian board salaries
have already surpassed European executive compensation in 2010 and
forecasters expect typical remunerations to surpass that in the United
States by 2013 (Mercer, 2011). The conflict of interest is that if board
members are individually financially motivated, then protectionist
networks and lack of transparency will persist in restricting interests
of wider stakeholders and longer-term renewal. This posits an urgent
need for reforming compensation structures of boards beyond elitism,
in favour of transparent, accountable sustainable renewal.
Complementary to experience, education and learning may facilitate open-minded values and enhanced knowledge within the boardroom. Leadership qualities and skills go beyond those of management.
Leadership drives the flow of vision within the firm whilst positioning the firm in context of externalities. The charisma, confidence,
approachability and integration of board members as individuals collectively create the leadership team. A study of Fortune 500 CEOs’
educational backgrounds found that 163 CEOs do not hold advanced
degrees. Almost an equal number, 165, hold MBAs (Forbes, 2012b).
Regardless of the educational qualification of the CEO, both groups
contribute equally to shareholder median total revenue (Forbes, 2012b).
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This suggests that CEOs have equal opportunities or that there are
social strata ties of networks that informally feed the leadership process (Nguyen, 2012).
Irrespective of experience and educational background, the turnover among the Fortune 500 and S&P 500 board members increased to
12.3% in 2011. This is almost the same as the 2008–2009 recession
level of 12.7% (Crist Kolder Associates, 2011). Forbes (2009) estimates
that 40% of new CEOs depart within 18 months and 64% leave within
4 years of their appointments. The associated costs to the firm are in
the millions for small corporations and tens of millions for large corporations. A gap in succession planning for the CEO role and sensible
transition for the firm remains elusive (Katz, 2012). The planned succession of chairperson role has also come under the spotlight in UK
firms (Spencer Stuart, 2011a). This is most recently exemplified by the
resignation of British Broadcasting Corporation’s (BBC) director general
George Entwistle in 2012. He was in the job for 54 days and took a year’s
salary of £1,000,000 following his resignation. The question arises as
to how corporations negotiate these individual contracts and why the
stories only emerge in crisis, beyond legal reprise and contractual obligations. The networking twist emerges that the new director general is
receiving guidance from Rupert Murdoch’s son-in-law (The Spectator, 13
November 2012).
The underlying reason for CEOs’ replacement is a failure to fit within
the organisation’s cultural context and the rejection of, rather than a
lack of competencies and capabilities (Forbes, 2009). The relationships
and dynamics between board leadership, board members and their
connectedness with internal organisation and alignment with external
markets become critically important.
Board leadership is a personal and cohesive fit within the organisation that impacts board performance. In either single or dual boards,
appointments should seek a good fit with other board members and
the firm’s cultural context. Leaders should be long-term visionaries
(20 years plus) with a balance of practical skills and open-minded
qualities to enhance holistic performance. The dual board structure
offers independence of mind, which should avoid compromise due to
multi-directorship interests. Incentivisation of leaders may be better
structured in advance and linked to longer-term targets of achieving
sustainability and innovating rather than short-term financial targets.
Furthermore, leaders’ succession plans should be implanted to allow
smooth transition.
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Cultural dynamics
Researchers, through archival and survey data, have mainly studied board performance through three sets of variables: input (board
size and composition); process (board meetings and fiduciary tasks);
and output (organisation’s financial performance, reputation, etc.).
Regardless of the research approach, the findings remain inconclusive (Bhagat and Bolton, 2008; Dalton and Dalton, 2011; Dalton
et al., 1998; DeRue et al., 2009). More pressing is that board effectiveness research is lacking in true behavioural studies (Clarke, 1998),
in understanding board cultural dynamics and politics (Huse, 2001),
along with individual corporate organisational contextual studies
(Pye and Pettigrew, 2005). Furthermore, the majority of studies that
have investigated board performance do so through a single theoretical model of corporate governance (agency theory, Fama and Jensen,
1983; resource dependency theory, Pfeffer, 1972; Pfeffer and Salancik,
1978; stewardship theory, Donaldson, 1990; stakeholder theory, Blair,
1995; Freeman, 1984).
In international markets the corporation is subject to country-specific
conceptions of corporate purpose (Hofstede et al., 2010). The expectation of how the corporation achieves its objectives follows along the
line of ‘concessionist’ and ‘communitarian’ thinking. ‘Concessionist’
thinking environments emphasise maximisation of shareholder value
as a primary board goal (Monks and Minow, 2004). The prominent
developed nations that reflect this approach are Anglo-American capitalistic countries such as the United States, UK, Australia and Canada.
Some developing countries moving in this direction include Brazil,
India, Korea and Malaysia. Irrespective of rising global social awareness during the 1990s, exemplified in the emergence of corporate
social responsibility (CSR) reporting, the Dow Jones Sustainability
Index and the FTSE4Good Index, along with philanthropic practices
(Porter and Kramer, 2011), the shared corporate purpose among the
Anglo-American countries remains intact – ‘maximising shareholders’
value’ (Friedman, 1970). The ‘communitarian’ approach prioritises the
interests of all stakeholders, of which shareholders are an important
group among the wider group of employees, creditors, suppliers, environment and other constituents as the ultimate goal of the corporation
(Freeman, 1984; Freeman et al., 2010; Monk and Minow, 2004). The
contexts for this more inclusive approach include Continental Europe,
Scandinavia, Japan and some developing nations such as South Africa.
Consequently, the role of board of directors varies from one country
to another (Pierce, 2011).
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In addition to national cultural contexts, prevailing industry and sector conditions or politically driven governance regulatory forces influence the boardroom decisions at the macro level. At the micro level,
the firm adopts a position within the marketplace engaging internal
controllable mechanisms which include resources, skills, teamwork
and unique capabilities. The combination of these cultural dynamics
defines corporate organisational lifecycle stages, ownership patterns
and the board dynamics (Luo, 2007; Minichilli et al., 2012; Pye and
Pettigrew, 2005). Together these reflect the philosophy, values and morals that shape the company’s culture and more specifically, the culture
and communication within and beyond the boardroom.
This makes board connectedness the bedrock for corporate sustainability (Deal and Kennedy, 1982; Nadler, 2004). This very much depends
on boards’ member capabilities, character, personality and their interpersonal dynamic synergies (Kakabadse and Kakabadse, 2001; Pierce,
2011). Whatever perspective one takes as a starting point for assessing
board performance (macro; micro determinants), it is important to
acknowledge that the board evolves over time and so it is the culture
and characteristics of boardroom dynamics among its members that are
continuously changing.
In parallel to the academic classical board performance studies
(Sonnenfeld, 2002) is the practice of board evaluation (Long, 2006). The
rationale for this has emerged from the wider international debate concerning corporate governance, board performance and director professionalism (Ingley and Van Der Walt, 2002; Van Der Walt and Ingley, 2003).
Over time, boards have come under increasing pressure to do more than
just fulfil their fiduciary duties. More importantly, academics have concluded that existing explanations of board effectiveness, which include
board structure and independence of directors have little or no explanatory or predictive capacities (Tricker, 2009). Statistics from 2007 revealed
that 75% of the UK FTSE 350 boards were evaluated externally by committees at least every three years (UK Corporate Governance Code, 2010).
Comparatively, this practice was less popular within North American
(only 45%) and Japanese firms (30%) (Korn-Ferry, 2007). However, independent board evaluation has become a regulatory requirement in countries such as the UK (2010), Australia (2010), France (2008) and Belgium
(2009). The current issues are whether self-evaluation or independent
evaluations are actually facilitating transparency and whether boards
fully understand the effectiveness of these evaluations?
The current problem is that even independent evaluation is not
truly independent. Dutra (2012) asks, ‘Who really gets to evaluate
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boards? Is it directors evaluating themselves and to what extent is this
credible?’ The success of boards’ cultural dynamics may elevate when
individual character and behaviour aligns between board members
in connection with internal, industry, national and global influences
from which they can extract value. In the current business climate,
corporate global connectedness is at its highest level; however, many
companies fail to align the internal and external cultural contexts
within their board as the failure of Kodak exemplifies (Forbes, 2012c).
Similarly, the synergies between owners, board members and their
senior management require special attention as executives might
manipulate and filter the information. One senior manager at Xerox
explains, ‘I was never allowed to present to the board unless things
were perfect … you could only go in with good news. Everything was
prettied up’ (Charan and Useem, 2002).
The Global Competitiveness Report (2012) ranks board efficacy and
the results show that the leading country is South Africa, which ranks
first out of 144 countries followed by New Zealand and Singapore.
Australia ranks fourth out of 144 countries, whilst the Scandinavian
countries rank higher than their European, North American, Asian and
South American counterparts in decreasing order.
Board committees have also emerged to monitor agent misbehaviour
and protect the stakeholders, including the shareholders. For instance,
remuneration and nomination committees have developed for the purpose of eradicating higher CEO compensation and for more transparency of the recruitment process, mainly after the corporate scandals
(Higgs Report, 2003). Similarly, firms embraced audit and CSR or ethics
committees to gain the minority shareholders’ and stakeholders’ credibility. Currently, boards committees are of a great importance to the
overall board performance.
Therefore, we suggest that board efficiency needs to determine board
culture dynamics in balancing the synergies between board directors
(independent and executives), CEO interrelationship and other board
committees. Also, the decisional corporate body should know the firm
inside out, namely, the boards need to have profound understanding
of the corporate organisational context (understanding corporate), and
its external environment knowledge (country culture and perception
of corporate role ‘purpose’, and a deep understanding of industry and
peers). Most importantly, boards’ directors need to act like owners in a
sense where they have specific roles in driving the corporate strategy
and risk management decisions (Wong, 2011).
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Sustainable jugaad innovation
In an increasingly populated world, globally expected to exceed 9 billion
by 2050 (United Nations, 2009) the current major boom is in urbanised
living. Whilst currently 50% of world population are in cities, statistics indicate that 7 out of 10 people will live in cities by 2050 (World
Health Organization and United Nations Habitat, 2012). In meeting the
demands of our rising megacities, we seem to be pushing the limits of
our naturally available resources (energy, water and commodities) and
we witness patterns of rising natural disasters, such as the Indian Ocean
tsunami of 2004, the 2010 earthquake in Haiti and the 2011 tsunami
in Japan. The combined impact of population rise, scarcity of resources
and patterns of natural disasters are a cry for corporations to behave in a
more ‘green’ and sustainable manner reflecting the ecological pressures
on our planet. At the same time, the economic impact on markets and
consumers of the global financial crisis of 2008 seems to be one of longterm recession. This leaves firms with contracted markets, consumers
with limited spending and governments with reduced fiscal contributions. Hence, corporations are faced with a new consumer trend which
has shifted from a demand for high quality over engineered goods to
products /services that are more eco-friendly and reasonably priced for
functionality (Radjou et al. 2012).
The combination of a need for innovation and growth pressure for
sustainability suggest that corporations should engage in jugaad innovation as a long-term vision. Whilst some successful corporations,
such as Renault-Nissan, GE, Procter & Gamble, PepsiCo and Siemens
are excellent examples of companies that have embraced jugaad innovation, the term is still nascent for the majority (Radjou et al., 2012).
A Hindi word, jugaad means a creative idea or a quick alternative way
of solving or fixing problems. India has practiced jugaad for many
centuries. However, only recently has Western management literature
popularised this concept. Larger corporations and developed nations
are looking at this notion and are starting to introduce it into their
environments and cultures. At the heart of this concept is the ability to innovate cost-effectively and sustainably under severe resource
constraints (Radjou et al., 2012). We often associate the concept with
innovations such as the nanocar at $2000, the Aakash Tablet PC at
$50, the 1 cent /minute mobile phone call and the $25 water purifier. Whilst the simplest interpretation is ‘creative improvisation’, the
deeper understanding appreciates that jugaad requires knowledge and
wisdom and is really more of a mindset. Radjou et al. (2012) have
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proposed four principles for the application of jugaad within Western
corporations. These are:
1. Thrift not waste – Tackle scarcity of all forms
resources.
Do More With Less
2. Inclusion, not exclusion – Enterpreneurial
organisations need to put inclusiveness into
practise by tightly connecting with, and harnessing the growing diversity that permeates
their communites of costomers, employees and
partners.
Keep it Simple
3. Bottom-up Partipation,not top-down command and control – Collaboration. CEOs who
tend to act as conductors must learn to facilitate collaborative improvisation just as jazz
band players do.
Follow your Heart
4. Flexible thinking and action, not linear planning – Flexibility in thinking and action jugaadpracticing firms are highly adaptable as they
aren’t wedded to any single business model and
pursue multiple options at any time.
Think and Act Flexibly
Source: Complied from Radjou et al. (2012).
Global problems contextualised in India
India is one of the BRIC nations. It is the seventh largest nation in the
world by landmass (3.2 million sq. km) and has a population of 1.2
billion people (Asian History, 2012), giving it a population density/
landmass of 375. This makes the current global population (7 billion)
to landmass (150 million sq. km) concern less of a problem (population density/landmass of 46.6). More interestingly, the difference is that
India is one of the fastest growing economies with an average growth
rate of 5.8% over the last two decades and it has the world’s second
largest labour force with 487 million workers. Since 1985, 430 million
people have come out of poverty. There are still fundamental problems.
For example, 46% of children under three suffer malnutrition and India
still has the largest concentration of people living on less than $1.25 a
day. However, economic indicators show that India will overtake China
as the most populous country in the world and PricewaterhouseCoopers
(2011) has forecasted that it will overtake the United States in terms of
gross domestic product (GDP) and purchase power parity (PPP) by 2045.
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Economists expect the growth rate to remain at 8% over the next four
decades. India is already the largest democracy in the world and by
2050 it will be the world’s fastest growing economy.
If we consider the above facts and extend them to the global scenario, it reflects that jugaad may have huge potential on a larger scale.
Importantly, jugaad is a bottom-up approach where even the CEO must
embrace this mindset. From the concept of jugaad, the term ‘frugal engineering’ has emerged. Renault-Nissan CEO Carlos Ghohosn coined the
term in 2006 after seeing Indian engineers in action. Over the last six
years, Renault-Nissan has applied this term in the development of electric cars, and other companies have gradually acknowledged it more as
a social phenomenon. Most recently, Prahalad’s (2005) analysis of the
bottom of the pyramid questions why for the last 50 years the World
Bank has not been able to solve the poverty problem. At the same time,
new base of the pyramid (BoP) solutions are fast emerging.
In view of the holistic global population and resources problem forecasted into the future and the potential solution in the form of sustainable jugaad innovation, we propose that corporate boards receive
jugaad innovation training and practice this within their organisations. Sustainable jugaad board effectiveness requires open-minded
top management to connect with base level players and connect sustainable innovation with capital for effective solutions. Critical to this
is trustworthy open relationships, mutual respect and understanding,
deeper interconnectedness and amazing results. In the resource-constrained environment Renault-Nissan’s CEO proposes that the way
forward is to:
1. Create ‘good enough’ products that deliver high value for money;
2. Foster healthy rivalry among global R&D teams;
3. Tap partners in emerging markets who excel at innovating more
with less; and
4. Send your top executives to emerging markets to cultivate the jugaad
mindset.
As well as engaging customers and developing innovation partnership (IBM, 2012), sustainable jugaad innovation requires empowering
employees and mobilising knowledge collectively.
Sustainable jugaad innovation needs to be top priority for boards to
drive the corporation forward with a long-term evolving vision in support of the societies of 2050. Yet, collaborative partnerships beyond the
firms and change of mind set within the firm must merge at board
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level. Then, the base of the pyramid will open up a whole new world of
opportunities.
Learning from the literature findings
The literature suggests that board diversity presides in board demographics, namely, age, gender and ethnic origins. Regulation mainly
drives the fact that currently boards focus on gender equality. Thus,
in the future we might see regulations that will foster age equality and
nationality balance as the majority of Western nations are ageing and
businesses are increasingly global. Currently, there is lack of transparency in the appointment process. Whilst age equals higher experience,
which has its benefits, it still seems odd that established boards are not
open to the younger talent pool. This may be why people opt for the
entrepreneurial route instead. Take, for example, the English business
magnates Richard Branson and Alan Sugar. Whilst leadership compensation and separation of ownership still top the list of issues within
leadership, new concerns are emerging, namely, succession as boards
increasingly suffer from high CEO turnovers. In this respect, leadership
education and connectedness becomes greatly important for leaders’
appointment.
The literature, however, has paid little attention to cultural dynamics
in a country and organisational context, along with the boards’ interpersonal skills. Similarly, board culture dynamics, and the emergent
issues of sustainability require greater board attention and investment
in sustainable jugaad innovation to thrive within the next 50 years.
Hence, this chapter tackles the main deficiencies within the boards
through proposing a framework for boards to reinvent themselves.
Boards reinventing themselves framework
Building on ‘the secret to boards in reinventing themselves’, we rely simply on their ability to balance the four elements of leadership, diversity,
cultural dynamics and sustainable jugaad innovation (see Figure 4.1).
These factors determine board relationships and dynamics. The pressures from within the company and from the firm’s macroeconomic
environment necessitate management and boards to sustainably innovative to drive business for the next 50 years.
Balancing the board effectiveness scoreboard
In Table 4.4 we provide a weighting that translates into a 12-point evaluative scoreboard where diversity has a maximum possible 3 points;
The Secret to Boards in Reinventing Themselves
External
Environment
Shareholders
117
Society
Firm
Boards
Sustainability
Innovation
1. Diversity
2. Leadership
3. Culture dynamics
4. Jugaad Sustainable
Innovation
Sustainability
Innovation
CEO
Management
Figure 4.1
How to make boards work
Source: Compiled by the authors.
leadership has a maximum possible 5 points; cultural dynamics has a
maximum possible 2 points; and jugaad effectiveness has a maximum
possible 2 points. Emerging from the literature review, we have identified the criteria for awarding points as Table 4.4 illustrates. The higher
the board scores, the more balanced the board.
Testing the model
To validate our framework we have used it to analyse a small selection
of 16 firms from within the ‘Global 100: World leaders in sustainability’
list. This corporate sustainability list captures the data of firms with more
than $2 billion market capitalisation and ranks them based on disclosed
information using key performance indicators (KPIs). This annually produced list is available at http://www.global100.org/. We reduced the list
of 100 companies by selecting corporations older than 50 years and then
dividing the firms into six regions: Scandinavia, Europe, Africa, Central
and South America, North America, and Asia (Figure 4.2).
Where there was more than one country within the region we
included the oldest corporation from each country in our sample. This
left us with 16 firms against which to test our framework (Table 4.5).
Our sample companies belong to the global 100 most sustainable corporations in the world. The criteria of this global 100 list consists of
key performance indicators which assess firms’ environmental effects
such as energy, carbon, water, waste productivity and firm’s capacity
118
Ouarda Dsouli et al.
Table 4.4
Characteristics for making boards work
Characteristic
Evaluation criteria
Measure
Points
1 Board
diversity
Female gender
Balance
Internationalisation
Above 30%
Mix of nationalities
Or (Foreign board
members that are not
American or European)
Board members under
the age of 40
1 Point
1/2 Point
(1 Point)
1 Point
Age diversification
2 Board
leadership
Leadership structure Unitary boards with
– Board independence board independency
between 50–70%
Or (Dual boards with
board independency
between 25 and 50%)
Leadership
Average board
qualification –
member education 2
average board
qualifications+1 leader
education
(CEO/Chairman) holding
at least 3 qualifications
Or (Average board
member education 2
qualifications+1 leader,
holding more than 3
qualifications and/ or
board comprise nonqualified members)
Leadership
One/both leaders are
connectedness
connected to more than
200 individuals and
sitting on no more than 3
boards currently
Leadership succession
Corporate with either
Vice Chairman and/
or Deputy Chairman
are suggested to allow a
smoother transition
Responsible CEO
Link compensation to
compensation
sustainability innovation
(targets achievement
for reduction of CO2
emission, eco friendly
strategies -production,
and investment in R&D)
1 Point
(1 Point)
1/2 Point
(1 Point)
1 point
1 point
(Continued)
The Secret to Boards in Reinventing Themselves
Table 4.4
119
Continued
Characteristic
Evaluation criteria
Measure
Points
3 Board
cultural
dynamics
Employee
representation
Boards’ social
responsibility and
committees
1 Point
½ Point
1 Point
4 Sustainable
jugaad
innovation
Innovation budgets
33% employees as board
members
Boards with minimum
of three committees:
audit, remuneration,
compensation
Or (Boards with 3
committees highlighted
above and CSR
committees)
Investment of 5% of
revenue in Research
and Development and
renewable energies
Boards need to be
more aware of their
environment. They need
to invest in renewable
energies and cut their
emissions (1 Point)
Sustainability
Total
1 Point
1 Point
12 Points
Source: Complied by the authors.
1 Company that
existed over 50 years
1 Country
1 Region
Figure 4.2
Selection criteria
Source: Compiled by the authors.
to innovate. The metrics also consider employees’ safety, turnover,
pension fund, in addition to factors of leadership diversity and links
between board compensation and average employee pay – responsible compensation. This ties the firm to the notion of clean capitalism
and its ability to be environment-friendly. The Global 100 also comprises the percentage of tax that the corporation pays. Apart from the
120
Ouarda Dsouli et al.
Table 4.5
Sample for model testing
Anglo-American
Platinum
South Africa
Petroleo Brasileiro sa
Brazil
Komatsu Ltd
Japan
Accionasa
Spain
Seimens ag
Germany
Sainsbury’s
UK
Schneider Electric
France
Omv ag
Austria
Swisscom ag
Switzerland
Phillips Electronics
Netherlands
Suncor Energy
Canada
Stockland Trust
Group
Australia
Storebrand asa
Norway
Johnson Controls Vestas Wind Systems Atlas Copco ab
U.S.
Denmark
Sweden
Source: Selected by authors from Global100.org.
sustainable jugaad innovation criteria and the responsible compensation, which are controlled by the global 100 ranks, data have been collected from Board EX database. Hence, for companies that rank in the
global 100 top quartile score 2 points, the ones that rank between 50
and 75 score 1.5 points, the ones that rank between 25 and 50 score 1
and the ones that rank in the bottom quartile score 0.5 point.
Findings
The application of the scoreboard to our sixteen boards suggests that
boards have strengths and weaknesses within different regulatory
environments and industries. Three companies overall are good in all
model components. These are Anglo American, Vestas Wind Systems
and Acciona. The rest of the companies are good in one aspect of our
criteria or the other (see Table 4.6). Similarly, some regions are adopting balanced board practices as is the case for Scandinavian countries, followed by the European boards and then the Americans. The
Scandinavian companies achieve almost half of the target points in
each of the constituents whilst the European companies are slightly
below that. North American companies are, on average, good in achieving balanced board leadership; however, they need to focus more on
board diversity. Suncor Energy Inc. was the only company to score 0.5
point in the board leadership out of the American firms. The company
had non-nationals within the board whilst the rest of the companies
scored zero. This also applies to the Brazilian firm. In our study, the
South African company tops the list and the Japanese firm scores lowest
and is far behind.
2
½
Austria
Switzerland
Netherlands
Omv ag
Swisscom ag
Philips Electronics (koninklijke)
1
½
Australia
US
Suncor Energy Inc.
Stockland Trust Group
Johnson Controls Inc.
Sweden
Norway
Atlas Copco ab
Storebrand asa
Source: Compiled by the authors.
Average Scandinavian Countries
1½
Denmark
Vestas Wind Systems a/s
1.8
2½
1½
0.5
Average North American Countries
0
0
1.3
Canada
Average European Countries
1
2
UK
France
Schneider Electric
½
2
0
0
2½
Board
diversity
Sainsbury’s
Spain
Germany
Japan
Komatsu Ltd
Siemens ag
Brazil
Petroleo Brasileiro sa
Acciona sa
South Africa
Country of
incorporation
Anglo-American Platinum Ltd.
Table 4.6 Results
2.2
1½
2
3
2.3
2
2
3
1.8
1½
2
1
2
2
1
3
1
2
3
Board
leadership
1.2
1
1
1½
0.7
½
½
1
0.9
½
1
1½
1
1
½
1
0
1/2
1
Culture
dynamics
1.5
1
2
1½
1.2
1
1
1½
1.4
2
2
1
11/2
1/2
1½
1½
6.7
6
6½
7½
4.3
3½
3½
6
5.4
5
5½
5½
6½
4½
3½
7½
2
3
½
1
8
Total
1½
Jugaad
innovation
122
Ouarda Dsouli et al.
Discussion
Board diversity
The findings suggest that some firms are more highly diversified than
others. For instance, Storebrand ASA, Anglo America Platinum Ltd. score
2.5 points each, whilst some others achieved zero points. These included
Stockland Trust Group, Johnson Controls Inc, Petroleo Brasileiro and
Komatsu. This suggests that whilst diversity is common practice within
some firms, it is almost absent within other firms (Table 4.4).
The board members average age in our 16 selected firms is equal
to 59.53 years. This confirms the literature findings (Spencer Stuart,
2011b, c, 2012a, c) (Table 4.2). However, some companies seem to perceive the importance of injecting new blood into their boards. For
example, five boards out of the 16 have board members below 40 years
old. The youngest was 32 and this was an employee representative with
no qualifications within Storebrand, Norway. The second youngest was
a 37-year-old Emirati with three qualifications within OMV Ag-Austria.
The third was a 38-year-old male with two qualifications within the
board of Vestas Wind Systems, Denmark. The others two were 40-yearold females from Schneider Electronics (France) and Anglo-American
Platinum (South Africa). Also 10 out of 16 youngest board members
were comprised of females. This suggests that females are making their
way into the masculine board world.
In terms of internationalisation, only three companies have board
directors who belong to non-European and American countries. There
is one South Korean within the Schneider Electric (France) board.
Two others were females, one Indian within the Phillips Electronics
(Netherlands) board and an Emirati within OMV Ag (Austria).
In terms of gender representation, only five out of 16 firms had
female representation of 30% and above. Among these two were
European: Sainsbury’s with 33.3% and Acciona with 44.4%. Two
were Scandinavian: Storebrand with 44.4%, topping the list of female
representation. This confirms the literature findings (GMI Ratings,
2012a). Next was Atlas Copco with 33.33%. The African company,
Anglo-American Platinum, achieved 40% female representation. Men
dominate the Japanese Komatsu board. They are representative of the
typical old boys circle with board average age of over 70 (Edling et al.,
2012). This also applies to the US Johnson Controls and the Brazilian
Petroleo Brasileiro, which have female representation of 10% with the
youngest board member age above 52 years. Vestas Wind System is the
only Scandinavian firm that has 25% gender board representation. The
The Secret to Boards in Reinventing Themselves
123
results confirm the GMI Ratings (2012a) and Catalyst (2012) findings
(Table 4.1).
Board leadership
The firms also face issues with respect to the board leadership and board
independence. Five out of 16 firms adopt the single structure. These are:
Acciona, Schneider Electronics, Philip Electronics, OMV and Johnson
Controls. Out of these five companies, three have board independence
above 70% apart from OMV, which has board independence of 25%.
Among the remaining 11 companies which have dual leadership, five
companies rely more on independent directors. These are Storebrand,
Sainsbury’s, Schneider Electronics, Vestas Wind Systems and Suncor
Energy. This suggests that mostly boards rely heavily on independence
of members, which implies a high possibility of the lack of inside knowledge of the business (Lorsch, 2009). This might be quite detrimental for
the business, especially for the ones with single board structures.
Whilst the majority of boards are well connected, multiple directorships are still an issue among all firms within this sample. Each firm
had a minimum of one board member who sits on four or more current
boards with a maximum of six board directorships. Among our sample, one female director was sitting on six boards. The director represents the Swedish Atlas Copco ab company, which brings to surface the
issue of multiple directorships to the forefront (Vinnicombe and Sealy,
2012).
On balance, regarding board leadership education and average qualifications, almost half of the firms in the sample scored 0, i.e. seven firms
scored 0. Six out of these have an average board education below 2 qualifications. This suggested that the non-transparent board appointment
process might, to some extent, influence boards (Kakabadse, 2011). In
this respect, the board member recruitment process remains a concern.
For example, Petrobras Petroleo (Brazil) has directors who have previously served as ministers before becoming directors of this corporation.
Whilst we commend Petrobras for appointing the first-ever female CEO
of an oil and gas company – Maria das Gracas Silva Foster – it is not a
coincidence that she is a lifelong friend of the president of the republic
of Brazil, Dilma Vana Roussef.
Also out of the five companies with single board structure, only one
company, US-based Johnson Controls, has no succession leadership
(vice chairperson/ deputy chairperson) and 100% board independence.
This implies a high transition risk in the event that the CEO steps down
(Katz, 2012). The other company that is at risk within this category
124
Ouarda Dsouli et al.
is Komatsu (Japan), as the board members have, overall, low levels of
education, no succession plans and very low connectedness. Although,
Stocklands (Australia) has a dual leadership structure, the company
might be facing succession issues, as its current CEO is retiring next
year and he is only the corporation’s third CEO in 60 years.
Board cultural dynamics
The results show that six out of the 16 firms have employee representatives on boards. Also the majority of the firms have a minimum of two
boards, except for the Japanese firm Komatsu, which has neither committees nor employee representatives.
Siemens AG is the only board with an employee representation of
50%, within which eight out of 10 representatives have no educational
qualifications and two of these are females. This reflects the communitarian thinking embedded within the German system (Freeman, 1984;
Freeman et al., 2010). On the other hand, the Anglo-American countries, such as the United States, UK, Canada, Australia, and the Spanish
and South African companies have no employee representation which
suggests the ‘concessionist’ shareholders thinking (Friedman, 1970).
The result shows that even the most sustainable and innovative firms
in the world hardly achieve the balanced boards’ structure which the
framework proposes. Whilst a small number of companies succeed in
reaching more than one aspect of the balanced boardroom, other firms
still have a long way to go. This reinforces the literature findings and
suggests a need for openness in boards to reinvent themselves.
Limitations
Although we conducted this study using a small sample, the results
could be very useful in identifying potential trends or as a pilot for
a larger-scale and more extensive macro comparison. Thus, currently
the study results apply to the small scale sample rather than being
more generally applicable (Dion, 1998; Lakatos, 1978). Other study constraints were those of time and availability of relevant data for analysis.
The non-availability of percentage of investment in R&D and renewable
energies restricted the sustainable jugaad innovation measure. Thus, the
limitation translates to the reliance on the Global 100 measures for sustainable jugaad innovation and responsible CEO compensation.
The application of our model for making boards work goes beyond
an evaluation tool to more of a framework to guide board behaviour
towards achieving balance in a wider context. We can tailor its range of
The Secret to Boards in Reinventing Themselves
125
application to different environments, industries and change scenarios
where the board seeks to develop transparent and trustworthy board
practice. In our sample test, the model is from a Western perspective,
where Eastern corporations may prefer to adopt greater emphasis on
cultural dynamics items in their approach. This leaves the adoption
of our framework open to context of application via use of the drivers:
diversity, leadership, cultural dynamics and sustainable jugaad innovation as tailorable measures. This could also account for the Japanese
firm Komatsu’s low score where internal and external values are different and more embedded within the culture. In this case, the board
could endogenously achieve balance. We suggest that other studies may
engage the model with different weightings appropriate to the firm’s
environment or circumstance.
Conclusion
Anglo-American Platinum typifies the exemplar role model company
for this study. We could link this to the charismatic, insightful and
determined personality of the chairman of its parent company, Anglo
American. However, the firm’s board members lack true internationalisation, as British and American members dominate. Furthermore,
the firm shares multi-directorships with leading companies such as
B.P., National Grid or Citigroup (British/American firms), which might
be detrimental for the business’ future competitiveness. Acciona is the
leading company within the European firms. This Spanish company
is listed as one of the most innovative companies in the world within
Booz & Company’s 2012 Global Innovation 1000 list (La Informacion,
2012). It is also a leading company in sustainability. Acciona has ranked
number one in its sector on the Dow Jones Sustainability Index for the
last six years (Acciona, 2012). This suggests that the company might
be benefiting indirectly from the expertise of politicians, as Miriam
Gonzales Durantez, wife of the current UK Deputy Prime Minister
Nick Clegg, sits on the board. She also happens to be the daughter
of a Spanish minister (Prince and Winnett, 2010). The Danish Vestas
Wind System is the leading firm amongst the Scandinavian firms;
however, the firm suffers from low gender balance (25% female
representation).
The patterns of findings through the application of our scoreboard
offer insight into the boardroom practices from a new perspective.
In comparative regional analysis, we find differences due to regulatory and cultural influences. For instance, Scandinavian firms scored
126
Ouarda Dsouli et al.
overall high in all components with 6.7. However, it is interesting to
note that whilst all Scandinavian firms have employee representation,
none of them have CSR committees in place. This suggests that social
responsibility may be embedded within the national regulation or
social culture. The European firms collectively scored an average of 5.4.
However, at component level, the average scores are low. This suggests
that European firms may pay more attention to board diversity and
leadership – the dominant features in our test case. This reflects that the
cultures of these countries either are reluctant to change the ‘preserved
culture’ or simply, they are resistant to the Americanisation of board
practice. Whilst the American firms topped the list with an average
of 2.3 in board leadership, they still have a long way to go in developing the diversity of their boards. Whilst history implies that Americans
were the first movers in fostering equality and democracy principles,
the diversity is nascent within the studied firms, apart from Suncor
Energy which had non-nationals within its boards. All three firms have
no female representation and no younger representation within their
boards. Hence, it seems that regulatory pressure is forcing corporations
to change behaviour rather than boards being pro-active. Our findings
reflect a pattern of slow forced change of diversity rather than pro-active boards’ stakeholder representative desires.
In the current business climate it seems that boards are unable to
readjust their firms for growth. Therefore, we propose within this
chapter that change needs to come from the CEO and board members. Boards should be regularly challenging their own perceptions
and questioning from a moral as well as an economic perspective. One
way to this is by reinventing themselves. Hence, this chapter focuses
on boards’ most vulnerable aspects and proposes guidelines to tackle
these deficiencies.
In this respect, to be sustainable in reinventing themselves, boards
needs to recognise that they are accountable and responsible for the
firms that they lead. An important part of this is a shift of the mind set
from one of hierarchical power and dominating competitive struggles
towards open-minded collaborative understanding. Board members
have to take a risk and open the doors to their boardrooms. Boards
need to understand that it is not about being the best and leading by
dominating, but it is more about delivering value to society, renewing
effective solutions to everyday problems and building a self-sustaining
world for tomorrow that will drive their firms for the future. The way
forward is to extend this nascent initiative and daring to think differently about the future.
The Secret to Boards in Reinventing Themselves
127
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5
Reinventing Board Effectiveness:
From Best Practice to Best Fit
Lutgart Van den Berghe and Abigail Levrau
Does compliance with corporate governance
codes lead to effective boards?
Although governance codes and best practice recommendations
have had a great deal of positive impact, we should not be blind
for some of the downside effects as well.
Codes of best practice have had a great deal of positive impact on
boards, directors becoming more active and empowered, taking their
jobs more seriously. Boards are not the cosy enclaves they used to be.
Directors are getting tough(er) with CEOs today, asking critical questions and demanding answers from management. Moreover, boards
face much greater pressure from the public, the government and the
shareholders.
Governance codes comprise reasonable recommendations, not in
the least to cope with the painful memories of the numerous corporate
failures and excesses. However, they also have serious flaws and unintended outcomes, which inevitably cause serious problems which can
possibly diminish governance effectiveness. The time is right to face the
limitations of these codes of best practice.
Board effectiveness goes beyond ‘visible’ factors
put forward by codes
Emphasis has been too focused on externally observable governance elements. Most of the recommendations for change are coming
from external groups, such as institutional shareholder groups, trade
federations and regulators. Consequently they focus on those characteristics of boards that are visible to outsiders, typically the measurable
input factors. They say little about what should actually happen inside
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the boardroom, and as a result have too little substantive effect on governance. Focussing on what is visible may be the best way to put public
pressure on boards to focus on ‘improvement’, but it misses the essential fact that these visible factors have rather limited impact on board
effectiveness. The problem is that the existing scoring metrics and
monitoring studies do not really come to grips with the very complex
and dynamic reality. We should not forget that the real action takes
place in the boardroom itself. It is time to regard boards for what they
really are: complex social and political systems (Crainer and Dearlove,
2007). What is measurable (board input indicators and formal procedures) may matter far less than what is not readily measurable (competencies, governance attitude and behaviour). Indeed, understanding
how boards work is not a simple task. Great boards do not work together
by accident, magic or happenstance. If grasping how an individual will
behave is difficult, the complexity involved in understanding how a
group goes about overseeing the operations of organisations, often
comprising hundreds or thousands of individuals, is daunting.
It is important to move beyond simplistic indicators that can be put
forward as mere window dressing or check-listing. We need to investigate the underlying character of the governance practice in all its
dimensions.
Fancy statements about the company’s corporate governance practices may look good in the annual report and make some shareholders feel good, but they don’t in and of themselves make boards more
effective (Carter and Lorsch, 2004; Conger, 2009).
Superficial checklists or window dressing about good governance are
problematic (Sonnenfeld and Ward, in Conger, 2009). It is even stated
that conventional wisdom about good governance can actually undermine governance effectiveness.
Unfortunately, codes have unintentionally triggered a kind of ‘box
ticking’ approach. In particular, this method is the reference for many
external analyses. Although there are a myriad of indicators of good
governance, governance ratings neglect key board process issues and
leadership integrity. Our previous research already highlighted the
shortcomings of the external governance ratings (Van den Berghe and
Levrau, 2003), but also Richard Leblanc (in Conger, 2009) as well as
Jeffrey Sonnenfeld (2002) are very critical of this methodology. They
state that these governance scoring methodologies, such as the one
used by ISS, appear to be incomplete at best, and deeply flawed at worst.
Reinventing Board Effectiveness
139
Leblanc also points to the fact that externally measurable governance
scores do not reflect the leadership, the chemistry, decisions, information, reporting, competencies and behaviour of boards and individual
directors. The focus should be on process and the calibre of leadership
to reach the goal of effective decision-making, not just on structural
prescriptions.
A similar observation can be made with regard to the public monitoring of corporate governance codes. Market-wide monitors are commonly found in the member states of the European Union and engage
in two types of monitoring activities (see also Table 5.1):
(i) Availability check: verification whether companies declare their
adherence to the (national) code without assessing the quality of the
available information;
Table 5.1
Types of monitoring
Market-wide
monitoring parties
Financial market
authorities
Monitoring activities
Country (selected) examples
Availability check
Bulgaria (FSC); France (AMF);
UK (FSA)
Member states FMAs in
Belgium, Estonia, France,
Germany, Lithuania, the
Netherlands, Portugal and
Spain.
Informative value
Stock exchanges
Availability check
Informative value
Trade bodies
and professional
organisations
(= private parties)
Availability check
Informative value
Financial press,
analysts and
academics
Availability check
Informative value
Denmark (NASDAQ OMX
Copenhagen); Ireland
Stock exchanges in Denmark,
Estonia, Finland, Lithuania
and Luxembourg
France (AFEP-MEDEF); Spain
(Instituto de ConsejerosAdministradores); Sweden
(The Corporate Board), Italy
(Assonime)
Belgium (GUBERNA/FBE)
N/A
Source: Compiled from the study of Risk Metrics Group (2009).
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Lutgart Van den Berghe and Abigail Levrau
(ii) Informative value check: verification whether the information provided by the company enables market actors to make an informed
judgement about the companies’ corporate governance practices.
Our experience with monitoring the compliance with the Belgian
Corporate Governance Code for listed companies1 clearly illustrates the
relative value of such public monitoring. The code has been ‘dissected’
in its different variables, describing the numerous recommendations
and guidelines. On a total of more than 300 variables, only some 47
variables are publicly measurable data while some 34 variables need an
explicit declaration as to comply-or-explain.2 These statistics already
show that the vast majority of the Code’s recommendations cannot be
measured or evaluated from the outside. Moreover, analysing in more
detail the variables that can be monitored from the outside, they clearly
are limited to either input variables or formal procedure descriptions.
Examples of the first category are the number of board members, the
type of directors (executive, non-executive, either independent or not),
the presence of board committees, the number of board and committee meetings, the separation of chair and CEO roles, etc. Examples of
the disclosure of formal procedures are the obligation to publish a corporate governance charter, describing the governance structures and
the roles of the board and of its respective committees, versus those
of management and shareholders. Consequently, elements that are
completely missing from such public monitoring are the requirements
that the board should act as a collegial body, reaches decisions in the
long-term interest of the company, the duty of directors to perform
a professional job, to challenge the management in a constructive
way, etc.
Board effectiveness is no absolute given as codes might assume
Remaining for a moment with the public assessment of the governance
quality, another element that deserves further attention is the assumption that there is one set of best practices for all relevant companies. Most
national codes start from international references,3 which they adapt or
translate to their local situation. To this end, the ‘dominant governance
logic’ in that country (Van den Berghe et al., 2002) becomes the prevailing national reference framework for all companies concerned (either
listed or unlisted companies). However, governance practices do differ
quite substantially from one country to another. Even within a given
country the governance challenges companies are facing might be quite
different according to the shareholding composition, the structuring
Reinventing Board Effectiveness
141
of the governance tripod, etc. Nonetheless, national codes start from
one set of ‘best practices’, while the EU legislation obliges listed companies to carefully explain any deviation from these best practices. Such
approach leads to the perception that deviating from the best practice or
the so-called ‘cookie-cutter’ solution is a second best solution (Kerstetter,
2009).
It is possible to defend the opposite thesis, i.e. that deviating can be a
best in class practice if it leads to a best fit for the company in question.
This reasoning was also put forward by Sir David Walker in his final
report4 (see Figure 5.1).
Although everybody agrees nowadays that ‘one size does not fit all’,
the analysis of board effectiveness suffers from insufficient fine-tuning
of the governance approach to the real needs of the company. A number
of assumptions of traditional governance appraisals should therefore be
put into question. Based on a broad overview of the academic literature
as well as on our large board and board evaluation practice, the proposal
is to look for a tailored ‘congruence’ model. Indeed board effectiveness
should be defined from a system approach. The numerous components
of board effectiveness are highly interrelated, obliging a good fit with
the internal organisation (culture, people, systems) as well as with the
relevant external levels (dictating formal and informal norms and obligations). Therefore, an effective board will have an optimal fit between
the various internal and external elements taking into consideration
the roles required of the board (Nicholson and Kiel, 2004). Moreover, in
order to reach board effectiveness, we should search for a dynamic and
proactive approach where the board and governance model anticipate
the future challenges the corporate strategy and ambition pose to the
organisation. Directors should be vigilant for the triggers that indicate
The FRC has confirmed that the intended and correct interpretation is not ‘comply or else’ and that clear and well-founded explanations which support actions to enhance the long-term value of
the firm should be acceptable to shareholders … The suggestion of
moving from ‘comply or explain’ to ‘apply or explain’ acknowledges that there may be instances where it is in the best interests of
the shareholder for the philosophy underpinning a Combined Code principle to be met in a different way from that set out in the Code itself.
Transition of this kind would be a welcome development…
Figure 5.1
Extract from the Walker Report (2009)
142
Lutgart Van den Berghe and Abigail Levrau
the ‘next step’ in the governance development process and help tailoring and adapting the governance system to the firm’s future ambitions
and goals.
But foremost, attention should be given to a reality check on the
effective translation of best practices into action. Indeed, formal compliance with best practices does not always translate into action while
beliefs do not automatically translate into practice as intended. To this
end we cannot rely on the public monitoring but should couple such
external analysis with an in-depth internal analysis how to optimise
the governance structure, processes and board dynamics. The challenge
is to improve their effectiveness and contribution to the long-term success of the company. In reality, certain trade-offs will have to be made
between different governance options.
Making governance more effective supposes focusing much more
on the true value drivers offered by corporate governance
Codes for listed companies have traditionally been developed as a
reaction to corporate scandals or failures. We should therefore not
be astonished to observe that most of their attention goes to a more
robust monitoring role for the board of directors. The huge attention
for monitoring, control and risk oversight unfortunately often came
at the detriment of sufficient attention for the leadership, strategy and
performance side of governance. This trend was further exaggerated by
the attention paid to a formal compliance with the governance recommendations given the public monitoring of (part of) the governance
practice in listed companies. Many criticise this trend of overly engineering and formalising the governance approach.
A Belgian-experienced director, who is also chairman of the Corporate
Governance Commission, put it this way:
The boardroom is full of road signs, but no one wonders whether
directors are good car drivers! Governance has placed too much
emphasis on structure and insufficient attention to board room
behaviour; of course structures are much more easy to cure than
behaviour. (Herman Daems, De Tijd, 23 November 2010)
It is clear that in the last couple of years, pressure has mounted to pay
more attention to board behaviour. There is a common understanding
that an improvement in corporate governance will in essence require
behavioural change. This ‘change of emphasis’ is also promoted by the
Reinventing Board Effectiveness
143
Financial Reporting Council (2011). The UK governance supervisor
clearly states:
Boards need to think deeply about the way in which they carry out
their role and the behaviours that they display, not just about the
structures and processes that they put in place. Boards are encouraged
to consider how the way in which decisions are taken might affect the
quality of those decisions, and the factors to be taken into account
when constructing the board and reviewing its performance.
The danger of overly focusing on formalism and rules in the board,
as we can observe for listed companies, clearly contrasts with the
evolution in the segment of unlisted companies. Those ‘closed’ companies focus much more on the true value drivers behind corporate
governance, offering strategic reflection, support for the development
of the business, a critical reflection platform on succession issues, etc.
Our research with unlisted growth companies clearly has proven that
the incentives to commit to good governance practices are not at all
compliance triggers but the true value added drivers (see priority list
in Figure 5.2). In our opinion they are more successful in finding the
‘non-statutory routes’ to governance implementation, as suggested by
Sir David Walker (2009), as their boards and major owners have more
“ownership’ of good corporate governance.
Listed companies have therefore a great deal to learn from their
unlisted colleagues in finding a more balanced approach towards
1. Need for a ‘second opinion’
and critical sounding board
5. To guarantee leadership
(succession) and continuity
2. To avoid the danger of
naval-gazing and tunnel vision
Why a
board of directors?
4. Need for more professional monitoring
of company, management and performance
Figure 5.2
3. Further growth requires
more in-house expertise
Top 5 drivers for an active board of directors in unlisted companies
Source: Workshop GUBERNA in collaboration with VOKA (2011).
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Lutgart Van den Berghe and Abigail Levrau
corporate governance, with more attention for the substance over the
form, with more attention for value creation over formal compliance
and control. Illustrative in this respect is the research by the scholars
from the London Business School, McKinsey and MWM consulting
(Acharya et al., 2008). Their comparative research of board practices
and board effectiveness revealed fundamental differences in the way
boards of listed versus unlisted (private equity portfolio companies)
operate. Whilst plc boards are typically more effective at governance
compliance, risk oversight, management succession and control, PE
portfolio company boards score significantly better on overall effectiveness, reflecting their greater added value on strategy and performance management. This added value is driven by PE boards’ aligned
focus on value creation, their sharper clarity on strategic and performance priorities and the greater engagement and commitment of
their board members. They therefore propose that listed company
boards should improve their effectiveness by following an integrated
programme of six initiatives: refocusing on strategy and performance
dialogues, reducing their size to encourage more effective collaboration, increasing the time expectation of non-executive directors,
transforming how boards are educated and informed about the business, significantly increasing informal interaction with executives
and exploring ways to change the remuneration structure of nonexecutives.
Scanning governance and board effectiveness is only
possible on the base of a critical internal assessment
The financial crisis has proven that (the public monitoring of) the compliance of listed companies with the governance codes has given a false
feeling of comfort as to the quality of corporate governance. It is not
because a corporation is nearly 100% compliant with the transparency
on formal procedures and lives up to nearly all of the input requirements that the governance practice is effective. Developing a useful
governance scan can rely upon the publicly available information as a
first touchstone, but should merely be based on a critical internal assessment exercise. A board evaluation is the cornerstone to complement
the public monitoring exercise, confronting the board practices and
the individual perceptions with the formal documents like corporate
governance charters and annual governance statements. Without such
‘internal’ governance assessment, it is impossible to make any evaluation of the intrinsic governance quality. Unfortunately, we analyse the
Reinventing Board Effectiveness
145
hell out of everything, except of boards! Perhaps do we think that a
board meeting is such a special, mystical and inviolate thing that we
shouldn’t?
An overall board evaluation exercise should make an inventory of
all the relevant elements of board effectiveness, as will be described
in Chapters 6 through 9. Overall facts and figures about the governance practices (as disclosed in the corporate governance charters and
annual governance report) will need to be complemented by individual inquiries. Such individual interviews can illuminate differences
in opinion within the board on the importance and satisfaction level
for relevant governance aspects. However, such an in-depth exercise does not need to be repeated every year, on the contrary. As
important as a full-fledged evaluation exercise may be, it is clear
that regular updates and appraisals need to set priorities and focus
on the most relevant issues, the topics that deserve special attention
or/and are in need of further improvement, etc. Evaluating the same
dimensions over and over again may at best yield merely incremental improvements and can cause the board to overlook areas it needs
to review. These follow-up appraisals will have to prioritise and focus
on the most relevant ‘gaps’ that need further reflection and improvement. The periodic judgement on board effectiveness should focus
on progress made and on areas for further improvement. Every 3 to
4 years the effectiveness of the appraisal process itself might need
some examination.
Although board assessment pays quite a lot of attention to the socalled ‘soft factors’, like director behaviour and board dynamics, there is
nothing soft on such board evaluation exercise. On the contrary, board
assessment may be perceived as a rather hard process and consequently,
is often confronted with much scepticism from within the board room.
Directors may question the fact that they – as seasoned professionals –
need to be evaluated. Still, a successful process of board evaluation and
continuous improvement need to have commitment from inside the
boardroom.
Boards have to want to change. And many boards are working very
hard to avoid it. (The Korn & ferry Institute, Briefings on Talent and
Leadership, Q3 2011).
The reluctance towards board assessments may also vary according to
the type of company and even among countries. Our in-depth review of
the governance practice of all listed companies in Belgium, for example,
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Lutgart Van den Berghe and Abigail Levrau
revealed that the requirement for periodical board evaluations is one of
the least respected governance recommendations.5 There is quite some
resistance to the requirement of a periodic board assessment, let alone
that boards have sympathy for externally supported board assessment
exercises. In fact, those statistics do not provide any inside into the ‘profoundness’ of the board evaluation. The European study by Heidrick &
Struggles (2011) states that board evaluation is more a matter of conformance rather than performance. They argue that 90% of current
board evaluations probably fall short of what is needed. Similar, Sir
David Walker (2009) has noted that not all boards have given the evaluation process the attention and seriousness it deserves. In this respect,
he argues that it is timely to promote enhanced rigour and disclosure.
For a long time, board assessment was indeed in its infancy. Step
by step, more academic research, more board service practices and a
greater emphasis of the governance regulators on board assessment
help this governance discipline evolving into a more professional competency. There is a variety of approaches to board assessment:6 such a
process can be facilitated by third parties, or the company may opt for
a self-evaluation process under the guidance of the chairman acting as
a facilitator, interviewer and participant. When it comes to (internally)
evaluating the chairman, a lead director or an independent director can guide this self-evaluation. The secretary-general can play an
important intermediary role, facilitating the evaluation process. The
underlying questionnaire or interview protocol can be very elaborate
or at the other extreme, boards can limit themselves to open questions
or even a simple brain storm session during one or other board meeting. The success of pure internal board exercises will depend on the
circumstances facing the board, the nature of the issues the board is
required to address and particularly, the style and disposition of the
chairman. Although each approach can bring interesting messages to
the table, it increasingly becomes clear that an externally supported
examination7 is the only guarantee for a more objective and thorough
assessment exercise.
Whereas previous governance codes introduced the need for a periodic board appraisal, evaluation or assessment, more recent updates
of codes and recommendations clearly attach more importance to the
quality and disclosure of the board evaluation process. The pressure is
mounting for independent board evaluation. Governance regulators
also increasingly point to the necessity to have from time to time (e.g.
every two to three years) such an externally supported board assessment. In particular, an external reviewer is believed to be able to make
Reinventing Board Effectiveness
147
a more substantial critical input. Most illustrative in this respect are
the extensive recommendations in the Walker Report in the United
Kingdom (2009). For example, in its section 4.39, it states that many
comments on the draft report emphasised the importance of the
independence alongside the capability of the evaluator. It is therefore suggested that the board service advisors should form a professional grouping with the purpose to articulate appropriate evaluation
standards while also providing assurance that there are no conflicts
of interest with the board service providers. In light of the independent assessment, it is more appropriate to work with non-conflicted
board service firms, who do not deliver other important services to
the company.
Today, criticism remains as to the value added to such exercise. Why
should a company perform a board appraisal? In most European countries it is now a firm recommendation in the governance codes for listed
companies. For others, influential investors might impose such a critical evaluation. Instead of governance being a lagging indicator, board
assessment can allow companies to get ahead of the curve and make
governance a leading indicator of proactive and dynamic development
of the company. We do believe that the company itself, its board, its
management and even its shareholders and other stakeholders should
be themselves convinced of the value add such examination might
bring to governance effectiveness and even to the long-term success of
the company. A well-organised evaluation process can bring the necessary level of awareness to the surface, improve the understanding
of the individual director’s points of view and disclose board dynamics issues. It helps identifying areas that need greater attention by the
board. Deeply held tensions may arise because of insufficient involvement of (some) directors, insufficient quality of director contributions
(in relation to expectations for an effective board), incorrect delineation of boundaries of roles, clear differences of view, insufficient chemistry, problematic information procurement, etc. If suppressed tension
is a concern and this concern remains unchallenged, this can cause
irreparable harm. Board evaluation can clarify the individual and collective responsibility of the board of directors and the CEO in light of
the changing role (demands) of the board and improve the working
relationship between the board and the management. Indeed, boards
can become a self-correcting system (e.g. if the board realises it is failing
to perform a specific function effectively, it can take action to rectify
the situation). Bringing discipline to the board can enhance its effectiveness.
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Lutgart Van den Berghe and Abigail Levrau
Like with musicians or sportsmen, they all know that whenever
they think about their technique they improve their performance.
(Dunne, 1997)
However, the critical question remains whether performance evaluations actually improve board performance. How the practice is implemented is critical to its effectiveness: GARBAGE IN – GARBAGE OUT
is the adagium (Leblanc in Conger, 2009). Many boards do not perform their assessment in a rigorous enough manner. Social norms of
respect and mechanical evaluation processes get in the way of candid
and constructive feedback that could actually improve a board’s performance. Board evaluations are currently defective because they do
not assess individual directors. And the greatest opposition comes
from the individual directors themselves. Directors feel reluctant to
criticise colleagues or make remarks that might undermine the chairman’s authority. Boards are also too reluctant to pull the trigger on a
nonperforming director. Either they are afraid of their vested interests and/or are looking for the path of the least resistance. Moreover,
most are reluctant to solicit the input of professional service advisors. The latter have most of the time other on-going professional
relations with the companies whose boards they have to assess and
consequently are commercially disinclined to engage in rigorous, indepth reviews. For those service firms, board evaluation may not be
viewed as particularly remunerative or worth the risk, given more
lucrative assignments being done for management. Consequently,
what happens in many cases is the proliferation, photocopying and
passing off of substandard, paper-based board and director evaluation
questionnaires.
But performed well, board evaluations can play a vital role in improving corporate governance. Our experience with board evaluation practice confirms that Conger (2009) is right when he stated that
Directors told us that after they initiated board evaluations, their
meetings went more smoothly, they made better decisions, they
acquired greater influence, and they paid more attention to longterm corporate strategy. Formal evaluations can help ensure a healthy
balance of power between the board and the CEO and improve the
working relationship between the two.
Given the emphasis on board behaviour and governance attitude, a
thorough board evaluation exercise should include a written attitude
Reinventing Board Effectiveness
149
From basic compliance evaluation >>>>>>> To ‘best in class’ evaluation
Compliance &
benchmarking
exercise
Figure 5.3
Assesment of
the board as an
effective
decision-making
body
Structured
board review at
group level
+
Individual
director
assesment and
profiling
(Required) evolution in board evaluation
survey, assessing the capabilities of the board to function as an effective
decision-making body. According to Kakabadse and Kakabadse (2008)
individual director assessment and profiling takes board development
to a much greater depth than board assessment review check lists, but
that does not mean that structured board assessment review should not
be pursued. Board assessment and review focuses conversation at only
the group level. Profiling draws out group and individual behaviour
and implicitly displays the level of responsibility each individual feels
to make changes (see Figure 5.3). However, a word of caution needs to
be added: not all boards need profiling nor do all boards accept such an
exercise nor are they prepared for deep individual and team scrutiny.
Questions to test this include: are the board members capable of entering into penetrating examination of board dynamics? Are they able to
face up to the reality? Do directors require development in resilience,
robustness and confidence to openly discuss the outcome? Profiling is
simply a more intense board review process and requires a greater level
of courage to participate.
Conclusion
The leading role of governance codes to guide and judge governance
practices has been copied all over the world, not only for listed but
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Lutgart Van den Berghe and Abigail Levrau
more and more for unlisted companies, state-owned enterprises and
social profit organisations as well. Governance codes are valuable as a
first step, but we need to acknowledge that they are only a partial solution to foster governance and board effectiveness. To reach the goal of
good governance, codes mainly focus on the necessary (measurable)
input factors, while lacking sufficient attention for more process and
qualitative drivers of good governance. To this end, attention should
also be paid to board dynamics, professional governance behaviour
and the professional development of directors. A second important
flaw of the governance codes is the underlying assumption that the
governance quality can be externally monitored by the market. This
approach has not proven to be sufficiently effective. Although the
pressure of public scrutiny might induce boards to improve their
corporate governance, the public disclosure is not a valid solution to
reach the final goal of effective boards, operating in the best interest of the company. Such public monitoring dares to (quickly) evolve
towards a mere window dressing and ‘tick the box’ mentality, with a
focus on full compliance with a standard set of ‘best practices’. Only
if we combine active public monitoring with independent critical
examination of board effectiveness and governance quality will we be
able to make an important step forward in making codes more effective. Such approach should necessarily be much more tailored to the
specific governance challenge each governance practice poses, taking
into consideration the specific corporate context, the type of capital
funding (listed, closed or any mixed formula in between) and the governance structures and players in place.
Although this book is about board effectiveness, one should not
ignore that in order to reach this goal we need to reflect thoroughly
on the role of the shareholder. Most codes devoted relatively limited
attention to this important pillar of good governance. As stated in the
Walker Report (2009) ‘Responsibility of shareholders as owners has
been inadequately acknowledged in the past’.
In our board effectiveness approach we clearly try to remedy this
omission by explicitly positioning the role of the board in the context
of the shareholder model. At the same time we propose to integrate
the vision of the shareholder in evaluating the role and value add of
the board of directors (a so-called 360° assessment). Given our focus
on improving the value added of boards, we however cannot pay sufficient attention to the interaction with shareholders, nor are we able
Reinventing Board Effectiveness
151
to give to shareholder governance the place it deserves in corporate
governance.
In order to come up with a useful board assessment, such exercise
should start off with a holistic and systemic approach, integrating all
relevant context factors and comparing the formal procedures and
governance principles with their execution in practice as will be highlighted in the next chapter.
Notes
1. GUBERNA, the Belgian Directors and Governance Institute, together with
the Federation of Belgian Companies has performed monitoring studies of
the compliance with the Belgian Corporate Governance Code in 2006, 2008,
2010 and 2012. For more details on the outcome of these monitoring studies
see www.guberna.be
2. The comply or explain principle is commonly found in Europe. 20 out of
the 22 European governance codes are based on this approach. The principle offers companies flexibility to implement the Code by explicitly stating
whether that recommendation is complied with or in case of non-compliance what the explanation is for such deviation.
3. Internationally, there is the OECD code that is accepted as a broad reference code. For the unlisted companies, ecoDa recently developed an international reference framework (see respectively http://www.oecd.org/corporate/
ca/corporategovernanceprinciples/31557724.pdf and http://www.ecoda.
org/Publications.html). The first European code for listed companies, that
became the reference for many other (European) countries, is the UK Code
(from the Cadbury Code in the nineties to the Combined Code in the 21st
Century).
4. Sir David Walker led an independent review of corporate governance in the
UK banking industry. His report with final recommendations was published
on 26 November 2009.
5. 75% of Belgian listed (index) companies declare in their annual report that
they engage in a board evaluation exercise, describing briefly the main characteristics of the process (as required by the Belgian Corporate Governance
Code).
6. See e.g. Kakabadse (2008); Nadler et al. (2006).
7. When using external support for board assessment, Kakabadse (2008) gives
the following suggestions to choose the most relevant service provider:
• choose the person not the institution;
• choose the advisor that understands you and your organisation (sensitivity
to the context);
• concentrate on the intellectual firepower of the consultant, not the size,
grandeur or boutique nature of the institution he or she works for;
• don’t haggle over pay for the quality of advice needed.
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Perspective (Boston: Kluwer Academic Publishers, 2002).
Walker, D. A Review of Corporate Governance in UK Banks and Other Financial
Industry Entities (London: The Walker Review Secretariat, 2009).
6
Fine-tuning Board Effectiveness
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Lutgart Van den Berghe and Abigail Levrau
The problem is that directors are essentially trying to make a
refurbished 1955 Chevrolet keep up with the traffic on a twentyfirst century superhighway. (Carter and Lorsch, 2004, p. 29)
Assessment of governance and board effectiveness is best
served by a holistic system approach
Defining governance and board effectiveness is not a straightforward
exercise. In principle, boards are seen to be responsible for reaching the
corporate goal and ambition. As an example, the Belgian corporate law
states that it is the board’s duty (its reason for being) to do anything
that is necessary in order to realise the corporate goal. Based on the
fact that directors have been blamed (or even attacked) for not being
able to prevent corporate collapses during the ‘Internet bubble’ or for
the failures during the financial crisis, this seems to be the opinion of
society as well.
However, academic research has made it clear that it is not feasible to
directly link board practice with corporate performance. In fact, boards
do not operate in isolation but need to rely on management and the
corporation in general to fulfil their ambitious role. Consequently, it
is impossible to judge the value of a board on its own in isolation of
the ‘system’ it operates in. Developing an understanding of governance
and board effectiveness requires a holistic framework that includes all
potential governance mechanisms as well as those relevant elements
the governance model needs to be aligned with. In fact, board effectiveness is best served by a ‘system approach’ that views boards as dynamic
and open social (and political) systems, where a change in one element
will affect other elements in the system.
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Lutgart Van den Berghe and Abigail Levrau
Such approach is inherently different from the one traditionally
used in academic research. Historically most academic research is centred around specific sub-elements of the governance system and its
effectiveness is judged on the basis of corporate results, such as the
link between performance and the presence of independent directors, or the splitting of the roles of CEO and chairman (Daily et al.,
2003). Research of Levrau (2007) clearly showed that in reality the
link between board and corporate performance works in an indirect
way. Moreover, the focus on input factors alone was by far insufficient to measure board effectiveness. The model developed by Levrau
(2007), shown in Figure 6.1, which built further on previous work of
Nicholson and Kiel (2004) and Forbes and Milliken (1999), demonstrates that we need to look at board effectiveness in different steps:
from input over board process to board output, while taking into consideration the numerous interactions between all of the constituent
elements within the broader framework of external boundaries (legislative and societal environment as well as the industrial environment)
and contingencies (the relationship between the board and management, respectively shareholders).
Boundaries
Legislative and societal environment
Industrial environment
BOARD OF DIRECTORS AS A SYSTEM
Input
BOARD
Composition
Output
INTERACTION &
BEHAVIOUR
BOARD
TASK
PERFORMANCE
Cohesiveness
Competence
Structure
Actual <>
Conflict
Debate
Expected
Feedback
Figure 6.1
A congruence model for board effectiveness
Board/management
relationship
Firm performance
Size
Processes
Contingencies
Board/shareholder
relationship
Fine-tuning Board Effectiveness Is Not Enough
The Right
FollowThrough
The Right
Remuneration
155
The Right
Structures
The Right
People
Board
effectiveness
The Right
Issues
The Right
Process
The Right
Information
The Right
Culture
Figure 6.2
Board effectiveness tool
Paying more attention to the board process itself seemed to be the
remedy, also in light of the failure of many companies fully compliant with the input and formal requirements of the governance codes.
The challenge, however, is to capture these insights and translate the
academic models into a practical instrument that support value adding
board evaluation exercises. To this end we developed an own evaluation
methodology for measuring board effectiveness, which is also inspired
by a comparable approach promoted by the NACD. This tool is illustrated in Figure 6.2.
The methodology is built on the assumption that the great challenge
for any board was to find the right governance approach. Such governance approach should be in line with the (formal) requirements of the
governance codes while at the same time enabling the development
of the internal processes, culture and behaviour in order to allow the
board to realise the value add it is supposed to deliver. Although this
framework gains excellent feedback from the companies as a guide for
developing a board evaluation exercise, it becomes clear that it is less
adapted and suitable for judging the value added of the board (the final
goal) and for understanding the interplay and trade-offs between the
different elements that facilitate such value creation. In fact, the tool is
still too much focusing on governance as an end in itself, rather than as
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a means to an end. We have therefore developed a new holistic model
that should remedy the flaws of the actual approach.
Measuring board effectiveness should start with the question what
effectiveness really means. We consider a board to be effective if it facilitates the creation of value added for the company, its management, its
shareholders and all of its relevant stakeholders. The board’s value add
capacity will be enhanced if we develop a better insight into what really
drives board output. In our opinion, the two main drivers are effective
decision-making and a board that optimally performs its role in line with
the relevant context factors (see Figure 6.3). Each of these board output
drivers in themselves is influenced by a whole set of determining factors,
which operate and impact each other in a dynamic and interactive way.
In the remainder of this chapter we will focus on the question what a
congruent and best fit board role should look like, what elements may
interfere in defining this role and to what extent the board’s role can be
aligned with the relevant context factors. Figure 6.4 gives an overview of
An effective board creates value
added for the company
1. A congruent & best
fit board role
2. Effective board
decision-making
3. Board and director
effectiveness (assumed vs
real value added) are
regularly assessed in an
objective and critical way
Figure 6.3
A systems framework for board effectiveness assessment
Fine-tuning Board Effectiveness Is Not Enough
Performance
1.1. External context
– Laws & regulation
– Code
recommendations
– Societal norms
157
1.4. Leadership
DIRECT
External monitoring &
benchmarking
1.5. Strategy
1.2. Business context
– Business life cycle
– Business complexity
& environment
– Business performance
& financial situation
– Stakeholders
Dual Role
1. A congruent
& best fit board
role
1.6. Advice
Pro-active governance
1.3. Internal context
Shareholder model
Board model
Management model
CONTROL
1.7. Monitor
Alignment
Figure 6.4
Conformance
A congruent and best fit board role
the framework we developed to this end. Each of the constituent parts
will be further analysed in greater detail in the following paragraphs.
The second board output driver, effective board decision-making, will
be studied in Chapter 8.
Defining the ‘best fit’ governance structure
A sophisticated understanding of the roles a board has to play and
the interplay between those roles and the company’s environment
is central to any assessment of board effectiveness. (Nicholson and
Kiel, 2004)
The model positions the board as an open system, interacting with the
firm’s environment, both the external environment (1.1), the business
environment (1.2) and the internal organisational environment (1.3).
As Nicholson and Kiel (2004) pointed out, only boards that maintain a
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balance with the internal and external environment will flourish. Besides
the respect for the legal obligations (1.1.1), companies should align their
board model and governance approach with the ‘best practice’ guidance,
given by the relevant governance codes (1.1.2), while paying sufficient
attention to the valid societal norms and expectations (1.1.3). However,
the company must use the flexibility offered to translate the guidance
into a fit with the corporate situation (1.2) including the stage in its life
cycle, the challenges the company is facing, the strategy it envisions
etc. (i.e. finding a pro-active congruence). In addition, the board model
should perfectly be aligned with the other governance tripod bodies
(referring to the shareholder structure and management model). It is
indeed important that the positioning of the board of directors is in line
with the respective roles of shareholders and management while paying special attention to their mutual interaction (1.3). These three steps,
highlighted in Figure 6.4 are further analysed in the next paragraphs.
External contingency factors
Although legal principles set the minimum (theoretical) governance
framework, for a long time most legislation and corporate bylaws stayed
rather general in their description of the board’s structure and role.
Consequently heterogeneous board and governance practices were
developed, with some resembling ‘best practices’, while others are subject to (serious) critique and certainly show room for improvement. This
has given lean way to the development of a large set of self-regulatory
principles and recommendations. Both are intertwined, in the sense
that in the EU, those self-regulatory principles have been embedded
into law through the obligation for listed companies to designate a code
of reference and respect the ‘comply or explain’ approach. But the legalisation of the self-regulatory guidance goes much further nowadays. In
Europe, some specific parts of these codes have become mandatory (e.g.
necessity to install an audit committee), while some member states go
much further in ‘gold plating’ by integrating numerous other parts of
their national code into corporate law (see e.g. the laws on gender quota
for board composition, specific legislation on executive remuneration,
the obligation to set up a remuneration committee, a legal definition of
what constitutes an independent director, etc.). The evolution in legal
reforms and self-regulatory requirements are all aimed at empowering
the board and directors in performing their roles.
Besides the legal principles and the code recommendations, societal
norms also impact the board’s role. The empowerment of the board,
as prescribed by the numerous recent governance codes, coincides
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with the increase in societal expectations towards boards of directors
and corporate leaders. Alongside this evolution, the societal interest
in governance in general and boards of directors more specifically has
substantially increased. Main Street has bypassed Wall Street in calling directors to account for the performance of their duties, leading
to increased pressure on boards to perform effectively. Inquiries with
board members (such as the one regularly done by McKinsey) revealed
that the directors themselves want to live up to these societal expectations and express their interest in going beyond the traditional board
scope by paying more attention to, for example, corporate strategy and
business performance. Also academic researchers are impacted by this
expansion of societal expectations towards boards. Historically, the
governance literature concentrated on a single specific role of the board
(the so-called mono-paradigm approach), hereby ignoring the need for
an integrated approach as well as the numerous interactions between
the different board roles (Nicholson and Kiel, 2004). More recently, the
academic literature expanded its approach towards board effectiveness
from a mono-paradigm to a multi-paradigm approach. These evolutions
prove the dynamic approach needed to study board effectiveness.
However, some academics have critique on the trend towards board
empowerment and plead for a minimalist approach. Steen Thomsen
(2008) states that boards become overloaded with responsibilities. They
will either fail to live up to expectations or have dysfunctional effects on
company behaviour and performance. Whereas they clearly have a role to
play on the level of monitoring, management replacement, control and
ratification of major decisions, they should abstain from playing a major
role in strategy, risk management, shareholder and stakeholder relations.
Like penicillin, boards may be essential for a limited range of very important tasks, but are no cure to all pains. This minimalist approach is mainly
based on the limitations boards are facing, such as the information gap
non-executive directors are confronted with and the limited resources
available for board decision-making (available time, board support, difficulties with group decision-making). This seems to us a ‘defeatist’ point
of view. We are, in contrast, convinced of the necessity to upgrade the
board’s role and decision-making process because there is no valid alternative to a well-functioning and empowered board of directors.
The corporate context factors
The corporate context (including both external and internal business
factors) also affects the conditions for board effectiveness. Important
factors in this respect are the specific development cycle of the
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company (development phase of the business and life cycle considerations: start-up, growth company, maturing business), the business
performance (prospering, going concern or in trouble), the financial
situation/structure (the need for capital), the competitive market position and evolution (new competitors, globalising markets), the business
environment (technological turbulence, rapid technological change),
etc. Comparing the governance in start-ups versus mature businesses
or in companies in good financial shape versus those in crisis mode
clearly reveals the need for adapting the board’s role and governance
approach to those relevant corporate context factors. A small (unlisted)
company, who is willing to develop a more active role for its board, will
need to realise a serious upgrade in its corporate reporting, accountability and transparency in order to attract external directors who want to
take up this responsibility (and liability). At the same time, due to the
lack of sufficient in-house expertise, those directors might well expect
to be confronted with numerous demands for advice and support also
outside their regular role as directors. Strategy reflection might be much
more important than any other board role. At the other end of the spectrum, a large (listed) company will have access to all relevant in-house
or external expertise and be able to provide its directors with a – sometimes overwhelming – set of detailed information, strategy plans etc.
Here the board might be much more leaning towards monitoring than
to any other board duty. Consequently, a director who wants to serve
in different types of corporate contexts should be well aware of the
huge differences in governance approach. It is not that he or she has to
behave as a ‘chameleon’, but there are ‘horses for courses’.
Board effectiveness also presumes alignment with the complexity of
the business. According to Carter and Lorsch (2004) complexity seems
to be more important than corporate size to define the board’s role.
The more diverse the portfolio of businesses, the more complex the role
of the board becomes to oversee all of the relevant business contexts.
The more international the business, the more complex the corporate
structure becomes, leading to the need for an oversight of all of these
corporate entities by the main board. Next to the governance role to be
played by the main board, that board will need to install a tailored system of ‘internal governance’ at the level of the local/subsidiary boards
as well as guaranteeing the interface with the main board.
Internal or governance contingency factors
In a system approach, it has to be made clear from the outset that
numerous specific board elements will impact each other. A key driver
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161
of board effectiveness is the optimal alignment of the board model with
the shareholder, stakeholder and management model.
In most cases, the shareholder model will substantially impact if not
dictate the board model. In this respect it is essential to analyse the
shareholding structure (degree of control; minority shareholders or not,
etc.) and typology (families, joint venture between entrepreneurs, private equity, public capital market, institutional investors, public sector,
etc.), as well as the development phase of the corporate shareholders
(family life cycle, life cycle private equity, etc.). Moreover, boards need to
have a very clear sense of what shareholders want to achieve. Numerous
governance models consider directors as the stewards of shareholders,
having a clear fiduciary duty towards shareholders. In a more stakeholder-oriented model, the board has a broader duty, focusing on the
interest of the company and all its related parties.
Although directors will normally define the management model,
it is clear from governance practice that the management model and
the type of leadership will in turn substantially impact the position
and operation of the board. Moreover board effectiveness is substantially affected by the interface between management and the board and
between the CEO and the chair of the board (the cutting edge management/board). Each company, each director or top manager may
have a specific view on the role of the board and the best board model.
Changes in top management constellation, board composition or board
chair may substantially impact board practices. Conger (2009) developed a board typology, based on the position of management and its
relationship with the board (see Figure 6.5).
Board type 1 = monitors management in order for management
to conduct the business in the best interest of the
owners
Board type 2 = partnering with management and case of joint
decision-making
Board type 3 = legitimating management to outside constituencies
Board type 4 = controlling management on behalf of a dominant
owner
Board type 5 = is controlled by management, consequently limited to a pure regulatory body
Figure 6.5
Board typologies in function of relationship with management
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Lutgart Van den Berghe and Abigail Levrau
Ceremonial board = no formal decision-making
Rubber stamping
board
= only role is agreement with finalised decisions
Statutory board
= discussions limited to formalistic role of the
board (with limited role in strategy process)
Pro-active board
= much more active involvement of directors
in strategy and decision-making, with board
committees, independent directors etc.
Participative board = with open debate culture, striving to reach
consensus between management and the board,
harmony and complementarily between board
and management
Figure 6.6
Board typologies in function of decision-making role
Most boards struggle with drawing the right mix of board roles
(Carter and Lorsch 2004). At one end of the spectrum boards are
merely watch dogs that limit their role to observing events; they only
act if they sense that something is amiss. Their only real option if the
company falters is to replace the CEO. At the other extreme are the
pilot boards that have much higher aspirations: its members believe
that they should contribute to discussions and decisions about the
company’s direction. The non-executives want to be very involved
with management in making many key decisions and probing performance.1 The spectrum of board roles in relation to the impact of
the board on corporate decision-making, might be summarised as follows in Figure 6.6.
In practice, most boards are somewhere in-between. The challenge
is therefore to be explicit on the distinct board duties: monitoring the
company and management’s performance (minimal duty for every
board, but question is what level of detail?), making major decisions
(such as nomination/replacement of CEO, strategic decisions, major
capital expenditures, M&A, capital structure & dividends; some are also
involved in organisational structure changes) and offering advice and
council to management (let management benefit from the directors’
experience and wisdom).
Board task performance
Judging board performance refers to the comparison between the
expected role of the board (see points 1.4 through 1.7. in Figure 6.4)
with its real value added. From a legal point of view, defining the
Fine-tuning Board Effectiveness Is Not Enough
163
(expected) role of the board of directors is the right and duty of the
shareholders or founders of an organisation. In fact, besides the legal
responsibilities, the board’s decision-power is delegated to them by the
shareholders. At the same time, shareholders are the ultimate judges of
the performance of the board. They have the power to give discharge
for a good performance or, if they judge that directors did not perform
accordingly to their wish, they can dismiss the directors and nominate
others. However, shareholders will seldom describe the expected role
of the board in sufficient detail (in the bylaws) nor will the shareholders’ meeting be the public domain for a critical evaluation of board
performance. When shareholders are outsiders (dispersed shareholding
and no representation on the board) board effectiveness will be more
an internal ‘self-regulatory’ issue, mostly under the pressure of a governance code. On the other hand of the spectrum, when shareholders
are insiders (more concentrated shareholding and representation on the
board) they again will not use the shareholders meeting to come up
with a thorough board evaluation, but use -again- an internal approach
to express their opinion on board performance.
The analysis of the formal role of the board can be based on quite
a number of reference documents, such as bylaws, statutes, corporate
governance or board and committee charters, and internal regulations
(e.g. delegation policies, management duties etc). However, to judge the
real role of the board other information resources will be needed. A first
indication of the board practice can be found in the Board Agenda and
the Board Minutes. Of course, to be sure about the board output further inquiries with individual board members, the board secretary, the
management and eventually with some important shareholders will
be needed to complete the full picture. If governance should serve the
company well, the board’s role should not only be judged in a retrospective way (did the board perform up to the set standards?) but in a prospective way as well (what are the expectations for the future evolution
of the board, given the corporate strategy, ambitions and challenges?).
Measuring board performance against the EXPECTED role
of the board of directors
Based on the (practical) guidelines of governance codes as well as on the
academic input from the multi-paradigm theories, we can state that all
boards should perform the following four roles (see Figure 6.4):
●
●
Making sure the company has the right leadership (1.4)
Deciding upon the strategic direction of the company and how this
should be realised (1.5)
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Lutgart Van den Berghe and Abigail Levrau
Monitoring execution and results, including also the governance
scan and board evaluation (1.7)
Advisory/support function (resource-based view on the role of directors, 1.6).
The many corporate failures have put the spotlights on the monitoring role of boards, pushing their stewardship role into the background.
Most boards of directors tend to focus too much on control to the detriment of corporate development.
Today the governance agenda might be unbalanced with too much
attention for reporting and disclosure with the danger that the board
concentrates far too much on monitoring and control (conformance), with less time available for direction and resource provision.
(Nordberg, 2011)
There is a plea to invest the available board time in a more balanced
involvement in the various roles. But as discussed in the previous section, the relative importance of these major categories of board duties
may substantially differ from one board to another depending on or
influenced by the context. Given the need to develop a more holistic
approach towards board effectiveness, each of these major roles raises
quite a number of additional issues.
Leadership
The leadership role of the board is one of its most crucial tasks. It does
not only consist of appointing the right leadership team and defining a
workable delegation policy, but it also includes the duty to come to grips
with a clear understanding of the nature and purpose of the organisation as a touch stone for judging strategic ambitions and corporate
performance.
From time to time, it is necessary that the board reflects somewhat
deeper and decides on the corporate values, the ambition and the strategic goals of the corporation, to be proposed and approved by the shareholders’ meeting. This in itself is a tough job, because boards might be
responsible to a very diverse set of shareholders, whose interests are
not per definition aligned (e.g. widely varying investment horizons).
Moreover, they have to take stakeholders’ interests into consideration.
Apparently, board practices on balancing shareholder and stakeholder
interests vary across different types of companies. According to research
of London Business School and McKinsey (2008) listed companies
Fine-tuning Board Effectiveness Is Not Enough
165
attach significantly more attention to stakeholder interests than their
colleagues in private equity (PE) backed companies. This last board category is closely interwoven with its shareholders and has consequently a
clear view on their interests. They focus nearly exclusively on corporate
financial performance and cash flow. On the contrary publicly listed
companies (plc) boards are faced with a wide variety of more distant
shareholders and are open to public scrutiny to a much larger degree.
Such boards invest much more time in developing a good dialogue and
the right mix of attention for all sorts of shareholders and stakeholders’
interests. Family businesses operate somewhat in between. By definition they are much more sensible to the long-term survival of the firm
and have a closer relationship to their important stakeholders than any
other type of business. At the same time they operate – to some extent –
as PE-backed companies with a much closer shareholder monitoring.
Directors must exercise judgement and have a real challenge in deciding to whom they are really responsible and where there commitments
ultimately lie. The financial crisis has given a boost to a higher sensitivity of boards towards fostering long-term value creation and corporate success within a framework of corporate social responsibilities.
In this respect it is worthwhile to remember that boards have much
more difficulties than a sports team: where a sports team has specificity and clarity, directors face ambiguity, diversity and multiple goals
(Conger, 2009). Boards have to manage a complex set of goals, which
may be strict trade-offs (cash for dividends or investments) or synergistic (invest in supply-chain to increase cost effectiveness and customer
satisfaction). The multiplicity of goals makes one parameter of teamwork effectiveness challenging. Judging board effectiveness on the base
of the evolution of the share price or even total shareholder return – as
practiced in many academic publications – is therefore no longer a valid
route.
It is essential for directors to build a shared view of the corporate context, a holistic common understanding of the enterprise, its vision, goals,
values and performance expectations (financial as well as non-financial
ones). The chairman and the CEO play an important role in communicating and championing the organisation’s mission, values and strategy
in order to reach a shared understanding about the nature and purpose
of the organisation, the internal and external challenges and the direction to take in the future. An interesting test to check the alignment
of the board and management can be to ask the board and top management about its raison d’être, the final goals of the company and its
objectives to reach. Aligned focus on value creation and a sharp clarity
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Lutgart Van den Berghe and Abigail Levrau
on strategic and performance priorities are seen to be key drivers of
board effectiveness.
A continuous effort of the board is to ensure that the company has the
right ‘daily’ leadership. In fact, the board has only a part-time presence
in the company and as such is not in the position to run the company.
To this end the board has to appoint a competent management team
that perfectly fits with the corporate strategy, ambitions, development
cycle and governance model of the firm and as such aligning leadership with strategy. Although some shareholder models might place the
responsibility for nominating the corporate leader with the shareholders, most governance recommendations consider it good practice that
the board (eventually with the support of a nomination and remuneration committee) takes care of the nomination process and the contract
negotiations for the top executives. Whatever the type of management
structure chosen, there will be a key person, the CEO, who acts as the
leader of the organisation. For a board it is essential to be aware to what
extent the CEO commands the respect of the top team. Therefore the
CEO will have to play a key role in the nomination process of ‘his or
her’ management team.
Depending upon the shareholder model and the shareholder impact,
it will be entirely or partly the board’s role to define the delegation of
power (and the empowerment philosophy), the authorisation levels as
well as the organisation of accountability. The right level of delegation
to management will depend upon numerous corporate and context factors. There is no right delegation or leadership style, what is important
is to understand where shareholders and directors stand on this matter,
not to neglect neither the impact of the management capabilities nor
style preferences. From time to time, the board should reflect on the
empowerment philosophy, its application in practice and its alignment
with the management potential and the corporate strategy and ambitions (for some reflection questions, see Figure 6.6).
Whatever the level of board engagement, delegation to management
will always be substantial, because non-executive directors cannot (continuously) perform a (daily) management function. Therefore board
effectiveness analysis should focus on the question if there are clear
lines about which decisions necessitate board approval, which points
need to be on the board’s agenda, etc. Although this might be explicated in a governance charter, the reality is much tougher than such
charters might assume. Assuming that the dividing line between the
board’s role and that of management is fixed is totally incorrect. The
distinction between management and governance is not cut-and-dried.
Fine-tuning Board Effectiveness Is Not Enough
✓
✓
✓
✓
✓
167
To what extent do directors want to be informed advisors to the
CEO?
What variables does the board want to monitor closely (financial info,
competition info, risk exposures, management succession, employee
morale, customer satisfaction)?
How extensively does the board want to be involved in setting and
evaluating strategy (only corporate level, after the strategy has been
defined or part of that development)?
What decisions and approvals are the board’s domain rather than that
of management?
How will we monitor the performance of the CEO and the company
(aggregate outcomes, key drivers of performance, corporate level or
business unit information, etc)?
Figure 6.7
Reflection questions
Corporate governance is about the exercise of power over corporate entities (Tricker, 2000): if management is about running the business, governance is about seeing that the business is run properly (Tricker, 1984).
A continuous attention for a good understanding of each other’s role,
coupled with sufficient flexibility (e.g. in case of unforeseen questions or
in crisis situation) and empathy for the concrete execution of the delegation policy, are cornerstones of good governance (see e.g. Useem, 2006).
Our research of Belgian governance practices clearly reveal that all listed
companies nowadays have a corporate governance charter, describing
the respective roles of the board and management. Nonetheless the
execution in practice of those written procedures appears to be far from
evident. The collaboration and interaction between those two main
corporate bodies, board and management, is one of the most delicate
elements for effective governance. In practice, the execution of written
procedures is far from evident and remains a point of attention in all
kind of companies. This is clearly a point where public monitoring is
inadequate. Only a thorough in-depth evaluation of board effectiveness will be able to detect the points of attention that need further
improvement.
Special attention should be given to the relationship and interaction
with the CEO. The board and the CEO must work together as partners; there really is no other way. Unfortunately, boards are rarely
explicit about figuring out the best way to work effectively with the
CEO, even not when a new CEO enters into office. Moreover, enhancing board power made the relationship with the CEO more problematic.
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Increasingly, this is a complicated relationship and such tensions are
not recognised by those pressing for governance reform, or by directors
themselves (Carter and Lorsch, 2004). It is crucial to clarify the working
relationship with the CEO and the senior management. The board has
the ultimate legal authority but the reality is much more complex and
the power relationship may well be the reverse. The directors are overwhelmingly dependent on the CEO for planning their meetings and
providing them the information and knowledge they need. The board
can only be as effective as the CEO wants it to be. Directors who understand that management has many levers of power will approach their
task in a very different way from those who believe that they hold most
of the power. In this sense, boards embody an interesting paradox: they
are simultaneously among the most and the least hierarchical institutions in the business world.
In order for boards to fulfil their leadership role, they should devote
sufficient attention to talent management and succession planning
(follow-up on the pipeline). Unfortunately, in practice this seems to be
a point that does not receive the attention it should get. The interview
data in our research of Belgian governance practices revealed that in
most listed companies, succession planning of senior management is
not a priority on the board’s agenda. Similar findings are reported for
other countries. For example, only 1 out of 3 directors interviewed by
McKinsey (McKinsey Quarterly, February 2008) reported that their
boards have experience with talent management. In contrast, another
McKinsey research (Acharya et al., 2008), revealed that listed boards
perform a much broader role on people issues than their counterparts
in the PE portfolio companies. They are involved in key management
development process and are more active in defining remuneration policies. However, they are more advisory than directive and slower to act
when changes are needed.
Monitoring executive performance is a crucial element in the board’s
leadership role. Such exercise is important for deciding upon the career
development of the top team (and succession planning) as well as for
deciding upon the variable remuneration (performance-based remuneration). CEO appraisal is a key to effective monitoring of the company’s
performance and is a way for directors to build their understanding of
how they all see the company and its leader (Carter and Lorsch, 2004).
Our research of Belgian governance practices in listed companies shows
that a yearly CEO evaluation exercise is a well-established event. A more
complex question is the issue to what extent the board should also evaluate the performance of senior executives. In practice, the CEO will take
Fine-tuning Board Effectiveness Is Not Enough
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the lead in evaluating his top management team, while most boards
will then decide in consultation with the CEO on the final appreciation
of the top team. However, this interactive evaluation exercise poses a
difficult balancing act between the leadership role of the board and
the leadership role of the CEO. Being aware of that sensitive balance is
crucial for effective governance practices.
Given that the monitoring of executive performance will form the
base for deciding upon variable executive remuneration, such an annual
evaluation process includes several steps. Our own experience in remuneration committees coincides to a large extent with the proposals of
Conger (2009) and Carter and Lorsch (2004) as set out in Figure 6.8.
Step 1
Establishing evaluation targets (start of the year): finding the right objectives
and measures; including both financial and non-financial targets; with
attention for leadership skills, talent management (and succession planning),
efforts at internal and external communications; an effective appraisal uses
objectives that focus on behaviours and actions that the CEO can control
directly. It should also adjust for changes in industry and economy;
Step 2
Reviewing performance (on a regular basis, at least at mid year): checking
whether on track;
Step 3
Assessing results and determining rewards (end of the year): such an
assessment can start with a self-assessment by the CEO. However,
companies may not solely rely on CEO self-evaluations! Self-evaluation
data should be balanced with other inside and outside information:
remuneration committee/board assessment, whereby the board should
distinguish between performance of the CEO and performance of the
company and visit also how the CEO is perceived from within (by
employees); this inside information should be complemented with
information of performance vis-à-vis customers, investors including
also comparison with peers; but also individual board members could
give their personal view; some even propose written evaluations of the
CEO’s performance by each director (combining open ended questions
with scaling questions) because written feedback forces greater clarity
and reflection. Anyway, it is good to foresee a set of performance levels,
such as poor, acceptable & outstanding for each of the relevant key
performance indicators (KPIs).
Figure 6.8
Evaluation process of executive management
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Lutgart Van den Berghe and Abigail Levrau
However, it is essential to implement this general framework with sufficient flexibility and tailor the ‘ideal’ process framework to the specific
board context of each company. Moreover, directors should be aware
that performance feedback is an emotional process that poses the danger of defensive attitudes (certainly when such evaluation deviates substantially from the self-evaluation), mishear what is intended (where
the specific KPI’s sufficiently clear?), etc. The more KPIs can be made
explicit and measurable, the less confusion performance assessment
might pose. The more qualitative performance elements become, the
more vigilant the board should be in order to prevent that tensions pop
up at each performance feedback.
The board’s role in deciding upon executive remuneration has not
only been on the forefront of the recent governance literature, it is a
top item in media attention as well. Based on societal and political critique, boards are blamed for failing in their duty to align the executive
remuneration with the long-term performance of the company. Such
critique is universal and points to a policy of ‘paying for non-performance’ and of overly generous bonus systems with the wrong incentives.
In the slipstream of this critique, substantial new legislation has been
developed. Shareholders are given more countervailing power, while
the politicians increasingly interfere directly in defining the executive
remuneration construction. Research (Baeten, 2012) has clearly proven
that a governance model, where shareholders are on the board, performs
a far tougher monitoring role on executive remuneration than models
with dispersed and more distant shareholders. This research also highlights that remuneration committees might lead to more sophisticated
remuneration models (with more complex short and long-term incentives) and more benchmarking, leading to an upward trend in pay levels
(racketing effect). Therefore, an analysis of board effectiveness should
devote sufficient attention to the board’s attitude and role towards the
monitoring of executive remuneration in three areas (design, decisionmaking process and disclosure).
Strategy
The strategic role of the board of directors has historically been subject
to much dispute, especially in the management literature. 2 Not surprisingly, there is no board duty that is executed with so many nuances
around the globe as the interference of directors in the strategic process. Consequently any board evaluation should carefully check whether
there is an explicit view on the role of the board of directors in the
strategy cycle. There should be a clear view on the process of strategy
Fine-tuning Board Effectiveness Is Not Enough
171
Shareholders
Management
BoD
Aims/Objectives
Ambition
Feedback &
adjustment
Strategy cycle
Monitoring
implementation
Strategic
choices
BoD &
management
Execution/
implementation
BoD
Management
Figure 6.9
Conceptual model of the strategy cycle
development and the respective role of the board and management.
This reflection should be done in joint effort between the board and
management.
In fact, from a governance point of view, shareholders, management
and the board should regularly interact to define, execute and evaluate
the corporate strategy. We developed a conceptual model to describe
the potential interaction and respective roles (Figure 6.9).
The strategic role of the board is linked to the general scope of the board
of directors (e.g. pilot versus watch dog) and the complementary role of
executives and (eventually) shareholders. Instructive in this respect may
be the observation whether the board receives strategy proposals and
possible strategic scenarios or whether its role is limited to approving a
finalised strategy proposal. Or on the other hand, the board should be
aware to what extent shareholders want to (directly) interfere in important strategic choices and decisions. Delineating strategic responsibilities
is an important duty and distinctive board models will lead to different
strategy role models (Kakabadse and Kakabadse, 2008).
Strategy is a dynamic process whereby the board can organise an
annual retreat for thorough strategic reflection, but throughout the
remainder of the year strategic issues and their execution will have to
be further reflected upon. Directors have a role to play in the follow-up
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Lutgart Van den Berghe and Abigail Levrau
of the strategy execution and should consequently be informed of how
well (or not) the process of strategy is proceeding. The quality of the
strategic decision-making process depends on quite a number of important aspects, as highlighted in the following Figure 6.10.
Because of the increasing volatility, directors should go beyond
the expected and be prepared for major adverse effects, anticipating
change and asking for different scenarios. Taking sufficient time for
‘what if’ discussions, even debating alternative responses in a hypothetical context may be worthwhile. Versatility requires attentiveness
to the context and its demands, anticipating when change is required.
Some reflection questions on strategy are provided by Conger (2009)
(see Figure 6.11).
A real-life example of how a Dutch independent director challenges
management on a big acquisition deal is provided in Figure 6.12.
Moreover, ex-post evaluations and lessons learned are important to
build a culture of continuous improvement in the board’s performance. It is not straightforward to recognise mistakes, but one can learn
a lot from an ex-post evaluation of critical strategic decisions, such as
M&A, large investments or divestments, etc. Recognising and acting on
a failed course of action is critical for governance effectiveness.
●
●
●
●
●
●
Taking all relevant goals into consideration;
For each alternative the respective advantages and disadvantages,
potential return, costs and risks have to be evaluated carefully;
Intensive search for extra, new relevant information;
Serious attention for the information and expert views of those that
oppose the/some proposals;
Final screening of advantages and disadvantages before making final
choice;
Coupling the choice with a detailed implementation (and crisis) plan.
Figure 6.10
✓
✓
✓
✓
✓
Aspects of the strategic decision-making proces
Does this proposal fit with the general strategy?
What is the cost of not doing this?
Are there alternatives?
What are the unseen risks?
Who would oppose this?
Figure 6.11
Reflection questions on strategy
Fine-tuning Board Effectiveness Is Not Enough
173
The size of the acquisition is really big and reflecting the potential deal
again, I would appreciate if you could explain in more depth, at our next
board meeting, some aspects of the deal such as:
✓
✓
✓
✓
✓
✓
✓
Certainty to realise the ‘longer term synergy opportunities’ as
described.
Which managers (both from acquired company and our own division) will constitute the team that will run the new business and its
integration?
Will the quick exclusivity/high price be counterbalanced by a beneficial S&P Agreement (less reps and warranties?)
Which person in the management board will be responsible for the
acquisition and the subsequent integration?
Will/could our responsible executive board member play a role in the
BB project after his retirement?
Combined procurement.
Will the deal influence, in a material way, the corporate tax strategy?
Figure 6.12
Reflection questions on M&As
At the same time such more elaborate strategy process may reveal
quite a lot about the management team. Are directors conscious of the
spread of views amongst the management on the vision and strategy?
Are they aware of tensions on the strategic course between the members
of the top management team? Our governance research on listed companies in Belgium has revealed that in practice top management is not
inclined to inform the board on differences in opinion within the top
team, nor do they want to come to the board with a strategy proposal
that does not receive the support of the whole team. Consequently it
might be interesting for directors to become more attentive to the strategy process behind the scene, for example, which proposals do not get
into the board room. An interesting test in this respect is to question
management about the market challenges, the strains confronting the
company and the route it should take. Ideally a strategic conclave might
create a more open atmosphere than a regular board meeting and as
such might reveal a deeper understanding of the strategic views of the
different members of the management team.
Although most boards want to be (more) involved in the strategy
development (Carter and Lorsch, 2004), some academics are critical about this evolution. Thomsen (2008), for example, is convinced
that the marginal value of a board of directors steeply declines when
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it comes to their involvement in strategy (idem for risk management,
shareholder and stakeholder relations). Thomsen states that – due to the
lack of insight and information – (independent) directors are rather enablers than generators of strategy. Also research of the London Business
School (Acharya et al., 2008) revealed that the role of listed companies’
boards is usually at best limited to challenging the strategy developed by
management. Their directors are not involved early and often enough
in the strategy process, not being presented with or exploring credible
alternatives, or having sufficient information and insight to effectively
engage in challenging the executive team. On the opposite end of the
spectrum stands the private equity portfolio company boards who by
far outperform the listed companies’ boards mainly because of their
higher involvement in strategy and performance management. Those
PE portfolio companies’ boards work very closely together to shape
the strategy and define the priority agenda. Such boards are often the
source of major strategic initiatives and ideas, stimulating management
to look for ‘out of the box’ opportunities.
Our research with unlisted companies and companies backed by private equity convinced us of the value add an effective board can bring
to the strategy process. However such value add does not materialise
itself so easily and necessitates that directors have an in-depth view on
the company and the business, while at the same time devoting more
attention to strategy than merely one annual open brain storm session.
The model given in Figure 6.13 tries to demonstrate how such more
elaborate strategy role might work out in practice. It includes not only
the interaction between the board and management, but also refers to
the specific role of the shareholders and a (eventually ad-hoc) strategy
committee. Moreover, it starts from the assumption that strategy is a
process that never ends, while at the same time being aware that not all
meetings need to question the strategy over and over again. Board effectiveness is best served by a clear delineation and respect of each other’s
role as well as a clear understanding of the priorities per meeting.
Monitoring duties (and the alertness for red flags)
Although there is much less controversy as to the monitoring role of
the board, the execution in practice is not straightforward at all. Most,
if not all governance codes have been developed in reaction to failing
monitoring systems (like the Maxwell case in the 1990s, the Enron case
at the beginning of the 21st century or more recently the financial crisis). Like Carter and Lorsch pointed out (2004, p. 141), ‘It seemed that
Fine-tuning Board Effectiveness Is Not Enough
Shareholders
175
Aims/objectives
Ambition
Management
Main issues of company’s strategy
Strategic choices/options
Strategic committee
Board of directors
Debate strategic framework
Challenge strategic proposals
Agreement strategic direction
Management
Adjustment proposals
Scenario/risk-analysis
Strategic committee
Board of directors
Decision concrete/specific strategic proposal
Management
Strategy implementation
Development of ‘ad hoc’ files
Strategic committee
Board of directors
Follow-up strategy implementation
Decision ‘ad hoc’ files
Adjustment strategic plan
Adjustment objectives/ambition
Shareholders
Discussion strategy and results
Agreement adjustment objectives/ambition/plan
Management
Figure 6.13
New strategy cycle
A board’s strategic role in practice
the board was the last to know, and yet the industry ‘dogs’ had been
barking for some time about the company’. Consequently, the attention
for a deepening out of the monitoring role of the board of directors has
been on the agenda everywhere in the world.
In fact, the monitoring role of the board touches upon all of the
company’s operations, activities and decisions. Monitoring is most of
all associated with the financial control of the firm. In the larger companies this duty will be taken care of by a whole battery of people,
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not in the least the audit committee, the external auditor and the internal audit. Audit committees have complex duties in overseeing the
financial statements and the respect of the accounting principles. They
should devote sufficient attention to delicate accounting issues, especially when judgement calls have to be made. Another important complementary monitoring duty relates to internal control and (enterprise)
risk management. In this respect, the board should stimulate and oversee that the company develops a tailored management information system. Here the governance practice might be quite different according
to the size of the company as well as the type of shareholders involved.
In PE portfolio companies there has always been a great deal of investment of boards in understanding operational, business and financial
risk. They seem to be more focused on risk management rather than
risk avoidance. On the other hand the listed companies have been
forced the last decade to develop much more sophisticated risk management processes, obliging the board to decide upon the risk appetite of the company. Risk management should indeed go beyond the
traditional ‘insurable’ risks, including all types of risks, like financial
and operational risks. But a domain that is often underdeveloped, while
deserving greater attention, is the domain of strategic risks. Whereas
the internal control and risk management can be delegated to the audit
committee the discussion of the strategic risk should be at the core of
the board’s deliberations. Unfortunately, our experience with board
evaluation exercises points out that boards are still struggling to tackle
this aspect in an appropriate way.
Performance management is a monitoring role of the board that is
conceived quite differently from one company to another. It should
include the analysis of the financial as well as the non-financial performance, including relevant indicators of corporate social responsibility. The typical performance management in (larger) listed companies
attaches quite some importance to delivering the performance the
market expects and overseeing the quarterly/annual information to the
financial markets. At the other extreme, boards of private equity portfolio companies play a much more prominent role in performance management and are actively involved in driving performance, monitoring
progress intensively (Acharya et al., 2008). This part of the board’s role
is perhaps the most striking difference between those two types of
boards. Performance management includes identifying the critical performance initiatives and the key performance indicators to monitor as
a board. Such exercise coincides to some extent with the evaluation of
management performance.
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With hindsight of the financial crisis, it is also very important that
directors are vigilant guardians, attentive to any ‘red flag’ they may
observe. A good board must be able to offer contestable advice and smell
any smoke coming under the door. To this end, it is not only relevant
to have independent directors, but such vigilance requires that some
members of the board have relevant industry experience and can smell
that smoke might be coming. Moreover it is essential that directors have
a frank discussion within the board and with management. In order to
be able to recognise problems before they are out of control, directors
should speak out frankly to each other about their concerns. This is
where strategy and monitoring again meet: directors should sufficiently
challenge the strategic direction of the company, be alert to signals like
missed plans and budgets, acquisitions that never work out, risk management failures, loss of market share to competitors, inadequate staff
development, etc. (Carter and Lorsch, 2004).
A dimension of the board’s monitoring role that has not received the
attention that it deserves is the so-called internal governance (Van den
Berghe, 2009). In this context, internal governance simply refers to the
oversight of subsidiaries. In a globalised world, the single corporation
becomes more the exception than the rule. Many companies nowadays control different subsidiaries via share holdings. For example, in
its 2011 statements, Siemens reported more than 900 fully-owned and
400 majority-owned subsidiaries or joint ventures. General Electric,
meanwhile, holds an ownership stake in 8,000 entities. In each of these
cases, the subsidiaries are legally independent, with their own management teams and discrete businesses, yet they are very core and vital to
the creation of value, also for group shareholders. The more complex
corporations become, the more they are a conglomerate of diversified
subsidiaries, branches and business units, the more elaborated internal governance should be. The example of Lernout and Hauspie shows
how vulnerable shareholders and stakeholders may be when no robust
internal governance mechanisms are installed by the corporate headquarters or when the corporate board has no proper nor full oversight
of what is happening in the subsidiaries worldwide.
Everyone knows good (corporate) governance must begin at the helm
of an organisation, but for many multinationals it ends there, too.
(Steger and Brellochs, 2006)
Finally, boards of directors – especially of listed companies – face
an increasing amount of transparency requirements, not in the least
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triggered by the many corporate failures and crisis. The aim is to provide correct information to the market that goes far beyond financial
statements. Being transparent on various dimensions of the company’s
governance and activities should enable market parties to make an
informed judgement. Part of the board’s monitoring duty is to oversee this external accountability and disclosure. Unfortunately, this
task appears to be less straightforward in practice. In the previous paragraphs, we already pointed to the danger of the ‘box ticking’ approach,
an approach many companies adhere to in there reporting on governance issues. Moreover, as shown by the many ‘monitoring’ studies,
information on various elements of their governance is still lacking,
leaving investors with an incomplete picture. In more extreme cases, a
board of directors may be accused of providing misleading information.
The Fortis debacle is still a painful memory in this respect.3
Advisory/support function
Directors can also play an important role as advisors to management.
This role reflects a resource-based view on the board of directors. Nonexecutive directors have indeed a wide experience and additional expertise they can bring to the table. Also their broad network can open doors
in the interest of the company. The smaller the company the more this
role comes to the forefront. However, it should be made clear from the
outset that directors are there to oversee and control management, not
primarily to be the advisors to management. Finding a right balance
between the support role and the monitoring role is essential for effective governance.
Some conclusions
Defining governance and board effectiveness is not a straight forward
exercise. In principle, boards are seen to be responsible for reaching
the corporate goal and ambition. But it is impossible to judge the value
of a board on its own in isolation of the ‘system’ it operates in. Board
effectiveness is best served by a ‘system approach’, that views boards
as dynamic and open social (and political) systems, where a change in
one element will affect other elements in the system. Such approach
is inherently different than the one traditionally used in academic
research. Historically most academic research is centred around specific
individual sub-elements of the governance system and its effectiveness
judged on the base of corporate results. This approach does not yield
consistent results because the governance practices are so complex that
Fine-tuning Board Effectiveness Is Not Enough
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they cannot be brought back to such unilateral and direct links. We need
to look at board effectiveness in different steps: from input over board
process to board output, while taking into consideration the numerous
interactions between all of the constituent elements within the broader
framework of external boundaries (legislative and societal environment
as well as the industrial environment) and contingencies (the relationship between the board and management, respectively shareholders).
Measuring board effectiveness should start with the question what
effectiveness really means. We consider a board to be effective if it facilitates the creation of value added for the company, its management, its
shareholders and all of its relevant stakeholders. The board’s value added
capacity will be enhanced if we develop a better insight into what really
drives board output. In our opinion the two main drivers: (1) a board
that optimally performs its role in line with the relevant context factors
and (2) that is able to reach the goal of effective decision-making in the
long-term interest of the company and its relevant stakeholders. Each
of those board output drivers is influenced by a whole set of factors,
which impact each other in a dynamic and interactive way. In a system
approach, it has to be made clear from the outset that governance components or board aspects cannot be analysed in isolation.
Therefore we developed a holistic board assessment model that positions the board as an open system, interacting with the firm’s environment, the external contingency factors, the business environment
and the internal organisational environment. Besides the respect for
the legal obligations, companies should align their board model and
governance approach with the ‘best practice’ guidance, given by the relevant governance codes, while paying sufficient attention to the valid
societal norms and expectations. However, the company must use the
flexibility offered to translate the guidance into a fit with the corporate
situation including the stage in its life cycle, the challenges the company is facing, the strategy it envisions etc. Moreover, it is important
that the positioning of the board of directors is in line with the respective roles of shareholders and management, while paying special attention to their mutual interaction and the dialogue with stakeholders.
In fact, a key driver of board effectiveness is the optimal alignment of
the board model with the shareholder, stakeholder and management
model.
Board assessment should bring along a view on the performance of the
board, i.e. judging its value added and comparing the board’s contribution to the expected board role. A board has to perform a multitude of
tasks, but the configuration of board roles may be quite different from
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one context to another. In contrast to mainstream governance literature
(focusing on agency theory), the configuration of board roles should be
built on a multi-paradigm approach with the following four basic board
tasks: making sure the company has the right leadership; deciding upon
the strategic direction of the company and how this should be realised;
monitoring execution and results, including the governance scan and
board evaluation; advisory and support function.
The leadership role of the board is one of its most crucial tasks. Of
course, it consists of a multitude of subtasks. A crucial task is to appoint
and take care of the succession of the leadership team, a team that is perfectly aligned with the strategic ambitions. The board will have to decide
on a workable delegation policy and the empowerment philosophy that
underlies such delegation. It is important for governance effectiveness
that there is agreement on a clear division of roles, collaboration and
interaction between the board and management, such division perfectly
fit with the specific context at hand. Monitoring executive performance
is of course a crucial element in the board’s leadership role. The leadership
role also includes the duty to come to grips with a clear understanding of
the nature and purpose of the organisation as a touch stone for judging
strategic ambitions and corporate performance. Directors must exercise
judgement and have a real challenge in deciding to whom they are really
responsible and where there commitments ultimately lie. Apparently,
board practices on balancing shareholder and stakeholder interests vary
across different types of companies and nations. But the financial crisis has given a boost to a higher sensitivity of boards towards fostering
long-term value creation and corporate success within a framework of
corporate social responsibilities. However, the multiplicity of goals makes
one parameter of teamwork effectiveness challenging. Judging board
effectiveness on the basis of the evolution of the share price or even total
shareholder return – as practiced in many academic publications – is
therefore no longer a valid route. It is essential for directors to build a
shared view of the corporate context, a holistic common understanding
of the enterprise, its vision, goals, values and performance expectations
(financial as well as non-financial ones).
The strategic role of the board of directors has historically been subject to much dispute, especially in the management literature. Not surprisingly, there is no board duty that is executed with so many nuances
around the globe as the interference of directors in the strategic process. Consequently any board evaluation should carefully check whether
there is an explicit view on the respective roles of the board of directors,
management and shareholders in the process of strategy development,
Fine-tuning Board Effectiveness Is Not Enough
181
strategic choices, strategy implementation and evaluation. The trend
towards more accountability of directors coincides with the tendency
for the board to play a more prominent role in the strategy process
with an annual strategic retreat and a vigilant follow-up throughout
the remainder of the year of the evolution of the strategy execution. It
might also be important that directors get a feel for the strategy process behind the board scene, for example which proposals do not get
into the board room. Versatility requires attentiveness to the context
and its demands, anticipating when change is required. Ex-post evaluations and lessons learned are important to build a culture of continuous
improvement. Recognising and acting on a failed course of action is
also critical for governance effectiveness.
In contrast to the board’s role in strategy, there is much less controversy
as to its monitoring role. However, the execution of the monitoring role
is not straightforward at all, since many corporate scandals and business
failures are due to a failing monitoring system. Monitoring is most of all
associated with financial control, but in fact it touches upon all aspects
of the company’s operations, activities, decisions and results, including
also internal control and risk management, performance management,
internal governance, external accountability and disclosure. In the larger
companies, a whole battery of internal and external experts is involved to
support the board in performing this important oversight function. The
challenge for board effectiveness is not only to be complete in performing the monitoring role but at the same time to be aware of the need for a
balanced collaboration and a clear role definition for the board, its committees and all experts involved in this monitoring process.
Directors can also play an important role as advisors to management.
The smaller the company the more this role comes to the forefront.
However, finding a right balance between the support role and the
monitoring role is essential for effective governance.
Notes
1. This practice is for example commonly found among venture capital and private equity funds who invest in smaller or start-up businesses where management experience is lacking. The non-executive directors may be extra paid
for the extra time invested.
2. See e.g. the discussions in various issues of Harvard Business Review, edited by
Kenneth Andrews.
3. In 2010, Deminor launched a procedure against Fortis SA/NV for having violated its obligations as a listed company with respect to the information it
has to communicate to the public. The purpose of this procedure, which is
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launched before the Court of commerce of Brussels, is to claim damages for
the investors who have hired Deminor. Deminor believed that, in particular
since the announcement of the launch of the takeover of ABN Amro up until
the dismantling of the group in the autumn 2008, Fortis’ communication
was misleading on several material aspects, including on its subprime exposure, its dividend policy, its liquidity, its solvency and the consequences of
the acquisition of ABN Amro. During this period of time, investors decided
to buy and/or hold Fortis shares based on misleading information from Fortis
(Deminor, 2010).
References
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for a Complex World (Boston: Harvard Business School Press, 2004).
Conger, J.A. Boardroom Realities. Building Leaders Across Your Board (San Francisco:
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Daily, C.M., Dalton, D.R. and Cannella, Jr. A.A. ‘Corporate governance: decades of dialogue and data’, Academy of Management Review, XXVIII (2003)
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Forbes, D.P. and Milliken, F. ‘Cognition and corporate governance: understanding board of directors as strategic decision-making groups’, Academy of
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Inquiry into the Determinants of Board Effectiveness, PhD thesis (Ghent: Ghent
University, 2007).
McKinsey Quarterly, Making the board more strategic: A McKinsey Global Survey
(March 2008).
Nicholson, G.J. and Kiel, G.C. ‘A framework for diagnosing board effectiveness’,
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Nordberg, D. Corporate Governance – Principles and Issues (London: SAGE
Publications, 2011).
Steger, U. and Brellochs J. ‘Herding your subsidiaries towards good governance’,
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Thomsen, S. ‘A minimum theory of boards’, International Journal of Corporate
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Useem, M. ‘How well-run boards make decisions’, Harvard Business Review,
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427–442.
Part II
The ‘Inside Out’ Perspective
7
An Effective Board Makes the
Necessary Trade-Offs
Lutgart Van den Berghe and Abigail Levrau
Historically, the legal basis of corporate governance has been rather limited, leaving the companies free to organise their governance, direction
and control as they saw fit. But corporate failures in the 1990s (such as
Maxwell or BCCI in the UK) and in the beginning of the 21st century
(such as Enron and Worldcom in the United States, or Parmalat and
Ahold on the European continent) led to a real up-rise of governance
codes (in Europe) as well as legislation (SOx in the US and European
Directives) that drastically increased the requirements companies had
to comply with. Although governance codes can never mimic the
numerous challenges companies are confronted with, they have come
a long way in describing in greater detail the conditions to reach good
governance practices in general and board effectiveness more specifically. However, the recent financial crisis was an abrupt wake-up call
that those recipes were not that effective after all. In answering the
societal revolt, politicians (at both sides of the Atlantic) took over the
reins and overwhelmed the companies with an avalanche of legal rules
and obligations. This incremental building up of corporate governance
laws and regulations, combined with strengthened self-regulatory recommendations, led to a construction that is not only very complex,
but at the same time contains quite a number of paradoxes, that need
further in-depth reflection and trade-offs.
How can you promote the board as a collegial body if more and more
discussions are delegated to specific board committees? How can you
promote critical points of view by independent outsiders and constructive dissent, yet also reaching a consensus that is fully supported by
the whole board? Can true independence be compatible with annual
election or ad nutum dismissal of such directors? Can executives be
both your peers as a director and at the same time the persons you
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should monitor? And what about the dual role of a non-executive director as an advisor while also being the critical monitor of management?
Diversity needs are growing in all directions, but what about a collegial
chemistry? The board duties and the time commitment are increasing
exponentially, but the remuneration of non-executive directors is not
keeping pace. On the contrary, remuneration of directors is the central focus of huge societal and political attacks, completely ignoring
the crucial distinction between executive and non-executive directors.
Board decisions are taken behind closed doors not at least because of
the sensitive issues that are being discussed. In addition discretion is a
legal obligation of directors in many jurisdictions. Yet we live in a world
of full disclosure and huge transparency needs, dictated by governance
codes and regulations.
The challenge of this chapter is to look deeper into each of these
apparent paradoxes and reflect upon possible ways for boards to make
the correct trade-offs.
Trade-offs to ensure that the board behaves as
a collegial body
Boards embody an interesting paradox: they are simultaneously among
the most and the least hierarchical institutions in the business world.
As a collegial body – at least in theory – there is an almost complete
absence of formal hierarchy within the board. Each director is individually and jointly responsible. Even the chairman is supposed to deal with
the other directors as peers. At the same time, the board sits at the pinnacle of the corporate structure and as such is – theoretically at least
– the boss of the CEO, mostly member (and thus peer) of that same
board. However, reality is far more complex because director position
(and power) may well depend on the degree of insight and information.
The non-executive directors completely depend upon the CEO and the
other executives to get the necessary information to perform their tasks.
Put differently, non-executive directors suffer from an information gap
vis-à-vis the executives while at the same time being responsible for controlling and monitoring those executives. This apparent paradox also
puts forward some legal aspects. Although executive directors know
far more from the inside and outside of the corporation, non-executive
directors are assumed (in Europe) to have the same collegial responsibilities, accountabilities and even liabilities. Moreover, a comparable
difference in information and insight may exist between the chairman and the other non-executive directors, between the members of a
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specific board committee and the non-members, between the directors
representing the ‘controlling’ shareholders and the independent directors. Consequently, we need to devote much more attention to improving the information process and sources for the non-executives.
Collective decision-making in its own right inhibits an important
set of trade-offs. In fact, the board has been constituted as a collegial
body, because it is assumed that key decisions necessitate a collective
decision-making mechanism. As we will see in Chapter 8, collective
decision-making may have quite substantial advantages over individual decision-making. However, these advantages will only be reached
if the specific conditions of effective group dynamics are materialised.
One of the main conditions is the need to reach consensus, based on
in-depth discussions that leave ample room for constructive dissent.
There must be a balance of perspectives on the board, building decisions on a wide and diverse set of opinions. In order to reach the goal
of constructive dissent, boards are increasingly composed of independent ‘free-thinking’ individuals, yet at the same time they must
function smoothly as a team. But can you reach a good cooperation
between a group of ‘high calibre’ individuals (each with their own ego),
with complex diversities of style, personality, background and being
attached to their independence? With the emphasis on more independent directors, the opinions are assumed to be even more diverse
than ever before (the opinion of independent directors are assumed
not to depend on another person’s opinion or choice). Independent
directors are attracted to intervene actively in the board’s deliberations with their own firm and non-biased opinion, critically judging
the proposed decisions with respect to the (long-term) interest of the
company. The difficulty is to get independent individuals with a tendency to be critical and even distrusted to work together. More attention for board chemistry and director behaviour is therefore of utmost
importance. A good chemistry is vital. Good cooperation within the
board team requires that directors take into account what everyone is
saying, going beyond self-interest (faced with choices, a self-interested
person chooses the one that benefits him personally the most) and
selfishness (giving priority to one’s personal scoring). This goes hand
in hand with professional behaviour aimed at building trust (while
staying vigilant on verification) and reliability (you can be confident
when they promise something or commit themselves). It also implies
a social behaviour, fostering durable relations, not taking advantage
of each other, while at the same time being strict on punishing noncooperative behaviour. It is evident that all these important dimensions
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of a professional director have been grossly overlooked in the governance codes as well as in the recruitment and selection process.
The board’s main role is to direct and control the company. This
dual function in itself may give rise to quite a number of tensions. The
board’s duty to ‘direct the company’ has of course to be seen in light of
its ‘part-time’ presence in the company. In so far that the board’s first
important duty is to make sure it installs the right permanent leadership by nominating a professional top management, evaluating its
performance and deciding on its remuneration. Although the board
will delegate an important part of the decision-power to the corporate
leaders, he will remain responsible for quite a large set of duties. Such
as deciding on the corporate goals and values, approving the corporate strategy and the concrete plans for its execution as well as setting
key performance indicators. Besides this direction role, the board plays
an important monitoring role, focusing on the conformance of the
outcome and process with the approved goals, objectives and values.
Directors watch over the execution of the strategy, analyse the outcome
in comparison to the performance targets while also carefully controlling the (financial) results and the risks involved. These different roles
require a very different orientation and behaviour of directors. The
conformance role demands careful monitoring and scrutiny and is risk
averse. Stimulating performance demands vision, in-depth understanding of the organisation and its environment, and a greater willingness
to take risks. Not everybody is convinced that these two fundamental
different roles can be reconciled. Cees Visser ,1 for example, argues that
one should eliminate the advice role and limit the role of the supervisory board to supervision, monitoring and control only. Only such
focus will guarantee more independent supervision and less inclination
to have conflicts of interest in controlling one’s own strategic proposals
and agreed upon strategy. This suggestion, aimed at the two-tier board
structure (in the Netherlands), ignores however the claims put forward
by the Dutch ‘Ondernemingskamer’ that the Dutch boards have not
taken their strategic role sufficiently at heart. Although one might differ
about the ‘depth’ of the involvement of the board in the strategy process, it is clear that the board has been installed as a college in order to
decide on the most important choices for the company. Consequently,
strategy is at the heart of the board’s duties. But directors should be
aware that the combination of the monitoring function with the direction function will necessitate the necessary trade-offs in the respective
roles of the executive and non-executive directors and of the board and
management. Executive directors are assumed to play a prominent role
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in the strategy cycle, while being more at a distance when the controlling and monitoring function of the board is at stake. It is the other
way around with non-executive directors, who play a predominant role
in the audit, remuneration and nomination files, while they are less
involved in each of the steps of the strategy process. In addition, the
dual role of the board implies for non-executive directors the need to
combine the necessary distance and good relationship with management (and executive directors). In this respect, Sir David Walker (2009)
states that non-executive directors have to motivate executives, inspire
them to act (as accelerator) while also challenging them. Challenging
does not mean to overload them with fear, but make them well aware of
the limits of the resources and the corporate risk appetite (the brake).
A complementary element of specialisation can be found in the specialised board committees. According to Ward (1997) the 21st century
board is characterised by committee federalism.
The rise in the board committee power is already turning them into
the tail that wags the boardroom dog at many companies. Tightened
duties, with stronger technical oversight and checklists of procedures to prove compliance, have shifted power to committees. This
is where the real action is migrating today. The long-term result will
be a sort of governance federalism, with the overall board serving as
a nexus that unites the power of committees.
Combining the drive towards a truly collegial board with the increasing
emphasis on board committees, each specialising in one of the main
domains of direction and control (nomination, remuneration, audit
and risk) is in itself again a kind of a paradox. Encouraging directors to
focus and specialise, requires no less than a major paradigm shift in the
way that a collegial board is conceived to work together. The symbiosis
between the main board and its board committees is one of the largest
challenges and trade-offs in the modern governance recommendations.
On the one hand the installation of board committees makes sense:
it allows making optimal use of the directors’ specialisation and their
available time. Specialisation and focus can be the effective response to
complexity, the need for in-depth discussions and for more pro-active
attitude of directors (Carter and Lorsch, 2004). At the same time, this
evolution might be dangerous from several perspectives. The more indepth specialisation of non-executive directors is not aimed at making
them the functional specialists, because they do not have to duplicate
the management responsibilities. Their duty remains on the steering
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and monitoring level, not at the development or execution level. Too
much interference with the operational business is counterproductive
(from an efficiency point of view) and might lead to serious objections
of management. Even more important is the fact that more involvement of (some) directors in specialised sub-domains of the board’s
responsibilities might make them not only better informed than their
colleagues, but also more implied in the specific decision-making. The
more important the issues might be, the more threatened the nonmembers might feel. Our board assessment experience clearly showed
that the least problematic is the role of the audit committee. More
frustration pops up around the impact of (the members of) the remuneration and the nomination committee. But most critique is oriented
towards strategic committees, because directors consider strategy as the
life blood of a working board. According to Carter and Lorsch (2004),
adding other board committees to the classical three (audit, nomination and remuneration), such as a strategy committee, often creates tensions with management because they delve too deep and get involved
in managerial decisions. However, such a committee may be a viable
solution for ad hoc projects (e.g. acquisition, important divestiture, crisis, risk situation).
A specific side-effect of board committees includes the dual role nonexecutives themselves have to perform in discussing the board files.
Being the chair or member of a board committee, a director will play a
‘subordinate’ role towards the full board, ‘presenting’ the committee’s
advice while the other non-executive directors are assumed to take the
role of critical evaluators and discussants of those proposals (and the
other way around for other committees). It is interesting to observe that
such reporting and discussions might take another format and create
other types of board dynamics than the traditional interaction with the
presentations made by management (Meurisse, 2011).
Since greater focus is key to governance excellence in complex businesses, we will have to find a way around and solve the implicit and
explicit trade-offs that come with board committees. We may never forget that it is the main board that finally has all decision rights as well as
responsibilities and accountabilities for effectively governing the company. This does not mean that boards need to redo the work performed
in committee meetings. More attention needs to be paid to a swift and
clear interaction between both levels. The committee chairs should diligently and carefully inform all directors about the committee proposals
and give notice of the diverging opinions – if any – within the committee. All directors should feel responsible and interested to take fully part
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in the approval of the committee proposals. Companies will also need
to invest more in a periodic assessment of the effectiveness of board
committees: do they achieve their role and their purpose, is their composition adequate, do they cooperate positively with the board, etc.?
The trade-offs in composing the board of directors
If there is one governance item that has engendered worldwide attention, it certainly is the composition of the board of directors. Today
companies, especially the listed ones, are confronted with so many
additional requirements and even mandatory rules for board composition that it becomes a hell of a job to make all the necessary trade-offs.
On the one hand, a company should strive for an ‘optimal’ board size,
because this is a precondition for having effective board discussions
and reap the benefits of collective decision-making. On the other hand,
corporate boards are faced with a complex set of obligations related to
diversity, including business expertise and board experience, to specialised board committees and independence, which could easily lead
to a large parliament, rather than a smooth collegial team. Moreover,
each of these requirements in their own right leads to quite a number
of trade-offs that a board needs to make when deciding on its optimal
composition.
In the 1990s, the need for independent directors was put forward as
one of the main governance recipes to give the boards more teeth in
their ‘supervisory’ function.
Non-executive directors who are separate from and genuinely independent of management, provide a vital counterbalance to the executives, as well as valuable advice, guidance and monitoring. (Colvin,
The Australian, 13 July 2011)
In companies with dispersed shareholding it became clear that management did not have sufficient countervailing power with boards that
were merely handpicked by the corporate leaders themselves. Everyone
remembers the provocative statement on (US) directors who were compared with ornaments on the corporate Christmas tree (see Lorsch and
Maciver, 1989). So boards needed to become much more independent
of management, with a majority of independent directors forming the
backbone of the empowered board. Apparently, the same recipe was
sought for companies with controlling shareholders. In this case, the
‘disease’ was different and consequently the emphasis was on the need
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to have sufficient independence and countervailing power towards the
powerful position of the main shareholder(s) instead of the CEO (with
the main shareholders being insiders, present or represented on the
board). Most of the countries with controlling shareholders went a long
way in obliging (by means of law) or at least promoting (by means of a
governance code) more independence in the board. Not that they went
so far in mandating a majority of independent board members, but at
least they need to install a majority of independent directors in the
most important board committees (audit, nomination and remuneration committee).
At the same time it is clear that the role and functioning of independent directors has been under attack, not in the least in the slipstream of the financial crisis. Having more independent directors is not
a synonym per se for better governance, because board independence
comes at a cost (Carter and Lorsch, 2004). Directors who have no other
relationship with the company may probably know not so much about
its business and will have a lot to learn (for which they will be very reliant on management). The more boards are becoming independent, the
more directors are very part-time (with demanding careers, serving on
more boards). Extending the number of days non-executive directors
need to be available for their board mandate still leaves them with only
a fraction of the full-time commitment of executives. The solution is
not to abolish independence, because it remains instrumental in avoiding conflicts of interest and is a necessary prerequisite for unbiased
board oversight. But the pendulum went too far, with too much attention being paid to independence at the detriment of other design elements. Boards need to understand the downside of independence and
find ways to combine the advantages with better managing the potential disadvantages. So they need to achieve a better balance between
understanding the business and independence while making sure a
minimum number of non-executive directors have deeper knowledge
of the company and its industry. According to statistics of Governance
Metrics International, the general trend in Europe the last couple of
years seems to be that the relevant importance of independent directors has regressed (from 49% to 38% in Germany, from 68% to 58% in
Sweden and from 65% to 51% in France over the period August 2005
to December 2010). This trend seems to prove that companies attach
more and more importance to other competencies and business expertise than to ‘textbook’ definitions of independence.
Independence is indeed only one essential component of the diversity
and competence needed to stimulate good governance. While board
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independence is important (and independent directors form a crucial
input factor to this end), we may not focus on one element of good governance and ignore the complexity of how boards (should) work. The
challenge is finding the right balance between (cognitive) diversity and
independence. Business knowledge and sector expertise should never
be substituted by a purely independence focus. Moreover, team context
principles may limit the ideal of absolute independence. Positive regard
and avoiding open conflict, an essential element of effective teams,
may be seen as a threat to independence. An aligned team may lack
sufficient independent thinkers and succumb to groupthink. It is a fine
line, and the board’s ability to lead as a team is about creating appropriate checks and balances and sufficient interdependence, not about
independence in the absolute.
The concept of independent directors raises an important challenge
in governance models with controlling shareholders. In such companies, independent directors are mandated to perform a countervailing
power towards the insider shareholders. However, these shareholders
control the shareholders’ meeting (and often also the board) and as
such have all the powers to nominate, appoint and dismiss independent
directors. Moreover, in many countries independent directors can be
dismissed at will (or ‘ad nutum’), even without any formal explanation
or reimbursement whatsoever. If the shareholders decide that a board
member no longer lives up to ‘their’ expectations, they have the right to
send him (or her) away without further notice or explanation.
These points of reflection have been largely ignored in academic
research, probably because most research focuses on the Anglo-American
models with dispersed shareholding. In contrast herewith, independent
directors that operate in a model with controlling shareholders often
express their concern about the apparent or potential impediment of
their independence. More recently, also the EU and some shareholder
activists have expressed their concern about this independence ‘paradox’. A special example of this increasing interest can be found in the
UK where the Financial Reporting Council is considering changes to
the UK Code to increase the independent status of directors in listed
companies with controlling shareholders (2011).
We therefore need to pay more attention to ways of promoting
solutions for this independence paradox in governance models with
controlling shareholders. The solution promoted by the Financial
Reporting Council (2011) is double: on the one hand, the board should
be composed of a majority of independent directors, even in companies
with controlling shareholders; on top of that, the independent directors
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must have a casting vote in the nomination committee when the nomination of independent directors is at stake. This solution will probably
be met with great scepticism by the majority shareholders, who consider their controlling position as one of the most essential conditions
for their willingness to go and stay on the stock exchange. Another
proposal that might inspire a route towards a (better) solution can be
found in the nomination procedure as developed by the Belgian State
for Belgacom. When launching the IPO, the by-laws and the prospectus
explicitly foresaw two types of directors, the ones nominated by the
state (by royal decree) and the independent directors nominated by the
general assembly, in a vote where the state had to abstain from voting.
So in fact, the independent directors are nominated by the minority
shareholders (holding less than 50% of the shares). Another additional
route could be to adapt the regulation of dismissal at will, for example by obliging a clear explanation in the shareholders meeting when
independent directors are dismissed before the end of their mandate,
or even to foresee a special majority (e.g. a total support of two-thirds
of all shareholders or a double majority of the controlling as well as of
the minority shareholders) and/or to foresee a compensation in case of
a pre-term ending (e.g. a severance pay equal to (part of) the director
remuneration for the remainder of the mandate period).
The last couple of years the attention of politicians and the media has
shifted to the gender balance on the board of directors. Although a better gender balance can be rationally defended on the base of the advantages offered by more cognitive diversity, attention is mostly focused
on (demographic) fairness and (economic) justice arguments. There is
probably no country in the world where the demographic texture is
well represented on the board of directors. For ages, boards have merely
been composed by relatively older, white, male directors. It is only during the last two decades that women have increasingly taken up board
mandates. Yet, even today, most boards still do not have that many
female directors. This ‘unbalance’ has triggered public attention, with
regular lists of companies having the best and worst gender balance
and with numerous proposals before parliament to introduce mandatory gender quota for listed companies, for state-owned enterprises, etc.
Some countries, like Norway, have shown the way, in the sense that
they were the first to introduce female quota regulations for listed companies, stimulating the other Scandinavian countries to go the same
way, yet with a more self-regulatory approach. Boards in these countries
are today among the most gender diverse, inspiring more and more
European countries to follow their example. Although it is the right of
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politicians to introduce gender quota legislation, this poses again an
important additional challenge for board composition. Companies and
their nomination committees will need to adapt their view on director vacancies. Gender diversity should not lead to ‘token’ directors, but
focus on the competencies and experiences needed. Diversity does not
come so easily and investments will be necessary to enlarge the relevant
pool of good board candidates.2 We do agree with Carter and Lorsch
(2004) that the so-called shortage of candidates is more likely reflecting nominating committees’ failure to look beyond the obvious than
it is because of a genuine lack of talent. Is the shortage of board talent
among women not the logical outcome of the view that the only good
directors are CEOs and ex-CEOs? With such reference group, the candidate pool is indeed very small.
A diversity element that has gained less attention in governance
codes, yet it is one of the main elements of a one-tier board structure,
is the optimal mixture of executive and non-executive directors. More
precisely, the choice of which members of the executive team also sit
on the board raises numerous important challenges that need further
reflection. Too much focus on independent directors can have the perverse, unintended effect that the vital role of insiders to effective board
functioning is overlooked. Insiders bring a depth of perspective on the
company (Sonnenfeld and Ward in Conger, 2009). There appears to be
a consensus that it is important to have the CEO as a board member
for the in-depth knowledge of the firm and its context. In contrast, for
other executives to join the board as a director, opinions may differ. A
first observation is certainly that the more executives on the board, the
larger the board will become, triggering the level of effective discussions. But there are other, more important disadvantages that deserve
our attention. It is essential for executives on the board to feel ‘equal’ to
everyone else in the board, in light of its collegial character. Given the
more hierarchical structure of most management bodies, this collegial
approach is especially tricky for other executives than the CEO, because
their boss is also member of that same college. This may make it hard to
take a position different from that of the CEO, while they cannot act as
a subordinate, since they are a member in a collegial board. The danger
is real that the other executive directors stick to the opinion or preference view of the CEO. Moreover, the presence of executive directors on
the board can pose problems if difficult issues about management have
to be discussed at board level. However, without executives, the board
misses the deep knowledge of the firm and the business environment,
such executives might bring into the deliberations.
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All these trade-offs might lead to the conclusion that it is best to have
the CEO on the board, while the other top executives might be invited
to present their dossiers to the board. This is what frequently happens
in practice. Our research of governance practices in listed companies in
Belgium revealed interesting observations in this respect. Inviting other
members of the management team to the board meetings brings the
executive team closer to the board and gives the non-executive directors a better view on the potential pipeline for succession planning.
Besides, it is also perceived to be an effective way to avoid the danger
that the board’s information is limited to what the CEO wants the nonexecutive directors to hear (making it more likely that the CEO can
mislead the board). Moreover, it is a good practice that all executives
are invited to the strategic conclave, so the non-executives can take full
advantage of their expertise and business knowledge in order to make
the important strategic decisions.
The trade-offs in the relation between executives
and non-executives
Besides reflecting on the role of executives on the board, the relation
between the non-executive directors and the executives, whether nominated as board members or not, deserves special attention. The board
must have an open and trusting relationship with top management in
order to be able to reach a productive critical working relationship. The
non-executive directors need to find the right balance between oversight and direction, between monitoring management and being their
advisors, between challenging the executives while at the same time
being supportive of their proposals. In an effective board everybody
tries to recognise that each party has a valid position and a job to do.
This is delicate because powerful egos are involved, significant careers
are at stake and there may even be a clash of styles and personalities.
For non-executive directors, an empowered board implies that they
need to invest time and energy in learning more about the company, its
business environment, its challenges and its risks. Who would be better
positioned to guide them in this learning process than the executives
themselves? Therefore, there is a growing trend to couple the formal
contacts in the margin of the board meetings with more informal contacts. Traditionally, non-executive directors have contacts with the management team at a limited number of formal meetings. Most of the time,
this will be during real-time board discussions, in front of the CEO and
the management group, which directors are supposed to monitor.
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How empowered the board might be, it is never the aim that nonexecutive directors trample on the toes of management. The challenge is to find the right balance and interface with management. This
balance is hard to achieve. The more the board gets empowered, the
higher the expectations towards directors, the more difficult this balance may become. We should clearly ask to what extent companies in
general and top management more specifically are prepared to accept
the consequences of a more involved board of directors. A point that
mostly poses problems is how far the board should get involved in the
operational matters. Their monitoring role should not be translated
into micro-management. The aim should be to respect the NIFO principle, that is, Nose In Fingers Out. In board discussions, it is important
to make the distinction between micro-management and appropriate
questioning, which is not always a bright line. What really defines
micro-management is not whether a director is digging into details.
It is really a question of which details and for what purpose. Drilling
down details may be beneficial if it helps revealing a higher level issue,
detecting structural elements, getting at the root of a problem or questioning the effectiveness of a process. Asking questions of an operational nature is not in itself micro-management as long as the question
leads to insights about strategic performance, major investment decisions, key personnel, choosing objectives or risk assessment. However,
micro-management may derail board discussions, taking the focus off
more serious issues. Micro-managing may typically happen in the area
of a director’s expertise and may be driven by the personal need to
demonstrate superior knowledge on the subject (Charan, 2009). In strategic discussions, non-executive directors can be a rich source of information and advice, but the entrepreneurship should finally come from
the management team. The board should ensure (and check) that management delivers the performance expected form them and encourage
and support management to take the firm forward. Once the nonexecutives become too much involved in an advisory role, they might
enter into a conflicting zone between advice, support and oversight.
This danger is especially present in smaller and medium-sized companies who suffer often from a lack of internal specialists and specific
support functions. There can be confusion about when directors are
offering advice and when they are making a decision that management
must accept.
The need to both control management and be their support and partner can be a source of role conflict and tension for both directors and
management. Effective boards are well aware of these potential tensions
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and invest to find the right balance that best suits the company and the
people involved.
The trade-offs to make sure non-executive directors
can perform their role in a professional way
Legally, boards are responsible for the company even if they delegate
the largest part to management. Even then, the scope of their responsibility is hard to reconcile with the limits of time and knowledge that
(independent) directors must live with. There is a growing gap between
what directors (can) do and what is expected of them. A key reality for
every board is that there is more to do than there is time to do it. Most
boards are still bound too tightly to historical practices and traditions
to handle their expanding responsibilities with ease (Carter and Lorsch,
2004). The sheer complexity of today’s businesses and the practical limits on directors’ time mean that boards simply can’t achieve everything
that is expected of them, even if they do devote more time to their
board duties.
Boards that clearly understand their roles will use their limited
resources better because their efforts will be much more focused. Boards
are becoming more differentiated in their composition and activities.
Directors must focus clearly on their major tasks, rather than trying
to do everything. Doing the right things is the challenge, while at the
same time managing the tension of upgrading the ‘time available’ and
the ‘knowledge required’. Additional solutions can be found in the
way the board is organised with a clear and differentiated definition
of a specific board’s role (and less dogma-driven design), where work is
allocated among directors (specialisation via the different board committees) and the correct board behaviour is promoted (all the rules in
the world won’t govern behaviour behind closed doors, only more peer
pressure through board assessments and education can help).
The old style board structure, with part-time ‘amateur’ directors, is
ill-suited for the heavy demands placed on today’s boards. If directors
want to live up to the huge expectations of their board mandate, they
will need to further professionalise. By professionalisation we explicitly mean that the director is willing to invest time and effort in getting acquainted with the needs of a specific board mandate and this
in three different directions: from a governance perspective (board
effectiveness), with sufficient knowledge of all of the different functional domains (director effectiveness) as well as of the company and
its business environment (business effectiveness). However the term
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‘professional’ director might also be used to refer to the director, who
builds a profession with different non-executive board seats. Gilson
and Kraakman (1991) proposed to introduce the professional director,
which they defined as being full-time committed to board service for a
portfolio of companies, with up to six mandates in their portfolio and
nominated by the institutional shareholders. They would be the ultimate pipeline between those who own and those who manage. This
approach is often used by private equity players who can rely on a
number of external or outside directors, experienced former CEOs or
experts specialised in the sectors the private equity company invests
in. The question is to what extent such directors can still be considered
independent directors in the strict sense of the word, if they need to
represent one of the shareholders. Where we do agree with this proposal
is that the status of a professional director could increase his independence in so far that, with so many seats he can offer his expertise to all,
but is dependent on none. Given the unwillingness (of US companies)
to open up their boards, their proposal resulted in no action.
Whatever the route chosen to arrive at a professional directorship,
non-executive directors will remain ‘non-executive’, leaving them with
a ‘part-time’ status at (each) company they govern. They will need to
cope with complex dossiers, take on their shoulders heavy responsibilities and combine this with other functions or mandates. However, even
as ‘outsiders’ they will need to stay up to date with the specific dossiers
on the board’s agenda. Here directors must be able to increasingly rely
upon better methods to make the relevant information available, accessible (in-between meetings) and memorable.
But the corporate world should also walk its talk and take the consequences of such huge investment of their non-executive directors
at heart. It is the corporation and its management that will finally
need to facilitate their non-executive directors becoming more professional. This comes down to quite a different position than today.
If non-executive directors need to fulfil their governance role as
assumed by law, by the governance codes and by societal norms, than
there is no other way than to better support these ‘part-time’ directors. This starts with induction and professional development offered
by the company, combined with a professional information process
and completed with a correct remuneration. As more is demanded of
directors in terms of time commitment, responsibility and exposure
to public scrutiny and potential liability, the question of a significant
increase in their remuneration is on the table. We agree with Carter
and Lorsch (2004) that compensation of directors is rarely discussed
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in the board room. It is only in the margin of a board assessment
that some companies may ask for a ‘bench marking’ study to find out
what others are paying. It is difficult to find a convincing logic for
the actual practices, certainly if compared to the remuneration paid
to executives or to consultants. 3 The whole subject is more mystery
than science. GUBERNA, as an association of directors, has been asked
for guidance over and over again. Therefore we recently developed an
analysis of corporate practices with listed as well as unlisted companies, of small, medium or larger size. Although market practices might
be quite different from one country to another, this study revealed
some interesting observations that might be valid also from an international perspective.
Whereas payment for services is seen as a straightforward practice,
quite a lot of small to medium-sized companies were – at least in the
past – rather reluctant to pay for their non-executive directors (most
of them being shareholder anyhow, so they were indirectly remunerated). Once independent directors enter the board room, it is clear
that for them a ‘decent’ reward for their board role has to be foreseen. Longitudinal research on the payment of directors in non-listed
companies (GUBERNA, 2012) clearly proved the significant increase in
the companies effectively remunerating their (independent) nonexecutive directors. At the same time, the amount paid has increased
over the last couple of years. However, the remuneration policy for nonexecutive directors does not seem to have been developed with great
reflection, leading to a very complex web of numerous pay practices.
Although many codes propose a fixed remuneration for non-executive
directors, many pay schedules include a kind of variable remuneration linked to the ‘performance’ of the director. The director’s performance is measured with respect to their effective time investment,
with indicators such as their additional functions in board committees, in chairing the board or the committees and in effectively attending the meetings of the board and the committees. Some companies
combine all of these time indicators on top of a fixed remuneration
for their general board mandate, while others only use some of these
elements (e.g. attendance record in the main board and/or membership fee per committee). More critical is the question of variable remuneration based on ‘corporate’ performance criteria. This issue deserves
special attention, with quite divergent views on the feasibility of such
remuneration policy. In light of the need for sufficient independence
and countervailing power towards management (who often receives
important performance-related pay packages), it is assumed that it is
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preferable not to (overly) expose non-executive directors to the same
type of performance-related pay. Anyhow, the failures in the financial sector have shown the downside of too much exposure to variable
remuneration. Consequently in many continental European countries, such variable remuneration is not an accepted practice for nonexecutive directors or is even prohibited by law (as is the case for listed
companies in Belgium unless explicitly allowed by the shareholders).
In other countries shareholding of directors is considered important
(UK, United States) if not necessary (see e.g. France). In those countries
shares and/or share options might be part of the remuneration package of a non-executive director. In companies backed by private equity
such performance-related remuneration might be the rule, rather than
the exception. The same holds for younger companies or start-ups who
may not have the necessary cash flow available to pay their directors
the necessary (fixed) remuneration and who need to rely on stock
options to compensate them in a sufficient way. Apparently there are
some advantages and disadvantages attached to both remuneration
approaches. The study of Acharya et al. (2008) provides an interesting
view in this respect. They make a plea for exploring new ways to change
the remuneration structure of non-executive directors and make them
more performance-related. This suggestion is based on the observation
that boards of PE portfolio companies outperform their colleagues at
listed companies, because such boards are far more focused on clear
performance objectives, given that their remuneration is aligned with
those performance objectives. However, the authors of the report
acknowledge that such type of variable remuneration may trigger the
independence of directors’ oversight role and carry the danger of a
focus on short-term results. But they consider the advantage of such
variable remuneration so important, that a search for corrective factors
to neutralise potential downsides be the goal to accomplish. In this
respect they, for example, propose to give non-executive directors performance shares tied to a rolling three-year performance period (which
brings those suggestions in line with the recent European executive
remuneration proposals).
Taking the need for sufficient checks and balances into consideration,
it is the shareholder that will finally have to approve the board remuneration policy and structure. However, it will be the remuneration
committee that will need to support the board in seeing to it that such
remuneration policy is developed, determining the form and amounts
of director remuneration, with appropriate benchmarking against peer
companies.
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The trade-offs in light of the increased attention
for transparency
Since boards make important decisions that influence the future of the
company (such as developing its strategy, deciding on its competitive
positioning and approach, setting priorities in asset allocation, nominating management at the top of the company) such decisions have a
confidential character by their very nature. Consequently directors are
assumed to respect the confidentiality of all board information (the
duty of discretion). Confidentiality is considered essential for the protection of the corporation as well as to guarantee board effectiveness
with open discussions, where every director can be critical and frank.
Our own experience with board evaluation reveals that a lack of confidentiality can also be detrimental for the trust between the board and
management, in particularly for the openness in the information flow.
It is a firm belief that individual directors have to abstain from any
public information on the board decisions and underlying discussions,
unless specifically requested to play such a role (e.g. the chairman may
have a more specific communication role). Certainly in listed companies board information may be sensitive and any abuse of fair disclosure and incorrect information may trigger liability claims towards the
company and its directors.
This makes the decisions behind closed board room doors a kind of
a black box4 for the outside world, something contradictory in an era
of disclosure and transparency. Carter and Lorsch (2004) ask special
attention for this paradox. And they are not the only ones. Especially
in the slipstream of the global financial crisis, more and more voices
are heard questioning this total discretion. The cry for more external
accountability and justification (justification for the decisions made)
is growing exponentially. Because of their duty of discretion, directors have to comply rarely with more open justification. It is seldom
that the outside world gets a glimpse on how the members of the
board contribute as individuals or work together. Most of the time
such deliberations as a group escape to the world outside. It is therefore almost impossible for anyone ‘outside the circle’ to get an accurate reading on whether pressing issues are receiving the appropriate
scrutiny with pertinent information at hand, and whether decisions
are made with due consideration and thorough discussion, in sum
whether the board is performing to its potential. That the work of
boards takes place ‘behind closed doors’ is the major reason experts
are sceptical about many of the current proposals for board reform.
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And a lack of transparency is usually a fertile ground for myths about
boards of directors.
Although the norm has long prevailed that board room discussions stay in the board room, an emerging norm of transparency will
encourage directors and executives to reveal more about their decisionmaking behind closed doors (Conger, 2009). However, the challenge
goes beyond external disclosure and accountability. Our experience in
board evaluations and director education has shown that many boards
are unaware of the impressions they are giving to other members of the
company. Most board evaluations that focus on the board’s image only
do so in the context of its members’ images. Board assessment should
however attach more importance to improving the internal and external communication on the board’s role, position and decisions taken.
The board should find the right balance between installing sufficient
trust in the discretion of directors so to stimulate open and frank discussions. But at the same time directors cannot neglect (any longer)
that the modern era of disclosure and transparency necessitates that
the board finds the right tone in explaining the decisions taken and
feels accountable to justify and defend the choices made, the resources
invested, etc. This even holds for so-called closed companies: even if
they do not rely on external or public funding, they will increasingly
need to face the modern demand on more openness.
In this context, Paul Strebel (2011) goes a step further by bringing
in the position of the critical stakeholders. He argues that boards need
an outreach program, an explicit program of reaching out beyond the
board room, comprising the following elements: identify which stakeholders are critical for value creation, adapt the composition of the
board to enable reaching out to the value critical stakeholders, develop
communication channels with them, tune into what they are saying
and draw on them to promote the creation of long-term value.
However, we should remain vigilant that transparency might encompass an unintended danger. Due to the increasing emphasis on accountability and transparency, board decisions could be impacted by the
need for rational explanations and justification. This might induce
an attitude of more risk-averse directors and less room for intuition in
developing entrepreneurial ventures.
Some conclusions
The incremental building up of corporate governance laws and regulations, combined with strengthened self-regulatory recommendations,
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led to a construction that is not only very complex, but at the same time
contains quite a number of paradoxes, which need further in-depth
reflection and trade-offs. The challenge for boards is to look deeper
into each of these apparent paradoxes and reflect upon possible ways to
make the correct trade-offs.
The trade-off to ensure that the board behaves
as a collegial body
In theory, the board is a college of peers with almost complete absence of
formal hierarchy. In practice, this assumption is hard to reach because
board organisation necessitates a more formal leadership (chairman)
while board composition leads to quite different types of directors:
executives, non-executives, independent or not, committee member or
not. Not only do these different types of directors have quite different
degrees of access to information but also their eventual role as shareholder may put them on a different footing when it comes to decision
power.
An effective board tries to cure these apparent paradoxes by paying more attention to the role of the chairman in fostering a collegial
decision-making. All non-executive directors need to receive the necessary information and induction allowing them a ‘collegial’ involvement in board decision-making. In this respect, the symbiosis between
the board and its committees remains one of the largest challenges.
In insider models, with shareholders on the board, one must be more
vigilant to guarantee that the board (and all directors) foster(s) the corporate interest while the shareholders meeting and dialogue may focus
on the interest of shareholders.
The trade-off to ensure that the board reaches a consensus
The assumption of a collegial body is built on the belief that at the helm
of a company, important decisions need to be taken in a consensus style,
after ample discussion, open to constructive dissent. Open discussions
and constructive dissent of independent free-thinking individuals are
hard to combine with smooth consensus decisions that are supported
by all directors (also those uttering critique). It certainly necessitates a
chairman that is making nice music out of a bunch of creative musicians. But it also supposes a group of directors with the right chemistry and professional board behaviour, elements that have been grossly
overlooked in board recruitment and director assessment.
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The trade-off between direction and control
The dual role of the board (to direct and to control) may in itself
give rise to a number of tensions. Those roles require a different orientation and behaviour of directors, with monitoring necessitating
careful scrutiny and risk aversion, while direction is more oriented
towards entrepreneurship and strategic risk-taking. This dual role also
implies that the non-executive directors combine the necessary distance with good relationship with management. Moreover one must
remain vigilant that the direction role fits with the part-time character of the board and that sufficient delegation is given to the full-time
managers and executive directors. The non-executive directors need
to find the right balance between oversight and direction, between
monitoring management and being their advisors, between challenging the executives while at the same time being supportive of their
proposals.
The trade-off in composing the board of directors
It is increasingly hard to comply with all code and legal requirements
for the composition of the board of directors. On the one hand, the
board should not be too large in light of effective discussions and board
dynamics. On the other hand, an increasing arsenal of diversity and
independence criteria complicate the completion of the optimal board
configuration.
In a one-tier board a first topic for reflection is on the mixture between
executive and non-executive directors, which executives (besides the
CEO) should be on the board? Although executives can bring a deep
knowledge of the company to the board, those executives are working
in a hierarchical management structure which conflicts with the peer
structure of the board.
Independence is considered a precondition for decision-making in the
interest of the corporation. However the focus on independence often
came at the detriment of sufficient knowledge of the business, while
independent directors can complicate reaching consensus in a cohesive
board team. Moreover, the respect of strict criteria to define independence is no guarantee at all that those directors will have an independent
attitude. Their personality may be less robust than expected or their
ability to go against possible abuse of powerful positions may be hampered because finally their nomination may depend on those powerful
insiders (shareholder or executive directors).
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Increasingly, the emphasis is on board diversity, with an overwhelming focus lately on gender diversity. Although diversity may deliver better board dynamics, it also offers quite some challenges, such as a more
complex recruitment process and a tougher route towards consensus
and team building.
The solution is to find the right balance between all these different
recommendations while at the same time coping with the potential
side-effects of those requirements. This again reconfirms the necessity
to launch a professional recruitment of directors with sufficient attention for their potential value added as well as for the conditions of effective board dynamics.
The trade-off to reach a professional board
There is a growing gap between what directors (can) do and what is
expected of them. Boards simply cannot achieve everything that is
expected of them, even if they do devote more time to their board
duties. Doing the right things is the first answer to this challenge.
Boards should use their limited resources better, allocate work among
colleagues through the use of board committees and focus on their
major tasks, rather than trying to be involved in operational issues.
A second solution lies in upgrading the ‘time available’ and the ‘professionalism’. Moreover, corporations and their management should
facilitate a professional board through a better support of part-time
directors.
The board duties and the time commitment are increasing exponentially, but the remuneration of non-executive directors is not keeping
pace. On the contrary, remuneration of directors is the central focus of
huge societal and political attacks, completely ignoring the crucial distinction between executive and non-executive directors. It is time boards
and their remuneration committees construct a modern remuneration
policy that is in line with the specific challenges a non-executive director
is confronted nowadays.
The trade-off to reach transparency
We live in a time of open communication with social networks and
Internet connections and citizens that increasingly demand accountability from everybody. Although the codes on corporate governance
and corporate law considerably increased the demands for disclosure
(especially in listed companies, this evolution is in sharp contrast with
An Effective Board Makes the Necessary Trade-Offs
209
the traditional assumptions of discretion and confidentiality that
underscore the decision-making in boards of directors).
In light of these tensions the board should act in concert on the best
way forward in complying with legal and code recommendations and
in answering the huge demands society is placing on their shoulders.
Boards should develop a more pro-active outreach plan that not only
encompasses public disclosure and justification but also internal communication. Even for corporate insiders, the board is often considered
as a black box. Directors should be aware that a lack of transparency is
usually a fertile ground for myths about board of directors.
Notes
1. Briefing note issued by Ernst & Young in 2007.
2. Different initiatives are taken to create a larger pool such as the supply of education for (potential) female directors and the launch of mentoring projects
as it is the case in Belgium and other European countries.
3. These may be two interesting reference groups; the Higgs report in the UK,
for example, made the suggestion to compare the level of the remuneration
of a non-executive director with the daily remuneration rate of the company’s senior professional advisers.
4. Steen Thomsen (2008) however does not agree with this ‘black box metaphor’. According to him this statement is ill-founded, because companies
make increasingly more disclosure about boards. He even goes one step further by proclaiming that today, we know much more about board decisionmaking than about many other kinds of company behaviour.
References
Acharya, V., Kehoe, C. and Reyner, M. ‘Private Equity vs PLC Boards in the
U.K.: A Comparison of Practices and Effectiveness’, Finance Working Paper No.
233/2009, (August 1, 2008).
Carter, C.B. and Lorsch, J.W. Back to the Drawing Board: Designing Corporate Boards
for a Complex World (Boston: Harvard Business School Press, 2004).
Charan, R. ‘When directors sweat the small stuff: micromanagement in the
boardroom’, The Conference Board Review, XLVII (2009) 46–48.
Colvin, J. ‘Dilemma for directors as complexity increases’, The Australian, 13
July 2011.
Conger, J.A. Boardroom Realities. Building Leaders Across Your Board (San Francisco:
Jossey-Bass, 2009).
Financial Reporting Council, Guidance on Board Effectiveness (London: Financial
Reporting Council, 2011).
Gilson, R.J. and Kraakman, R. ‘Reinventing the Outside Director: An Agenda for
Institutional Investors’, Stanford Law Review, XLIII (1991) 863–906.
GUBERNA, Vergoeding voor externe bestuurders van een KMO: Basisrapport en richtlijnen (Brussels: GUBERNA, 2012).
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Lorsch, J.W. and Maciver, E. Pawns or Potentates: The Reality of America’s Corporate
Boards (Boston: Harvard Business Review Press, 1989).
Lorsch, J.W. Leadership: The Key to Effective Boards. In: Conger, J.A. Boardroom
Realities. Building Leaders Across Your Board (San Francisco: Jossey-Bass, 2009).
Meurisse, P. A Board of Directors in Action During a Board Meeting: recovering
and describing the phenomenon (Northamptonshire: Veritas Business Services
Limited, 2011).
Sonnenfeld, J.A. and Ward, A. Conventional Wisdom, Conventional Mythology,
and the True Character of Board Governance. In: Conger, J.A. Boardroom
Realities. Building Leaders Across Your Board (San Francisco: Jossey-Bass,
2009).
Strebel, P. ‘In Touch Boards: Reaching Out to the Value Critical Stakeholders’,
10th European Corporate Governance Conference (06/12/2010), Brussels Corporate
Governance, XI (2011) 603–610.
Thomsen, S. ‘A Minimum Theory of Boards’, International Journal of Corporate
Governance, I (2008) 73–96.
Walker, D. A Review of Corporate Governance in UK Banks and Other Financial
Industry Entities (London: The Walker Review Secretariat, 2009).
Ward, R. 21st Century Corporate Board (New York: Wiley, 1997).
8
Promoting Effective Board
Decision-Making, the Essence
of Good Governance
Lutgart Van den Berghe and Abigail Levrau
Boards are at the helm of the company, making important decisions.
According to Meurisse (2011) the board of directors is the most powerful group, having the power not only to internally guide and influence all other organisational actors, but also to externally commit and
legally bind the organisation as a whole and in its interaction with other
societal actors. This power has been delegated to him by his superior,
the shareholder. The board itself, as superior, further delegates to top
management, his subordinates.
The principal work of boards revolves around complex decision-making (Leblanc, 2009). Useem and Neng (2009) refer to this fundamental
board duty as those moments when governing boards face a discrete
and realistic opportunity to commit company resources to one course
or another on behalf of the enterprise’s objectives, a choice of means
to accomplish ends which are not personal. Decisions are made by people, and in the case of a board, by a group of peers1 acting together as
a college.
A board can only become effective if it is organised as a collective decision-making body. Although this might sound straightforward, numerous companies, large (subsidiary companies) and small ones (unlisted
companies), do not organise active board meetings. Consequently, they
are losing the value add of a corporate body, dedicated to objective
decision-making in the interest of the company. But also a more active
board, merely operating as an advisory body, will not reap the benefits
of group decision-making. In such cases, there is no need to take diverging opinions into consideration; the leader’s opinion will (probably)
prevail. Again, the company dares to lose the most valuable thing of a
group, that is collective wisdom. It is only with active board members
that the essence of collective decision-making will be realised.
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Good governance must be embedded in a company’s values. It provides mechanisms to ensure leadership, integrity and transparency in
the decision-making process.
The board should be small enough for efficient decision-making. It
should be large enough for its members to contribute experience and
knowledge from different fields and for changes to the board’s composition to be managed without undue disruption (board composition).
No individual or group of directors should dominate the board’s decision-making. No one individual should have unfettered powers of
decision-making (group dynamics).
The agenda should list the topics to be discussed and specify whether
they are for information, for deliberation or for decision-making purposes (board organisation).
Evaluating the actual contribution of each director’s work, the director’s presence at board and committee meetings and his constructive
involvement in discussions and decision-making (board assessment).
The board should set up specialised committees to analyse specific
issues and advise the board on those issues. The decision-making
remains within the collegial responsibility of the board.
Clear procedures should exist for proposals from the executive management for decisions to be taken by the board and for the decisionmaking by the executive management (board organisation).
Figure 8.1 The guidance on good decision-making, given by the Belgian
Corporate Governance Code
Increasingly, the governance codes pay attention to effective board
decision-making. For example, the Belgian Corporate Governance Code
for listed companies sets out different points of attention, as listed in
Figure 8.1.
Although these proposals already point to the importance of group
dynamics and collective decision-making, and refer at least to some of the
underlying conditions (such as board composition and board organisation), transparency obligations or public monitoring will be sufficient to
reach that goal. It is only with a board assessment that such sensitive matters as group dynamics and board behaviour can be thoroughly analysed.
This chapter analyses the route towards effective board decision-making. Quality decisions will depend upon numerous factors, such as the
composition of the board, the manner in which the board is led and directors interact among themselves and with management. We will structure
the discussion on how to reach effective board decision-making around
six key components (see Figure 8.2): board leadership, board dynamics,
Promoting Effective Board Decision-Making, the Essence of Good Governance
213
2.1. Board
leadership
2.6. Board
composition
2.2. Board
dynamics
2. Effective Board
Decision-Making
2.3.
Professional
behaviour
2.5. Board
information
2.4. Board
organization
Figure 8.2
Effective board decision-making thanks to group dynamics (2.2)
professional behaviour, board organisation, board information and board
composition. Each of these components includes a set of drivers that will
be explained in the next paragraphs, with the exception of board leadership that deserves a special chapter (Chapter 9).
The board as a collective decision-making mechanism
The legal assumption, underpinning the installation and operation of
a board of directors, is that, at the top of the company, one needs a collegial body, striving to reach decisions in a consensus style. This legal
assumption is built on the belief that in order to decide on the most
important corporate affairs, one needs a well-balanced reflection while
at the same time installing a ‘checks and balance’ culture within the
organisation. This is in sharp contrast to the centralised power delegated
to a CEO. In fact, decision-making through a ‘college’ is much more
complex and challenging than individual decision-making. However, it
also apparently offers some benefits in comparison to individual decision-making. Individual leaders might be more efficient decision-makers
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The many are smarter than the few or as the French say ‘du choc des
idéesjaillit la lumière’;
Collective wisdom shapes business, economies, societies and nations;
Group decisions will over time be intellectually superior to the isolated
individual, no matter how smart or well-informed he may be: due to
the law of large numbers, neutralising errors, etc.;
Diversity contributes not just by adding different perspectives to the
group, but also by making it easier for every director to say what they
really think.
Figure 8.3
Benefits of group decision-making
from a timing perspective, but the downside might well be that their
decisions are more subjective, pay less attention to the numerous (sometimes conflicting) interests of a corporation and are less well-balanced
in light of a complex business environment, full of volatility and uncertainties. Illustrative of the benefits of group decision-making are the values attached to the ‘wisdom of crowds’ (Surowiecki, 2004) as explained
in Figure 8.3.
The worldwide assumption is that corporate decision-making at the
helm of the (larger) company should be based on collective reflection
and group decisions. Effective collective decision-making is very crucial
for realising the value add boards are created for. Yet, at the same time
it is a very challenging element that has not received the attention it
deserves in light of the complexities involved in reaching that goal.
It sounds like an ideal situation: gather a diverse group of accomplished, energetic, dedicated leaders from all walks of the public and
private sectors; give them stewardship of an important enterprise;
and let them prioritize the relevant issues and make good decisions
for present and future shareholder value. A dream story, but it doesn’t
always work like magic. (Walton, 2009)
In reality, boards can only look for ‘satisfying’ decision-making. In general, running a company requires making decisions that may turn out
poorly, taking entrepreneurial risk and acting on the basis of imperfect
information (Paredes, 2004).
Real life is not about making optimal decisions with perfect information and using fully rational thinking, but about making sufficiently
Promoting Effective Board Decision-Making, the Essence of Good Governance
215
acceptable decisions, often using subjective judgement, given the
constrained resources (including time and financial cost) available
to individuals as well as organisations. (Simon, 1983)
Board decision-making suffers from what is called ‘bounded rationality’. Indeed, board decision-making is not a completely rational process
(problem definition, generating solutions, choosing the solution, execution and follow-up) but bounded by numerous complexities as well
as decision-making infirmities and biases. Different types of pressure
can inhibit the quality of board decisions. Directors may suffer from
insufficient information, certainly in light of the growing volatility and
uncertainty for corporate affairs. The board information can be abstract,
complex at best and may be partly or completely lacking at worst. There
may be insufficient time to thoroughly reflect on all relevant aspects
and risks. But being a non-executive director may also mean a lack of
sufficient resources and support to study all of the relevant aspects.
Moreover, some of the major corporate decisions might resemble a big
bet: once done, they are hard to undo (such as M&A). Consequently,
the more important decisions are, the more attention should be paid to
the decision-making process. Andrew Campbell (ICSA 2011) gives some
suggestions (see Figure 8.4).
Board effectiveness should work on each of these challenges.
Nevertheless, it will be impossible to eliminate risk completely: the
more volatile the business environment, the more difficult it becomes
to judge beforehand the consequences and risks attached to major corporate decisions. It may therefore be appropriate to pay more attention
to the underlying uncertainties, the assumptions, possible scenarios,
while at the same time looking for sufficient flexibility and adaptability
●
●
●
●
●
Describe the process the proposal has gone through: who was involved?
The one who champions the proposal should present it directly to the
board
Consider options;
Get independent views;
Put additional safeguards in place, such as to prevent conflicts of
interest;
Do not let the champion participate in the decision-making.
Figure 8.4
Suggestions for board decision-making
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Lutgart Van den Berghe and Abigail Levrau
(escape ways) in case evolutions oblige such corrective steps, more specifically the analysis of the strategy role of the board.
The primary setting where decision-making takes place is the board
meeting. The board room is supposed to be ‘the arena’ where directors
(and top management) come together and interact as a group. Meurisse
(2011) describes a board meeting as a context-sensitive board process, a
joint activity in context, that board members jointly constitute, whilst
they are shaping the board meeting, paying attention to what they do
together (tasks) as well as how (process/behaviour). In studying boards,
he has identified a standard flow of activities in the decision-making
process (a summary is provided in Figure 8.5).
This sequence in board decision-making appears to be straightforward but at the same time it shows the vulnerability when specific steps
are missing or are not well carried out. We agree with Meurisse that
context and group characteristics as well as group behaviour mutually
interfere and dynamically shape the board meeting and hence effective
decision-making. Therefore, we try to ravel out some of the steps of the
decision-making process and as such to shed a light on the inner workings of the board.
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Opening of the agenda point by the meeting chair.
Reporting by the owner of the agenda point.
The meeting chair explicitly invites reactions.
Board members react upon the reporting: such intervention might
take the form of demanding more information (question), challenging,
tacit expressions of not being assured (yet) and explicit formulation of
(not) being assured.
The owner provides complementary reporting of the agenda point,
gives answers to the questions raised and tries to give additional assurance either directly after each intervention, or after the discussion
round.
If these are not sufficiently assuring the directors continue their
discussion.
The chair may interfere in this discussion for reasons of time management or to bring the discussion back on track.
When the chair considers the time right, he summarises the discussions and comes to the tacit or the explicit (consensus) decision or
conclusion.
If no explicit remarks on the proposed conclusion/decision, the meeting chair closes that point of the agenda and opens up a next one.
Figure 8.5
Standard flow of activities in the decision-making process
Promoting Effective Board Decision-Making, the Essence of Good Governance
217
Influence of group members on each other is inescapable
Group members influence each other, certainly in a relatively small
group. In fact, small groups have an identity of their own and this is
overwhelmingly clear when comparing the workings of different corporate boards (also over time). Board members can become so identified
with the group that the possibility of dissent seems practically unthinkable. Such groups can exacerbate our tendency to prefer the illusion of
certainty over the reality of doubt. Where internal cohesion and loyalty
prevail, one strives for unanimity at the detriment of valuable counter
opinions and critical evaluation of alternatives.
It is crystal clear that board effectiveness necessitates that we try to
overcome the danger of emphasising consensus over dissent and more
generally the danger of group think and herding. The concept of ‘group
think’ was invented by Irving Janis (1983) to describe specific patterns
of conformism and collective misjudgement of risks. It refers to social
pressure to conform, and consequently not opening people’s mind but
closing them. Herding is following one’s peers, influential people (obedience to authority or expertise) or those speaking first. In general, the
danger is sticking with the crowd, not challenging, in order not to stand
out but to conform. Those with opposing views often convince themselves that the majority view is correct. Herding danger may especially
be relevant in boards with a strong majority coalition or strong personalities. The danger of group think might increase with autocratic leaders or when the group gets more closed and more isolated. As we have
seen with the financial crisis (see Figure 8.6), group think and herding
may lead to collective misjudgement of risks (neglecting potential risks,
adverse effects etc). The more isolated a group becomes, the more they
can get a feeling of invulnerability. Exposure to external transparency
The pressure for conformity on boards can be strong, generating corresponding difficulty for an individual board member who wishes to challenge group thinking. Such challenge on substantive policy issues can
be seen as disruptive, non-collegial and even as disloyal. Yet, without it,
there can be an illusion of unanimity in a board, with silence assumed
to be acquiescence. The potential tensions here are likely to be greater
the larger the board size, so that an individual who wishes to question or
challenge is at greater risk of feeling and, indeed, of being isolated.
Figure 8.6
Extract from the Walker report regarding pressure for conformity
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Lutgart Van den Berghe and Abigail Levrau
and accountability is therefore an important lever for more empathy
and critical reflection.
Diversity and independence as remedies for effective
group decision-making
To overcome the danger of group think and herding it might be opportune to look for remedies that bring diversity of opinion and independent position taking (Surowiecki, 2004). Most governance codes and
recommendations attach quite a lot of importance to installing the necessary degree of diversity and independence when composing the board
of directors. The underlying rationale is that diversity of opinion is the
single best guarantee to reap the benefits from face-to-face board discussions, questioning evidence, revealing uncertainties, etc. A minority
viewpoint leads to debate, more nuanced decisions and more rigorous
decision-making. Diversity of opinion is driven by sociological, conceptual and especially cognitive diversity, adding different perspectives,
better and more novel conceptualisation of problems and various possible solutions, picking the good ones, while killing the losers. Diversity
is all the more important in small groups, hence the importance of
bringing in new members, new ideas and opinions. Secondly, independent director opinions are not determined by those of others but
are (relatively) free from the influence of others. Independent directors
are best placed to express an individual judgement, an own opinion,
that may well deviate from the mean stream of thinking (independence procures diversity of opinion). However, independence must not
be confused with rationality (an independent view can be irrational),
nor with impartiality (independent views can be biased).
However, such input recommendations by themselves are no guarantee for constructive dissent. Different types of research have proven that
more is needed in order to overcome group think and herding. A recent
study of Hudson on gender diversity in the board room, for example,
revealed that there are no significant differences in board behaviour of
female versus male directors. This is contrary to the significant differences at lower levels of hierarchy. They explain this phenomenon by the
‘coalition of the dominant’, whereby personality is adapted (a kind of
cloning) to be able to ‘belong’ to the dominant group (male). A solution
might be to require a minimum number of female directors (allies who
go against the tide), as is foreseen in the numerous quota regulations
that were introduced recently (with quota between 30% and 40% of
gender diversity). A comparable outcome was observed in studying the
Promoting Effective Board Decision-Making, the Essence of Good Governance
219
effect of independence on group decision-making. Our recent review of
the board practices at listed companies in Belgium revealed that outside
a more pronounced role in the different board committees, independent
directors are not perceived to perform a different role than their nonindependent colleagues. This does not mean that they do not operate as
professional directors, but that their interventions in board room discussions are not perceived as being different from those of their colleague
directors. In contrast to the gender diversity issue, this is not a matter
of an insufficient number of independent directors. These observations
convince us more than ever that the judgement of independence should
not be based on a detailed check list of a priori independence criteria.2 In
fact, a thorough board assessment should include an in-depth analysis
of individual director board behaviour. It is only when independence
and diversity lead to more constructive dissent that the conditions for
effective collective decision-making will be guaranteed. As Surowiecki
(2004) states, it is not so much about sociological diversity but much
more about cognitive diversity.
Promoting constructive dissent as a remedy for
effective group decision-making
Directors cannot be uncritical lovers but have to be loving critics of
the institution which they are paid to serve. (Crainer and Dearlove,
2007)
A candid dialogue and constructive dissent are essential to guarantee
effective group decision-making. By asking critical questions and by
challenging assumptions, directors may force executives to explain and
justify their tentative decisions, prior to execution. Effective boards
encourage candid dialogue, inquiry and challenging arguments by
directors. Open dialogue supposes that there is sufficient time for discussion before decisions are taken and that directors are proactive,
inquisitive and highly responsible people in search of the best solution
for the company. It is about asking questions, providing an alternative
view, being a sceptical voice when all are in agreement.
Well-positioned logic and constructive criticism strengthen relationships and commitment rather than damage them. The challenge is to
question but not hurting nor inquisitor, to explore but not putting down
anyone and to constructively interrogate the argument. Such approach
ensures successful adoption of the proposal, reduces risk and safeguards
the reputation of the organisation and also increases the commitment
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Directors should never doubt that their contribution is not sought or
valued.
Boardroom conversations have to be well-managed, so that different
points of view are heard, contemplated, debated and synthesised. The
chair should foster active discussions, getting each director into the discussion, solicit individual expressions of opinions especially on touchy
issues. Once emotions are drawn to the surface, the chair should use
his personal strength to work through these sentiments with considerable resilience and discipline.
Conversations should incorporate specialised knowledge but not allow
specialists or experts to dominate the decisions. Individual interest
should never hamper an open discussion or guide the decision making.
Consensus is not important at the start of the process, but only at the
end. To reach consensus it is important to check with all directors
before reaching a major decision while not pushing too quickly deciding on important strategic choices.
Be aware of executives who are defensive and not open with the board!
But vice versa be aware that directors may also shoot the messenger if
management reports bad news.
Also pay attention to the fact that directors also need to listen to each
other and to management. The chances are that directors talk a lot but
listen less.
Figure 8.7
A recipe for constructive dissent
of the board and management to a project. A recipe for constructive
dissent in provided in Figure 8.7.
Expressing different opinions is important to prevent the pluralistic ignorance syndrome (Westphal and Bednar, 2005), that is, directors
may not dare to express their personal opinion because they think that
the others do not share the same opinion or that a different opinion
will not be accepted. In any case, we should be aware of the potential
impact of the one who makes a proposal, or formulates the first choice.
The proposal or the first reaction may trigger the others to follow (nonconflicting followers). If there is no room for constructive dissent we
risk ending up with the Abeline paradox, that is, taking a collective
decision that nobody really wants because everyone went along with the
proposal, thinking that the others would like it. In fact, directors may
seriously underestimate that other directors share their concern based
on the illusion of unanimity. Or as Surowiecki (2004) puts it: ‘a camel
is a horse made by consensus’. Diversity has numerous advantages for a
well-balanced decision-making, but only if opinions are made explicit.
Promoting Effective Board Decision-Making, the Essence of Good Governance
221
The real value add of collective decision-making stands or falls with the
acceptance or not of diversity of opinions.
Group norms can however discourage dissent and add pressure to
reach consensus quickly. Directors shut up in order not to violate the
board’s norms or offend peers, not wanting to rock the boat. Even
though they notice problems at the horizon, they stop asking questions or expressing doubts, even when not convinced. ‘Going along’
is a relatively low-cost strategy (Paredes, 2004). The last couple of years
we observed societal critique that directors did not dare to challenge
management sufficiently or ask hard questions about board proposals.
Especially Sir David Walker puts this sharp in his analysis of the banking industry (see Figure 8.8).
According to Conger (2009), numerous failures were caused by directors that became complacent and too confident in their top management. Generally, people are biased to avoid the cognitive dissonance
that dissenting gives rise to. Board leaders and other directors face great
difficulty in dealing with dissonant information. Individuals tend to
interpret new evidence, at least initially, as being consistent with their
strongly held prior beliefs. Consequently, they are slow to accept new
information inconsistent with these beliefs (cognitive dissonance). It
takes courage to go against the tide and stick to ones beliefs, even if
they are a minority of one. It is at this point that true ‘independent’
board behaviour becomes observable. In order to convince others of
the necessary nuances or opposition, directors will have to find allies
who can enhance the influence of challenging opinions. In the end, it
really comes down to ‘negotiation skills’, understanding board dynamics, knowing who are (the other) influential directors and what their
thoughts on the issues at hand are.
The essential ‘challenge’ step in the sequence (of decision-making) appears
to have been missed in many board situations and needs to be unequivocally clearly recognised and embedded for the future. The most critical
need is for an environment in which effective challenge of the executive
is expected and achieved in the boardroom before decisions are taken on
major risk and strategic issues … serious shortcomings in the financial
sector were above all the failure of individuals or of non-executive directors as a group to challenge the executive on substantive issues as distinct
from a conventional relatively box-ticking focus on process.
Figure 8.8
Extract from the Walker Report regarding the lack of challenge
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Lutgart Van den Berghe and Abigail Levrau
Sir David Walker (2009) has given us another wake=up call, by putting
the spotlights on the intolerance of the CEO towards challenging in the
board room. He argues that:
Even a strong and established CEO may have a degree of concern,
if not resentment, that challenge from the non-executive directors
is unproductively time-consuming, adding little or no value, … the
greater the entrenchment of the CEO, perhaps partly on the basis of
excellent past performance and longevity in the role, the greater is
likely to be the risk of CEO hubris or arrogance and, in consequence,
the greater the importance (and, quite likely, difficulty) of nonexecutive director challenge.
It is worth exploring whether a process is in place to ensure that all
angles are canvassed. Is there a workable model that provides directors the opportunity to ask penetrating questions that may make management uncomfortable, yet avoids or at least minimises the feeling of
being personally attacked? Opposition may be organised in case of very
important decisions, for example, by formally allocating the responsibility for opposite or alternative views, by creating a (special) committee, betting the business decision or appointing a designated critic.
However, a critical director may feel marginalised after a number of
interventions, both by management and his fellow board members as
having never anything positive to say. In order to keep the collegial and
team spirit in the board it is important to rotate the responsibility for
opposition, so that the danger of being stigmatised as the negative one is
not falling on one or some directors. In any case, a professional director
should not agree with a rubber stamping role, with management reporting a decision as a ‘fait accompli’ without the opportunity to explore
alternative courses of action or with a chairman who is monopolising
the decision-making process.
Everyone benefits from a beast in the boardroom (Kellaway, Financial
Times, 9 October 2011)
In today’s governance environment special attention is also required
for the impact of board committee proposals. Directors, who are not
member of the committee in question, should remain vigilant and be
aware that committee proposals may seem much more consensus than
the underlying discussions within the committee. A committee may
have a stylised effect showing a tendency to speak with one voice after
Promoting Effective Board Decision-Making, the Essence of Good Governance
223
the committee meeting. The same attention should be paid to strategic
proposals coming from management. To some extent the challenge of a
non-nuanced view also exists for board decisions vis-à-vis external parties. Dutch research states it as follows:
The desire to speak with one voice, the inclination to paint a rosy
picture by some members, the suppression of scepticism by others,
etc. can be explained by the wish of board members to come across
as well informed. (Visser and Swank, 2006)
In our opinion it is more the collegial decision-making that necessitates
directors speaking with one voice towards the external world. Nuances
or differences in opinion should in principle be kept internally unless
the opposing director explicitly wants to see this mentioned in the minutes and the annual report to the shareholders (e.g. in case the director
wants to limit his or her liability).
Preventing unconstructive dissent as a remedy for
effective group decision-making
However, a culture to support or even stimulate directors to speak up
and express their doubts or differences of opinion should be managed
with great care. Board assessment should pay special attention to the
danger of individual director interventions that might undermine the
effectiveness of the board’s deliberations. Some directors might play
a follower role or shut up in order not to ‘look stupid’. Others might
expose a ’look good’ attitude and use the meeting to score points with
other directors to prove that they are very wise, or have read their board
papers. Discussion monopolists might undermine the decision-making
process. Some directors take up time describing how wonderful they
have done in their company, failing to tackle the real critical issues at
hand in this board. Powerful individuals can unwittingly divert the
conversation down a number of unproductive avenues.
Board interaction should allow functional cognitive conflict or constructive dissent. However, the border line with dysfunctional or affective conflicts is a sensitive one. Essential is the question if differences of
opinion are considered as positive functional conflicts or rather as dysfunctional affective conflicts. Differences of opinion can be interpreted
as personal critique, meant to be confrontational or merely as political
gaming. Sometimes there is a very fine line with functional conflicts.
Managers sometimes complain about the way critique and questions of
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directors are put forward. Some even call this growing critical attitude
of boards the ‘boardroom blitz(krieg)’ (Crainer and Dearlove, 2007).
They complain that management prepares lengthy documents to be
sent out 10 days before the board, allowing the directors to read and
think them through. But directors sometimes only read their material
on their way to the meeting, extracting at random some tricky questions, entering the boardroom ready to fire.
In this respect, Kakabadse and Kakabadse (2008) pleads to pay more
attention to the substantial difference between a dialogue and a debate.
Debate has a rather negative connotation as it induces win or lose
(beating down) and the taking of sides for or against, so that the most
powerful presence in the board room carries the case, irrespective of
whether that is the best argument. In contrast, in a dialogue everybody
Step 1: break down the argument into workable components: the chairman
coaches the management to emphasise the relevance (to the organisation,
its strategy and policies), alignment (with strategy and other initiatives,
projects), commitment of management, quality of supporting evidence
and justification of the case;
Step 2: position the argument, with a clear display of point and counterpoint; hidden behind are often powerful emotions; how an argument is
introduced and the signals from the chair can make a huge difference!
Step 3: manage expectations: no board likes surprises; the chairman’s guidance of the challenges facing management assists the board to realistically assess the merits of the case put before them; setting stretching
expectations is motivational, but requiring impossible hurdles to be met
deteriorates the performance of management; as the chairman positions
the board to be receptive to the argument from management, he also
briefs management concerning board expectations and mind-set;
Step 4: have a full and frank discussion: the form of the discussion depends
on the psychological contract between the chairman & the CEO! The aim
is to have all board members fully involved in the discussion;
Step 5: rework the argument to get final approval; a half-hearted yes is more
damaging than rethinking the proposal; on the management side, all too
often propositions never reach the board for fear of rejection, not because
the case is weak but because the board is not ready; effective boards facilitate the reworking through a no shame culture, no pet themes, clear criteria for reworking as well as realistic time frames.
Figure 8.9
Steps for effective and constructive decision-making
Source: Kakabadse and Kakabadse (2008).
Promoting Effective Board Decision-Making, the Essence of Good Governance
225
is engaged, no one wins. More specific, dialogue encourages in-depth,
uninhibited mutual exploration and inquiry to find the argument
which is best, given the circumstances and context. Effective and constructive dialogue encompasses five steps, set out in Figure 8.9.
Although it is clear that an effective board should stimulate dialogue
over debate, this requires fundamental skills of the board members.
According to Herman Van den Broeck and colleagues (2006), the quality of board decision-making depends upon the cognitive capacities of
the directors and the process of interaction (allowing functional cognitive conflict and constructive dissent).
You can be the smartest person, but if you don’t speak out frankly,
it’s worthless. You’ve got to be effective in communicating, in a
way that people will listen to and not just turn off. (Finkelstein and
Mooney, 2003)
Moreover, it does not prevent that conflicts still arise because the interests at stake may be quite different. According to Nordberg (2011) tensions on the board can come from the interactions between the different
actors involved: executives (seeking to have their proposals and policies
adapted), non-executives (checking the executives) and the chairman
(arbiter of disputes). Besides, directors might exhibit a tendency towards
unconstructive dissent. Such attitudes and potential conflicts need to
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Assess what kind of conflict is driving the problem: task conflict, relationship conflict, process conflict or some combination of the three.
Remember that trust is gold dust in these situations. With trust a board
can have strong task conflict without it turning personal. But in the
absence of trust, task conflict has a tendency to mutate into personal
dislike.
Where you don’t have strong trust among the board, use a qualified
consensus decision rule (i.e. everyone agrees they can ‘live’ with the
decision).
Avoid a majority-rule decision-making process where possible. Such
rule can usually be an excuse for the majority to quickly silence a dissenter. Moreover engaging with minority opinions has typically been
associated with high-quality group decision-making.
If you are in doubt about the level of trust and conflict in the board,
then discuss it with the board members or go for an externally supported board assessment exercise.
Figure 8.10
Recipe for managing conflict in the boardroom
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Lutgart Van den Berghe and Abigail Levrau
be managed. Certainly when it comes to personal conflicts, this often
turns toxic. Rules to successfully manage conflict may include the following steps (Peterson, 2007) (see Figure 8.10).
Also important in preventing dysfunctional conflict in the boardroom is the style of questioning. Directors should preferably pose their
questions in a non-threatening, non-personal and well-organised way.
A practical suggestion is to transfer the opposing or alternative views to
management beforehand, so that they can take the time to thoroughly
consider the alternatives. Another route is to organise the decision-making in several steps by asking management to develop an adapted version, taking into consideration the different opinions. A second round
of discussion can then follow, before finally deciding on important matters. The introduction of an open-ended point at each board meeting
may offer the opportunity for expressing more general concerns, doubts
and raising specific questions and consequently may help in fostering an
atmosphere or culture of open dialogue (Campbell and Stuart, 2009).
From diversity of opinion towards consensus decisions
However good the debate, finally a decision must be made. Directors
have a shared destiny as they are part of a collegial body. There are only
board decisions, and there are no individual decisions. Directors must
align behind common goals and live the collective results. It is clear
that the final goal within the board of directors is to reach a consensus,
supported by all board members. Moreover, once a decision is reached,
the CEO should have the full support of the board in implementing it.
However, consensus-building might be quite challenging. Evidence
of research on groups point out that also in boards, coordination problems may arise.3 Coordination becomes increasingly difficult the more
diverse and outspoken director opinions are. The challenge is to reach
a good cooperation between a group of ‘high caliber’ individuals, each
with their own ego, their own independence status, their specific point
of view, style, personality and back ground. In addition, we know – from
the work of Surowiecki (2004) – that there will be problems with decision-making in a small group if there is no method of aggregating the
opinions of its members. However, this recipe does not work that well
in a collegial body. Instead of a simple majority rule or a super majority
for certain types of decisions,4 a collegial body should strive for unanimity, certainly for very fundamental decisions. Reaching a consensus
may offer extra stress because the normal coordination methods may
Promoting Effective Board Decision-Making, the Essence of Good Governance
227
be considered insufficient. Anyhow, for a collegial body there should be
some alternative rules, in case of persistent differences in opinion.
Of course, decision-making may be facilitated by autocratic leadership, but such leadership endangers group think, again eliminating the
mere advantages of a collegial decision-making body. In practice, the
personality and style of the chairman as well as that of the CEO can
exert a considerable impact on the final decision-making. The CEO may
be particularly convincing and able to persuade (which is an important
source of CEO control). Since non-executive directors are not equipped
to exercise better judgment than the CEO (because of his informational
advantage), the rational choice of non-executives may be to go along
with the insiders who have the best insight. A board should always be
vigilant towards charismatic and confident leaders, certainly once they
tend to become overly self-confident and subject to hubris. But also
autocratic chairmen may fail to welcome dissent or to seek out alternative courses or disconfirming opinions, installing a culture of consent,
pushing decisions and avoiding trouble and conflict.
Furthermore, directors should also be aware of the dangerous ‘salami
technique’. This technique, sometimes used by management, consists
of cutting large strategic decisions into smaller pieces to allow the board
to address them sequentially. This requires vigilant directors: after making a decision, they should not only ensure that these partial decisions
are well implemented but foremost it should be clear from the outset
that many secondary subsequent decisions, which stem from the primary decision, are dealt with from the very beginning.
A special point of attention is which ‘non-board members’ are invited
to the board, for example to make presentations. Even if such persons
do not have decision-making power they might well influence the
outcome of the discussion and the final decision in different ways, for
example by their presentation, their intervention in the discussion,
their non-verbal utterances (like nodding their head) or the place they
receive at the board room table (Meurisse, 2011).
Finally, directors should avoid the practice of frequently postponing decisions because differences in opinion remain (evasive attitude,
side-stepping the problem). It is at this point that the chairman should
step forward and expose his force of synthesis and consensus building.
After encouraging debate and comment, the chairman should focus
on the main conclusions and propose a decision with conviction and
persuasion (what he says and how he says it are fundamental for final
decision-making).
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Lutgart Van den Berghe and Abigail Levrau
Is the chairman’s leadership style effective?
Do the chairman and CEO have a good working relationship?
Do they understand their respective role?
Does the CEO encourage contributions from the board?
Is the relationship between management and the directors a constructive one?
Are there agreed procedures for contact between management and
directors outside board meetings?
Can individual directors raise issues for discussion without difficulty,
in other words is dissent OK?
Do directors express their views to each other and to management in
ways that are constructive?
Having reached decisions, are directors cohesive in supporting the
board’s decision?
Is bad news communicated quickly and openly by management to the
board?
Figure 8.11
Reflection question on board dynamics
From the various points tackled in the previous paragraphs, it becomes
clear that checking the quality of board dynamics is a difficult exercise
and should be tailored to the specific challenges the company and its
board is confronted with. As inspiration we include in Figure 8.11 a
tentative list of questions for assessing board dynamics (with a scoring
scale from 1 to 5 as suggested by Carter and Lorsch, 2004).
Professional (director) behaviour (2.3)
Room for improvement
Board dynamics can only be developed effectively if the constituent
parties of the board, that is, the directors, behave in a professional way.
In contrast to the attention paid to the board of directors, its structure,
composition and organisation, the governance codes have not sufficiently emphasised the professional behaviour of directors. This again
is a much more qualitative aspect of board effectiveness that is difficult
to judge from the outside. We have already pointed that the debacle of
numerous financial institutions that apparently had good governance
records, based on the public monitoring of their disclosed board statistics, was a wake-up call. The inconsistent governance ratings alarmed
experts as well as politicians to turn their attention increasingly to the
Promoting Effective Board Decision-Making, the Essence of Good Governance
229
promotion of professional director behaviour. In addition, we observe a
huge increase in expectations towards directors.
Being a director these days can seem like competing in the Olympic
high jump – you might put in a world-beating performance, but the
bar just keeps getting higher … There is an expectation gap between
how the public and the law see the role and responsibility of nonexecutive directors as against what could reasonably and realistically
be expected of the directors, given the complexities of managing a
modern corporation”. (Colvin, The Australian, 13 July 2011)
As can be detected from the recent European Green Papers on corporate
governance, the European Commission tries to stimulate member states
to pay more attention to the time availability and the commitment of
(non-executive) directors. Regulators increasingly interfere to limit the
number of mandates per director, certainly in listed companies. These
conditions will become more and more important, given the complex
and more demanding job. Directors should think carefully before joining a board and check to what extent their existing engagements allow
an additional board mandate. On the other hand, bringing the need of
sufficient involvement of directors to the front should also push companies to act more rigorous in their selection process and choice of new
board members.
But the business world itself does not sit still too. There is a tendency
to stimulate directors to commit to a personal code or charter of professional behaviour. Various companies have already articulated their
expectations towards the directors in a ‘code of conduct’ while other
private initiatives start to flourish. GUBERNA, the Belgian Director and
Governance Institute, for example developed a ‘Guidance for the professional director’ in close collaboration with its member network. The
aim is to create awareness among individual directors of a professional
attitude and to provide them with a practical tool that supports such
behaviour.
One important lesson learned from the past incidents is that effective
governance is predominantly determined by the governance attitude
and behaviour of individuals. Therefore a judgement of the governance
quality should primarily pay attention to those more immaterial and
behavioural aspects. Such examination necessitates a comparison of the
actual governance practices with the external norms and guidelines as
well as with the internal board norms and board culture. Moreover, a
closer look at the engagement, commitment, involvement and attitude,
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so examining the ‘performance’ of the individual directors becomes
crucial to complete the board assessment. Unfortunately, in most cases
such ‘individual’ evaluations might pose serious resistance even more
than towards a collective board assessment.
While most boards no doubt expect annual evaluations of the senior
management, most do not hold their own performance to the same
level of scrutiny. (Sonnenfeld and Ward, 2009)
If a board is asking senior management to re-examine the way
they manage the company, it had better re-examined itself as well
(Campbell and Stuart, 2009).
Behaviour in line with external and internal norms
External as well as internal factors may influence board behaviour.5
Although directors meet in private, their decisions are often scrutinised
and criticised in the public arena, so they risk damaging their reputation, and risk legal repercussions. This has undoubtedly an impact on
individual behaviour. However, the most important impact will come
from the role and leadership style of the chairman as well as from the
norms that evolve in any group.
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Active involvement of directors is stimulated.
Directors ask tough questions without management becoming defensive.
Dissent among directors is encouraged, and pressures for conformity to
the majority opinion are acknowledged and guarded against.
Knowing that everyone in the room is ultimately honest and has the
best interest of the organisation at heart.
Directors aren’t intent on scoring points, by putting other directors
or management down. Instead they respect each other’s opinion and
expertise and engage in discussions with the goal of reaching understanding and consensus.
Directors understand when to listen and when to stimulate discussion.
Any discussion between directors and managers is two-way. Executives
can disagree with directors if they believe the latter are misinformed or
wrong, and directors really listen to management’s ideas.
Directors respect the agenda, are mindful of the schedule and understand the importance of staying focused on the important issues. While
discussion is encouraged, they recognise the limits imposed by time.
Figure 8.12
The minimum requisite behaviours
Promoting Effective Board Decision-Making, the Essence of Good Governance
231
Norms are a set of informal rules derived from shared beliefs which
regulate directors’ behaviour (Nadler et al., 2006). These unwritten
standards –some would describe them as the board’s culture – determine the behaviours that board members see as appropriate or otherwise as ambiguous, uncertain or sometimes threatening. Much of the
effectiveness of the board is determined by the process of the board,
how the directors work together, rather than by the actions of the individual director on its own. New directors learn about them by simply
observing experienced board members, such as who sits where, how
to behave if meetings fall behind schedule, which director’s opinion
deserve respect, etc. An overview of the minimum requisite behaviours
is provided in Figure 8.12. It’s the chairman’s role to make sure these
norms are respected, and to encourage an atmosphere in which different views are seen as constructive and encouraged.
Scanning board effectiveness should therefore attach importance
to checking if the board behaviour in general and the individual
directors’ behaviour more specifically fits with the relevant best practices and norms. But as already highlighted before, critically evaluating individual director performance and attitude is perhaps the most
controversial topic because it can undermine board collegiality and
may lead to conflict. Rigorous evaluations might drive away good
directors (who feel they have already proven themselves sufficiently).
Moreover, it is not an easy task to evaluate peers. Directors spend
relatively little time together while what occurs in the board room
may not be the best gauge of a director’s contribution. It is not only
what goes on in the meeting that counts, also sidebar conversations,
at dinners, during telephone conversations in-between meetings can
really matter!
In order to lower the barriers to such individual assessments, a board
reflection could start with the review of how the ‘team’ is functioning,
if the mix is right, if everyone contributes (which does not mean that
everyone should be leading). Some relevant questions are provided in
Figure 8.13. Also informing about the ability of the board and committee chairs to have an open dialogue and crucial conversations about
why things are working or not working that well is a valuable step forward. The aim is to review how a director can best contribute to the
effective functioning of the board. It is also suggested to get some input
from management on how it interacts with the board.
Individual appraisals could benefit from a self-evaluation form, to be
used only in private with the board chair, but this is not enough. The
individual bias in self-appraisals needs to be balanced by the perception
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Does it occur because of the persistent actions of one or a few directors?
Is personal feedback needed or should we replace one or two directors?
Does the problem lie with the board’s chair or CEO?
Do the difficulties stem from the board’s use of time? Is there an overloaded agenda? Do we need more meeting time or more delegation to
committees?
Or is the quality of knowledge and information a problem?
Figure 8.13
Reflection questions on altering board behaviour
Source: Carter and Lorsch (2004).
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Personal one-on-one interviews of the board chair with each individual director, questioning whether they have specific suggestions
or constructive advice for any of their fellow directors. However such
interviews might inhibit candour, lack supporting objective data and
invite assertions of subjectivity or bias.
A third-party survey can form a more neutral and less biased framework. External parties can also provide individual feedback to directors (eventually together with the chairman).
In-between, different scenarios of a hybrid approach exist. Combining
the involvement of a third-party survey with formal individual discussions, reporting back by the chair or by the governance or nomination
committee (who can coordinate the board assessment).
Figure 8.14
Methods for individual director assessment
of others. In practice there may be different approaches or methods as
described by Leblanc (2009) (see Figure 8.14).
A full-fledged director assessment should be based on a rigorous process and a tailored approach (not a copy-paste questionnaire), with sufficient nuances. A director interview protocol should be tailor-made,
taking into consideration the relevant criteria of the specific director
profile (personality, functioning as a director, role in board committees, leadership capacities, etc.). In fact, different directors contribute in
different ways. As a collegial body, each director will have to deliver its
part of the puzzle of expertise, competency and experience. In board
committees as well as in board discussions these individual specialities
will pop up. A ‘standard’ evaluation may not capture such performance
nuances (e.g. director x may not say a lot during meetings but can be
instrumental in building bridges outside of meetings).
Promoting Effective Board Decision-Making, the Essence of Good Governance
233
According to research of Carter and Lorsch (2004), CEOs are very critical about the value add of their independent directors. They doubt their
knowledge of the business and the organisation, their time investment
(insufficiently prepared) and the quality of their interventions (cannot
recall what happened at previous meetings). However, nowadays under
the pressure of governance codes and societal claims, shareholders,
management as well as directors themselves are much more exigent on
board performance. A good attendance record or perfunctory (routine)
questions is no longer sufficient. Appraisals are an effective means to
make those new performance expectations clear. Involved directors can
bring an added value thanks to their understanding of the company’s
critical and strategic issues, being well informed about the important
issues facing the company, understanding the industry they compete
in, being well aware about what is driving the performance of the company and the main risks the company is taking. Involvement and quality of the preparation will materialise itself in the level of contribution
to boardroom discussions and in fulfilling the accountabilities of the
board. But these new demands should trickle down into the recruitment process, where much more information will be gathered than just
a mere CV. More and more is the attitude of the director what ultimately
determines the governance potential a person holds.
Not in the recruitment of directors, or in the individual board assessment is this shift of mind towards the ‘soft skills’ of directors already
prevailing. These individual director attitudes are becoming more
important than (executive) experience. More attention for such attitude
elements is therefore essential to improve board effectiveness. An example of relevant attitude elements is given in Figure 8.15.
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the way a director brings the message, tone of voice; a director can be
right without being effective;
independent when to put your foot down;
separating the less and more important issues;
willingness to take constructive stands;
constructiveness in addressing and managing conflict in meetings;
discretion and confidentiality with board information;
willingness to encourage contributions of other directors;
effectiveness in communicating;
ability to ensure that the board makes decisions.
Figure 8.15
Attitude elements
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Lutgart Van den Berghe and Abigail Levrau
An in-depth individual director assessment will need to compare
the selection profile, the director’s role and his or her performance
to come up with suggestions for further individual improvement as
well as for the optimisation of the board’s composition. Afterwards
mandatory (individual) feedback should be provided to each assessed
individual. However, such individual assessments will only bring lasting effect if coupled with a good follow-up and by eventual corrective
actions. Are the results acted upon? Are they integrated into a development programme for directors? Are the results linked to continued
tenure? The outcome of an individual assessment can indeed serve
as an important tool to decide on re-nomination or not (Leblanc,
2009).
Director assessment is all the more important when it comes to the
chairman, who really performs a pivotal role in creating the right governance spirit, culture and board effectiveness. To this end it might
be important to have an externally facilitated board assessment, or at
least appoint an independent or lead director to lead the evaluation
of the chairman. Given the pivotal role the chairman is playing, this
book devotes different chapters to that theme (see Chapters 5, 6, 7
and 9).
Gaining expertise in the art of decision-making
In modern boards, directors have to become good decision-makers in
their own right. According to Goffee and Jones (2006) individual directors should behave as ‘authentic chameleons’. This means that they are
able to correctly read the context and choose the one(s) they are able to
operate. Moreover, they know how to strike a careful balance between
showing emotions and withholding them, getting close and keeping
sufficient distance, conforming yet being different, while at the same
time being true to oneself and walking the talk.
Professional behaviour is more than having interesting contributions to make. Directors should give careful thought to how they are
involved in board discussions, contributing to a constructive dissent,
keeping the focus on the corporate interest and not on their own personal interest and pet projects, not wasting valuable time in ‘fishing
expeditions’ for personal interest issues (not central to the board’s
work). They should pay attention to the relevance of their interventions: do they relate to the topics under discussion, do they focus on
the most relevant aspects in the interest of the corporation (See section
Organising effective board meeting and Using meeting time effectively
and efficiently).
Promoting Effective Board Decision-Making, the Essence of Good Governance
Engaged but
nonexecutive
235
Challenging
but
supportive
Independent but
involved
Figure 8.16
Effective non-executive director behaviour
Directors should treat their colleagues as well as the executives with
respect and encourage early disclosure of problems (never shoot the
messenger). In addition, individual directors should also be aware of
their own limits. In studying the work of non-executive directors in the
UK, Roberts and colleagues (2005) come up with three couplets of effective behaviours in this respect as summarised in Figure 8.16.
Directors should examine their own decision processes – explicit or
not. Directors should not prevent but rather promote critical board
evaluations in order to reach the goal of continuous improvement also
in their personal behaviour. It is learnt from board experience that it
is interesting to have from time to time (e.g. at the occasion of a board
assessment) an appraisal of the decision-making quality. A good exercise in this respect is a systematic evaluation of very important past
decisions (e.g. ex-post evaluation of (underlying assumptions of) an
important investment or a post-mortem M&A failure analysis) may
help in improving board decision-making. In many cases, a board will
find that a decision was sound when it was made but that the business
environment changed unexpectedly. Some decisions however will be
exposed as flawed from the start (Campbell, 2009).
Director typologies
Some academics have managed to study individual director behaviour
and identified different director types. Most influential in the field is
the typology developed by Leblanc and Gillies (2005). They made a
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distinction between functional and dysfunctional directors as shown
in Table 8.1.
From a different perspective, Dunne (1997) classifies directors in quite
a detailed set of director types as listed in Figure 8.17.
Table 8.1
Individual director types
Functional directors
Dysfunctional directors
Conductor-chairs
Caretaker-chairs
Change agents
Controllers
Consensus-builders
Conformists
Counsellors
Cheerleaders
Challengers
Critics
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The silent seether: very clever, very shrewd who sadly lack either confidence or arrogance to get themselves heard,
The seether: neither as quiet or as bright; over-promoted insecure
type,
The key influencer : powerful, e.g. family member, heir, key shareholder (representative),
Mr or Mrs Wonderful: ideal board member: strong views but will listen to others, questions rather than states, motivated by what is best
for the board/company, never a slave to political correctness or to the
convenient, expedient but flawed compromise, shares responsibility,
The quiet floater: diplomat, has never done much wrong, letting other
do all the fighting and emerging as the winner,
The dangerous ones: with nothing more to offer than their silken
tongues (wonderful capacity to sound good but aren’t),
The really useful old hand: sage guys, seen many swings, survived
numerous crises and had the joy of as many triumphs,
The really useless or dead hand: little to offer, fearful of anything
that involves too much change or disturbance, decision avoidance,
The great debater: just likes to talk, winning attention,
The young pretender or heir apparent: has not yet reached the formal
position, needs a mentor and a constructive critic to keep him balanced,
The pulse: has an innate sense of what people think inside and outside, help the board spot the logical decision and to calibrate the baron’s (managing directors) and the seethers (directors), and
Rosey: cheering up the rest, finding a positive interpretation, overpromoted super salesman unsuited to a board role.
Figure 8.17
Director types
Promoting Effective Board Decision-Making, the Essence of Good Governance
237
These few examples of classification categories are withheld to show
that directors are human beings which expose specific behaviour in a
board context. Depending on the personality and background a director will tend towards a more functional or dysfunctional role. However,
this role is not set in stone. In certain situations a director might behave
differently than what is perceived to be his normal fashion (Leblanc
and Gillies, 2005). This underlines the complexity of the way individual behaviour impact board dynamics and group decision-making. The
challenge is to find an optimal mix of behavioural characteristics of
directors in the specific composition of the board in order to promote
effective board processes. A useful tool in this respect, which combines
expertise with behavioural aspects, is the ‘Diversity Optima Disk’ developed by Martin Hilb and Nils Jent.6
Organising effective board meetings (2.4)
Our board satisfies all of the requirements of Cadbury, Greenbury
and Hampel, but our board meetings are a complete waste of time.
(Carter and Lorsch, 2004)
Sooner or later we will have to redesign how the board works from
a clean sheet of paper. There are a number of tools we can use for this
task: using technology such as teleconferencing, greater use of outside counsel, a core of staff for dedicated board support, streamlining
board meetings etc. (Ward, 1997).
Using meeting time effectively and efficiently
According to Carter and Lorsch (2004) time is the overarching constraint on the role any board can adopt. Increasingly, directors have to
commit much more time to their board mandate due to more stringent
governance recommendations and societal pressure. Thomsen (2008)
is pointing to the time constraints of non-executive directors as one of
the main reasons for his opposition against the increasing empowerment of the board of directors. However, by investing more time (and
money) and by more efficient use of board meetings, one should get the
value add a board has been established for.
To get more value from board meetings, every board should critically
assess its board organisation. It might be wise to screen the number
of board and committee meetings: monthly meetings may slip into a
routine with too much focus on detail, but quarterly meetings may be
inadequate for the task at hand. Screening the available meeting time
includes also an analysis of the duration per meeting. Most directors
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Lutgart Van den Berghe and Abigail Levrau
complain that there is too little time scheduled for tackling all agenda
points. Adding meetings may be harder to do (certainly for international boards) than adding some extra hours per meeting. As proposed
in most governance codes, board committees help to enhance board
effectiveness. Different specialised board committees offer the advantage of combining expertise with efficient use of time and division of
responsibilities. However, such evolution has to be developed with great
care. One must not forget that it is the board as a whole that finally
needs to take the decision, based on sufficient insight in the underlying
dossier and in the discussion and advice of the different committees.
Clear agenda setting helps to have focused discussions and decisionmaking. Effective agenda planning supposes an achievable agenda that
focuses on the right topics. A board evaluation exercise should assess
whether sufficient time is devoted to the real important issues: do the
discussions and decisions relate to the most relevant and prominent
challenges the corporation is faced with? One can do so by comparing the time spent for each of the important agenda points with their
relative weight or importance. According to Carter and Lorsch (2004)
directors frequently spend too little time discussing important strategic
issues, the agenda being too much dominated by reviewing the past
(what recently happened) and routine items. Therefore, codes often recommend to reserve a substantial part of every board meeting to the
major issues affecting the company’s future and to foresee an annual
strategic retreat of at least one full day.
Effective use of time is more than a question of what topics are on
the agenda. A critical board assessment will judge whether there is a
good balance between presentations and discussions. The challenge is
to have sufficient time to reach meaningful decisions by in-depth analysis and discussion, while not degressing into areas outside the board’s
realm. Finding the right balance is difficult and will be quite different
from one board model to another. At one end of the spectrum, board
time is predominantly used for presentations by management. Paredes’
research (2004) stated that many directors complained that they had
relatively little say over what was brought before them and that management presentations consume most of the time allotted to an agenda
item, affording directors little opportunity to ask questions and discuss
the matter during the formal meeting. This is in line with the research
of Carter and Lorsch (2004), observing that directors complain that
there is too much time in presentations and insufficient time for meaningful discussion especially on strategic matters. At the other extreme,
we observe boards that discuss over and over again, while twisting
Promoting Effective Board Decision-Making, the Essence of Good Governance
239
the management presentations in very strict time constraints. Such
approach can frustrate well-prepared managers, as phrased by Carter
and Lorsch (2004):
Senior executives who have been asked to discuss their business are
kept waiting outside the boardroom, and are then told they have
twenty rather than the originally scheduled forty minutes to talk
about an issue that is vital to them… This prevents thoughtful discussion and good decision making on critical issues, and tends to
undercut the motivation of the managers affected. It’s also insulting
to them.
Our own research on governance practices at Belgian listed companies
has revealed the following points of attention, and they are listed in
Figure 8.18.
Although respecting the foreseen timing (start/end time) is a sign of
a well-organised board, we should be aware of the danger that finishing
meetings timely does not lead to important discussions being truncated
because the last items are treated in a hurry. So timing should be aligned
with the agenda and overloaded agendas may be dangerous impediments to effective decision-making. A solution that has proven its value
in practice is to foresee A- and B-items, with the A-items referring to
the most important agenda points that have the priority. The B-items
are of less importance and might be placed at the end of the agenda, so
that any time pressure leads to quickly going over the less prominent
agenda points. Moreover, a good board agenda should clearly point out
whether agenda points are for information, discussion or approval.
Engagement outside the regular board meetings
The empowerment of the board implies a much larger involvement of
directors, also in-between meetings. Outside the regular board meetings, directors often meet for board committee meetings. Moreover,
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By moments, too much time spent on presentations by management
Too much details are being discussed in board room deliberations
Time pressure: dossiers are not sufficiently being tackled in-depth or
discussions are being cut to soon
Files presented to the board are sometimes too ‘operational’
Figure 8.18
Flaws in board meetings
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Lutgart Van den Berghe and Abigail Levrau
directors and managers have ample opportunities to discuss board
issues in-between meetings.
In this context, Carter and Lorsch (2004) even go a step further and
propose to move the involvement of directors outside the board room.
In larger (listed) companies hardly any time is spent in conversations
with down-the-line managers, visiting plants or key customers, talking
to industry experts etc. Given the increasing role of directors of ‘empowered’ boards and taking into consideration the increasing volatility of
the business environment non-executive directors need to be much more
involved. According to research of Acharya et al. (2008) formal board
meetings should become the structured backbone, but not the main
body of board interactions. Non-executive directors should make more
time available for these informal discussions and meetings with executives as well as for information sessions tailored to the specific needs of
the individual director and of the business in a given point in time. Their
research showed that the difference in board effectiveness between listed
companies and PE-backed unlisted companies is partly based on the difference in involvement of directors. In contrast to practices in listed companies, directors in PE portfolio companies engage with the business in a
much more active way, and have numerous informal contacts with management and businesses (phone calls, field visits, ad hoc meetings with
executives, interim information etc). This makes them more involved
and engaged directors, leading to more effective boards.
Whereas previous emphasis was especially on the independence
of the board, the new challenge is to have professional directors who
really know the business, the challenges the company is faced with, the
risks it runs, etc. However, this evolution will again necessitate finding
the right balance or Nose In Fingers Out (the so-called NIFO method).
A clear procedure how to organise the higher involvement of non-executive directors might be more than helpful. Indeed most CEOs want to
know when such conversations with their team members, employees or
subsidiaries are taking place. Non-executives may not undermine the
CEO’s position and relationship with subordinates. It is therefore necessary to reflect on specific rules for non-executive directors contacting
down-the-line managers (e.g. informing the CEO and the chairman/
secretary-general) and vice versa.
Director information (2.5)
A lack of knowledge is a lack of power. (Monks and Minow, 2001)
Promoting Effective Board Decision-Making, the Essence of Good Governance
241
Board material
For a board of directors to operate effectively, information is very essential. The board and the committees can only be as good as the info they
have at their disposal. The most basic information a director receives is
of course the board material, that is, the dossiers with information on
each of the (important) agenda points of the board meeting. The time
has gone that companies could permit themselves to distribute a limited dossier at the board meeting itself. In essence, board information
should be timely, consistent and relevant. Our research of governance
practices in listed companies in Belgium has revealed that over the last
decade the flow of information and the timing of delivery of board
material has considerably improved. That does not mean that there is
no room for improvement, even the contrary.
In his critique on the empowerment of boards, Thomsen (2008)
builds his doubts on board effectiveness among other things (a.o.) on
the fact that directors suffer from insufficient information, in so far that
their formal (legal) authority does not imply real authority. Especially in
the smaller, unlisted and less ‘mature’ companies, providing an active
board with sufficient board material may be a huge challenge. Research
of Reheul and Jorissen (2010) showed that an important trigger in the
development of management information is the installation of an active
board with external directors. At other companies, such as the listed or
more outspoken in state-owned ones, the problem might be the reverse,
i.e. too much information. Paredes’ research (2004) showed that directors complained they do not have the valuable information or in the
alternative are overloaded with information. Carter and Lorsch (2004)
stated that directors are concerned about the flow of information they
receive. Too much information poses serious problems for non-executive directors. With their part-time status, they probably will not have
the time to go through all of the nitty gritty details. Weighty dossiers can hide (or bury) essential information. Also our own experience
with board evaluations in different types of companies confirms that
the expectations towards board material are very diverse. In particular,
the individual information needs of directors differ substantially. A gap
may exist between what information the non-executive directors want
to receive and what management deliver (both in quantity and quality). The challenge is to deal with these diverging expectations and to
get clear and concise information that offers sufficient details but only
include those elements that add value for good decision-making. A solution that has proven its value in practice is to foresee a thorough executive
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Lutgart Van den Berghe and Abigail Levrau
Trust, but verify management : organise regularly (very) short board
sessions without management (but be vigilant to remain polite, trustful and focus on effectiveness);
Try to get assurance;
Search for extra info.
Figure 8.19
Tips for a director regarding board information
summary that highlights the most sensitive parts of the important
agenda points, giving a clear recommendation as to the proposed decision and the risks involved, eventually amended with a legal and/or
financial expert opinion. Still a director can never be guaranteed to
have all the relevant info and therefore it is suggested to endorse the
behaviour set out in Figure 8.19.
Minutes of board meetings can be important reference documents
for board decision-making and may guide management in their execution of board decisions and non-executive directors in their follow-up
of execution. To this end, special attention should be paid to the quality of the minutes. A common dilemma is whether to record just the
decision, or also a summary of the discussion or even the individual
interventions (eventually on a name basis). Inquiries with secretary
generals reveal that mentioning individual interventions is mostly limited to those dissent voices that explicitly want to be referred to in the
minutes. Detailed minutes might be especially relevant to prove the
specific diverging opinions, or more generally, the workings and deliberations of the board and the disagreements if any. However especially
in the United States warnings are given that elaborate minutes can be
a ground of litigation. Finding the right balance of detail is a real challenge (Dunne, 1997). On the one hand the more sterile the minutes the
less for a lawyer to have a go at; on the other hand the easier a negligence
suit might be. Increasingly, courts and regulators raised questions about
the amount and scope of attention that was spent on a matter when
the minutes did not adequately support the recollection of the directors as to what transpired (Lipton, 2008). This is not only a practice in
the United States but increasingly also in Continental Europe with the
Dutch Enterprise Chamber as the leading example. Taking appropriate
minutes is an art and the secretary-general (and general counsel) should
work with the directors to ensure that the written record properly
reflects the discussion and decisions taken by the board. The language
Promoting Effective Board Decision-Making, the Essence of Good Governance
243
of board minutes is an art form in itself (sometimes people interpret
what has been said as something different). Therefore it is advisable to
draft minutes promptly and circulate them to directors for their consideration shortly after the meeting.7 For effective follow-up, preferable
minutes are completed with an overview of decisions taken as well as
with a detailed list of implementation tasks (to-do list).
On top of the periodic pillar of board material, non-executive directors increasingly receive quite a substantial amount of additional
(interim) information, such as a monthly business update, investor
reports, update on important board files and even daily press clippings
about the company and its business environment.
Thinking more strategically about board information
Even if directors are overwhelmed with the volume of information, they
are often underwhelmed by the content. Board material might focus too
much on past financial performance and on financial forecasts and too
little on competitive performance, customer reactions, swot etc. This
was critically put forward by the study of Deloitte (2004), expressively
titled ‘In the Dark: What Boards Don’t Know about the Health of their
Businesses’. The results of polling nearly 250 board members of different countries were sobering.
While the overwhelming majority of board members and senior
executives said they need incisive information on their companies’
key nonfinancial drivers of success, they often find such data lacking; when nonfinancial information is available, it is of mediocre or
poor value. (Deloitte, 2004)
We need to think more strategically about board information. It is
essential that directors understand the business model, the functioning
of the organisation as well as its strategic challenges, risks and opportunities. At the occasion of a board assessment, directors along with
management can carefully define the information the board needs.
Developing a list of what is the key information a non-executive director should receive will inevitably differ from one company to another,
depending on its portfolio of activities, its business and corporate environment, its development/maturity cycle, etc. For them it is essential
to know how the business model really works and what the key drivers
of success are. Non-executive directors need a robust understanding of
how money is made and at what risk. Therefore, looking at the key questions a director might ask can be a good guidance for composing the
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Lutgart Van den Berghe and Abigail Levrau
list of key documentation a director should receive. The following two
lists of questions, provided by Carter and Lorsch (2004) and Kakabadse
and Kakabadse (2008), can be helpful in this respect (see Figures 8.20
and 8.21).
With hindsight of the corporate failures, it might be good to pay special attention to so-called red flags or early warning signs which may
provide insight of what is really going wrong in companies.
Making board information more memorable and accessible
Companies should also make efforts to make information more memorable and accessible. In board reviews, top management complains
sometimes about the problems their non-executive directors as part-
1. Where is shareholder value being created and destroyed? Do we know
which businesses earn in excess of the cost of capital?
2. What are the long term trends in our business?
3. What are the major risks the company is exposed to (and are these
risks well managed)?
4. Are there any financial reporting issues, aggressive accounting?
5. What major projects are under way (capital & change projects) and is
implementation on schedule?
6. What is the level of employee morale, retention rate?
7. Is our market share in key markets holding? What are customer satisfaction trends?
8. What is happening to our major brands and our corporate image?
9. How does our strategy differ from that of our competitors?
10. How is our stock viewed by analysts? Are we buy, hold or sell?
Figure 8.20
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Ten key questions on the company’s business
What is the competitive advantage of the firm?
Do customers recognise the value this firm provides?
Is it the reality that most customers can barely tell the difference
between one company’s services and the next except for those at the
very top of the value chain?
Is price the only real differentiator from the customer’s point of view?
What do shareholders expect in terms of return on their investment?
Is greater value to be gained from keeping the enterprise together or
separating out the assets for sale?
Figure 8.21
Some business reflection questions
Promoting Effective Board Decision-Making, the Essence of Good Governance
245
timers are faced with. The amount of information they need to master is growing rapidly. Markets are changing at an ever-increasing rate.
The task of remembering – let alone keeping up with change – is huge
for part-time directors who have to turn their minds to other matters
when board meetings are over, and who are often faced with gaps of
two months between meetings.
To make information more memorable, directors need frameworks to
help them capture and hold on to the crucial elements in the flood of
information that comes their way. They need to use tools to synthesise and
prioritise information. Models such as the balanced scorecard (to evaluate
performance), the five forces model of Porter (to analyse competition), the
Dupont equation (to analyse the financial outcome) and risk mapping (to
define risk appetite) are useful to help directors cope with complexity and
to ensure that they focus on the things that really matter.
In using new technology, companies can help their directors in making information also more accessible. It could not only facilitate the
timeliness of information, but also the possibility to easily retrieve prior
information, make comparisons between different files, etc. However,
numerous companies do not dare to take the step towards electronic
information files for fear of data protection, etc. With all modern techniques available nowadays, this should no longer be an excuse.
Necessity of a diversity of information sources
In order to fulfil their monitoring role and to come to well-thought-out
discussions, non-executive directors have increasingly been asked to
combine the information received from management with information
gathered by the board itself. The main aim is to overcome the subjectivity of the information that goes to the top of the organisation (see
theories of Herbert Simon). In fact, there might be serious bottlenecks
and filters the info has to get through, certainly in larger organisations,
which implies the danger that the information may be outdated and
distorted before it gets to the board. Certainly for important and sometimes controversial dossiers, directors should be able to gather information within the company, coupled with second opinions via site visits,
hearings with different types of stakeholders and education/tutorial
events (Dunne, 1997). Directors should also have access to outside counsel and support where needed. This is also foreseen in most Codes.
Directors can’t offer perspective in a void. They need the support of
knowledge and perspective from qualified advisors. (Elson, Hubbard
and Zarb, 2012)
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Lutgart Van den Berghe and Abigail Levrau
Practice shows that especially board committees rely very frequently
on outside counsel. In audit committees there is the support of external
auditors and fiscal and due diligence specialist. For benchmarking executive remuneration, remuneration committees often rely on outside
counsel. Nomination committees turn to head hunters in search of top
management and board vacancies. Governance committees sometimes
consult external specialist for developing governance procedures, board
charters or for organising a board assessment. Of course boards should
guard against overly relying on outside advisors, certainly when the
company has substantial in-house support facilities. Kerstetter (2009)
reflects on the question when to use or not to use outside board advisors
(see recommendations in Figure 8.22).
An adjacent question that is increasingly posed is to what extent
non-executive directors should be able to rely on a specific support
function. In this respect, the Institute of Chartered Secretaries and
Administrators (ICSA) and ecoDa (The European Confederation of
Directors’ Associations) developed a ‘Board Support Survey’ (2010).
Although initially focusing on the board secretary, they observed that
in order to reach the goal of board effectiveness and given the huge
increase in board responsibilities, non-executive directors are in need
of much more ‘support’ than ever before. In the study of Acharya et al.
(2008), it is stated that the PE non-executive directors (who represent
the PE company on the board of their portfolio companies) can indeed
play a much more efficient and active role because they will have junior
staff who can analyse data and provide additional support and leverage while delivering a more granular view on topics of board attention.
Interestingly, many activist investors joining public company boards
will similarly insist on having a budget to cover additional staff support. If we really want to make the empowered board work and realise
the value add an effective board can bring to the company, we also
should pay attention to the support of independent directors.
●
●
●
●
Start with selecting and trusting the right management.
Be aware that you can’t hire outside advisors for every decision, the
board doesn’t feel comfortable with.
You are on the board – at least partially – because of your good
judgement.
There are no standard rules or guidance when outside board support
is necessary.
Figure 8.22
Recommendations for the use of outside board advisors
Promoting Effective Board Decision-Making, the Essence of Good Governance
247
Director induction and education
For effectiveness reasons, companies should install an education process for new directors (induction) as well as invest in the regular refreshment of the knowledge of non-executive directors. But also executive
directors will need to undertake specialised board training because they
need to effectively make the transition from operational manager (with
a focus on one aspect of a firm’s activities) to company director (where
they must exercise oversight over the firm as a whole).
Induction is essential for all new directors, to provide them the
necessary introduction into the company, its board and the duties of
directors. The more directors are distant from the business in question
(and this is often the case for independent directors), the higher the
need for an in-depth induction process. Independent directors bring
their unique lens to a problem, but they need to be aware of the limits of that lens, so that for them special education programmes may
be very relevant. According to research of Acharya et al. (2008), only
one-third of the directors of listed companies they surveyed describe
the induction as of high quality. This contrasts substantially with the
deep business understanding of non-executive directors in PE portfolio
companies (see also the governance manual for NEDs of 3i). According
to Kakabadse and Kakabadse (2008), the introduction for a new chairman is even more important, mainly to get information on the board
culture and board dynamics, on the critical relationships, the shadow
board (those that really pull the strings), those that have negative feelings of being passed over.
Besides an induction programme, there is need for continuous director education. This is not only recommended by the Codes but is also
emphasised by Sir David Walker (2009) (see Figure 8.23).
To ensure that non-executive directors have the knowledge and understanding of the business to enable them to contribute effectively, a board
should provide thematic business awareness sessions on a regular basis
and each non-executive director should be provided with a substantive personalised approach to induction, training and development to
be reviewed annually with the chairman. Appropriate provision should
be made similarly for executive board members in business areas other
than those for which they have direct responsibility.
Figure 8.23
Extract from the Walker Report regarding director education
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Once in office, directors need to stay relevant, individually and collectively (Conger, 2009). Skills have to be kept fresh to be of value. It
might also be opportune to schedule field trips to bring directors closer
to the company. However, each director may have quite separate and
more personalised development requirements. Therefore it is suggested
to ask the directors for their ideas on continuing education and to set
the tone for active learning. According to Conger (2009) it is important
to support active learning, such as by way of corporate-funded directors’ education (in-company). In-board room programs are particularly
powerful experiences because the team can learn together. Active learning must be a team phenomenon, because the consequent knowledge
gained from active learning must be useful to the full group. However,
also board education outside the board room can help directors stay
relevant. By learning what other directors are doing, a director can
compare and contrast the skills and practices of his or her own board
with others, and also calibrate his or her skills in a broader population
of directors. Mixing with different directors of different backgrounds,
from different sectors and organisations of a considerably different
structure and complexity, forces the individual to re-examine his or her
assumptions (Kakabadse and Kakabadse, 2008)
Corporate management techniques have benefited from several generations of business school research and training. But the scholarship
and study of corporate boards is still a largely ignored field. In many
boardrooms there remains little more than shared wisdom and rules
of thumb for decisions. (Ward, 1997)
For years there has been little or no formal education for most directors.
In contrast with general management education that most top managers
went through when taking over the leadership of a company, directors
were assumed to be wise men (most were effectively men) who didn’t
need any additional training at all. Even on the contrary, it seemed
‘humiliating’ to dare challenge the mere need for additional education
with such impressive track record as executive.
Every year, companies invest huge amounts of time and money on
executive development and education. Yet very little is spent on formally developing the board. Instead, board directors are somehow
expected to step over the threshold of the boardroom fully formed or
to magically transform themselves. We disagree there is a choice in
the matter. That was the past; development is now a must! (Kakabadse
and Kakabadse, 2008).
Promoting Effective Board Decision-Making, the Essence of Good Governance
249
The last couple of years, this trend seems to be changing, with national
as well as international director education (slowly) becoming a discipline in its own right. But the changing trend still leaves much room for
improvement before companies will be convinced of the value add of
such additional education programmes. On the other hand, the trend
towards ‘director certification’ appears to evolve at a more rapid pace, as
proven by the many alumni of national directors’ institutes such as the
IOD in the UK and GUBERNA in Belgium.
A board composition that induces the right governance
attitude and creates value add
The context and personalities influence board functioning and
board contribution. (Kakabadse and Kakabadse, 2008)
A top priority in governance codes
Structuring the board with the right people is indeed a crucial building
block for board effectiveness. Worldwide, governance codes have paid
considerable attention to the right board composition. However, the
codes’ recommendations mainly focus on the essential input criteria,
mostly ignoring the necessary behaviour and group dynamics.
A first element of board composition codes focus upon is the ‘optimal’ number of directors. Although Egon Zehnder’s research states that
size is the factor that is the least relevant for board effectiveness, the
assumption gains support that the number of board members matters
from a group dynamics point of view. There is no ‘holy’ number, rather
it is more an optimal range below or above which collective decisionmaking becomes less feasible. The study of Heidrick & Struggles (2011)
provides some insights on the size of European boards and point out
that boards are becoming bigger to accommodate the requirements
for diversity, to populate the increasing number of committees and to
increase the competency set.
On the other hand, there is the proposal to limit the board size.
Such proposition is not only retained in most governance codes, but
is equally supported by academic research. Carter and Lorsch (2004)
state that smaller boards are more effective than larger ones, because
larger boards pose more problems for optimal group dynamics, directors are less involved and committed and consequently less powerful.
In such boards it is increasingly difficult to communicate and discuss
together and there is less contact among directors outside the regular
meetings. However, there has to be a minimum number of directors
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in order to have a well-functioning collective decision-making process.
There should be sufficient directors so that there is sufficient expertise
on the board and ideally not too much overlap among board committees. Some companies find the solution in opting for a relatively small
board that is supported by additional external specialists; without them
being director they complement the board’s (committees) expertise.
Another important input factor identified in the governance codes is
that (unitary) boards need a majority of non-executive directors in order
to guarantee the objectivity required in the monitoring process. A board
has to oversee management and too much executives on the board might
lead to insufficient ‘checks and balances’. In the same line of thinking it
is also recommended that the functions of chairman of the board and
CEO, or leader of the executive management, should be split.
Probably most attention in recent governance recommendations
has been paid to the minimum degree of independence, not only in
the board as a whole, but especially in the main board committees.
In board committees, such as the audit and remuneration committee
there is a plea for a majority of independent directors, again in light of a
thorough control and the prevention of conflicts of interest.8 As soon as
board members face a conflict of interest, independent directors should
step in to guarantee that only the corporate interest prevails. In that
perspective, independence is indeed an important element of board
effectiveness. However, the attention for independent decision-making
is no guarantee whatsoever. It might give a false sense of effectiveness
if a company perfectly ticks of the box of the minimum number of
independent directors, selected on the base of a strict definition of what
constitutes independence. Judging board independence is more than
a minimum number of independent directors. Independence in character should prevail over independence in structure: most important
is the intellectual independence, and the courage to speak up as well
as the board’s tolerance for candour. We fully agree with Carter and
Lorsch (2004) that independence is primarily a psychological condition. In fact, independent directors can expose a lack of independent
attitude, whereas non-independent directors (e.g. (representatives of)
shareholders) can adopt a more independent position, than the Codes
assume. Independence must become a state of mind that permeates the
boardroom. To this end, it is important to have at least a minimum
number of (three) independent directors, achieving a strong sense of
identity as a group, eventually meeting alone from time to time. Such
group that regularly refers to the corporate interest as the only relevant
reference point will affect the entire board step by step in behaving
Promoting Effective Board Decision-Making, the Essence of Good Governance
251
independently. If any conflict of interest arises, there should be automatically a strict procedure respected, informing the board, limiting or
even fully eliminating the involvement to the concerned director in the
discussion and certainly in the decision-making. Another side-effect of
overly emphasising the minimum number of independent directors is
that this might lead to insufficient attention for ‘insiders’ with knowledge of the company and its business environment.
A board composition element that recently gained lots of attention,
especially in the media and in the political world,9 is the need for more
diversity, especially gender diversity. As already highlighted before,
diversity is an important determinant of effective group decision-making. In this respect, gender is one of the different demographic and
business characteristics that constitute a condition for effective group
dynamics. Not everybody agrees with the pressure put on the business
world to integrate more female directors in their board. However, gender diversity has gained so much importance in public life, that whatever the corporation’s opinion might be, publicly listed companies and
state-owned enterprises will increasingly have to live up to this societal
pressure and pay more attention to the gender balance in their board
of directors. Probably all other boards will be faced with a comparable
pressure, albeit of a less mandatory nature.
All of these ‘input’ requirements need to be guaranteed by installing a professional nomination process for the recruitment of directors.
Corporations have been blamed, all over the world, for their adherence
to a very amateur selection of new directors, fishing in the same ‘old
boys’ network’ over and over again. Moreover, boards often were fixed
on brand name or marquee directors, while it has become clear that
the quality of their contributions, the knowledge directors bring and
their passionate interest in the business is much more important. It is
clear that for effective group dynamics one should search new directors beyond the famous ‘old boys’ network’. The diversity search does
not come so easily and investments will be necessary to enlarge the
relevant pool of good board candidates. However, we do agree with
Carter and Lorsch (2004) that the so-called shortage of candidates is
more likely reflecting nominating committees’ failure to look beyond
the obvious than it is because of a genuine lack of talent. Is the shortage
of board talent among women not the logical outcome of the view that
the only good directors are CEOs and ex-CEOs (knowing that 99% of
the CEOs of S&P 500 companies in 2002 were male according to Carter
and Lorsch (2004)). Codes have tried to incentivise nomination committees to open the Pandora box and go for a more formal selection
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process. According to Timmerman and Van Durme (2009), a professional selection process should include the following three steps. Firstly,
it should start by developing a selection profile. Next, the nomination
committee has to guarantee rigor in deciding on re-nomination and
eventually opening up a vacancy for a new candidate. Finally, specific
attention should be paid to the complementary role of the nomination
committee, board and shareholders. Our research on governance practices in listed companies in Belgium has revealed some progress in the
professionalism of the selection of independent directors. In particular,
we witness more attention for a well-defined profile and an increasing
role of the nomination committee. Nevertheless, the influence of the
‘own’ network for recruiting the candidates is still prevalent and may
not be underestimated.
The United States has been leading the movement for more regulatory intervention in the nomination of directors. The Securities and
Exchange Commission (SEC) formally adopted a new governance disclosure regulation (active as from the 28 February 2010), which among
others, obliges listed companies to disclose the specific qualifications
of their directors and of the candidates put forward for nomination on
the board. Such disclosure will require boards to give careful thought
to the skill sets directors bring along because they will have to disclose
the attributes or skills that qualified a person to serve as a director.
Moreover for each director all previous and actual board mandates at
listed companies (and registered investment companies) during the past
five years will have to be disclosed as well. Also the European Union
follows that track. In its green papers on corporate governance in
the financial sector and more generally in listed companies the route
towards more mandatory rules for board nominations has been investigated. For the financial sector this already resulted in more stringent
rules (CRDIV), which will have to be monitored by the financial sector
authorities (see e.g. the consultation document of the EBA and the position paper of ecoDa).
However, we need to think more strategically about board
composition and recruitment
Although most codes relate their recommendations on board composition to the need for effective board decision-making, none take these
recommendations far enough. In practice, we frequently observe the
temptation to get the most qualified or high-profile directors, focusing
to a large extent on their specific expertise and past accomplishments.
Such recruitment efforts, without due regard to the board as a group
Promoting Effective Board Decision-Making, the Essence of Good Governance
253
decision-making body, may be missing a key consideration: lack of
chemistry. Good decision-making depends upon effective interaction,
with each director making his or her contribution that affects the whole
(group dynamics). People with the right governance attitude and with
the relevant business competencies are key for creating the right board
chemistry that facilitates collegial decisions in the long-term interest of
the company. It is therefore important that the nomination committee
tries to consider if a board candidate has the personal and interpersonal qualities that will contribute to the boardroom process, culture
and chemistry, taking into consideration the existing board members.
This implies that, with each new vacancy, the behavioural qualities of
incumbent directors must be assessed (and remedied as appropriate) as
well. There is much room for improvement when it comes to defining
the ideal director profile for a board vacancy and certainly for a chairman’s vacancy.
The concept of strategic board recruitment is still fairly new (Ward,
1997). While board structure is important, the calibre and abilities of
the directors is an even more critical determinant of a board’s effectiveness. Good people – who are suited to the job at hand – will perform
well even if the structure is less than ideal, but the opposite is certainly
not true. Even with a perfect structure, modest talent or expertise that
is not suited to the needs of the company will limit a board’s effectiveness. The mix of characters on the board will clearly have a big influence on its effectiveness. Directors should be there because they are able
to add something.
As stated before, building a board of great character is both a matter
of the individuals who compose the board and the group process norms
the board holds. Although each individual director can make a vital
contribution and can make a difference to the character of the board,
ultimately it is the collective functioning of the board as a unit that provides effective corporate governance. As such, building a board is not
a matter of building a model of the ‘ideal’ director and selecting eight
or ten of these ideal individuals, but instead means finding a balance
of skill sets, experience, leadership and connections across the board as
a whole in order to form an ideal combination. Indeed 11 top football
players do not make a winning football team. That’s why we need to
think differently about the type of people who make good directors and
about how they are encouraged to live up to their potential, once on
the board and that underlines the plea to focus on the character, skills,
leadership and experience of the individual, and the collective needs of
the board (Sonnenfeld and Ward, 2009).
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It is important to realise that the board is a social system that may be
substantially influenced by the nomination of new director(s). There can
be a period of ‘relative instability’, while relationships and board practices
adapt to the new element(s) in the group, bringing in different knowledge, skills, abilities and behaviour. The board will evolve over time to
a new equilibrium. These board dynamics should be reminded again,
also because board composition and the board’s role mutually influence
each other. The defined role influences the composition needed and the
composition influences the practical execution of this role. The challenge for the board is to understand the roles required and then match
the intellectual capital of the board to those roles (Nicholson and Kiel,
2004). Our own experience with board evaluation exercises confirms
the importance of this critical fit. In particular, it is striking to observe
that there is to some extent a correlation between the topics tackled by
the directors and the expertise present in the board. HR issues as well
as aspects of risk management, for example, are being less discussed in
contrast to financial and legal dimensions of a proposal partly because
these competencies are commonly under-represented. Such observations
point to the need to clearly develop the board’s profile with respect to all
relevant competencies. The aim should be to try filling the vacancies –as
much as possible – with the missing competencies and experiences.
Defining the board (vacancy) profile
Before drafting any board vacancy profile, one needs to update the general board profile so that the vacancy fits with the relevant context factors of the company (see also Chapter 6). Whatever the recommendations
of governance codes, defining a board profile is no universal given, nor a
permanent one size fits all recipe. In order to install an effective board,
one needs to align the board profile with the specific role the board has
to play in that company, taking into account the future needs of the company. One must think strategically about the required skill mix and the
value add demanded from that board (Hudson, 2009). Diversity needs
should be defined in relation to the expertise and experience that fits
the specific needs of the company, in light of its strategic ambition and
challenges. Consequently there is no ‘one size fits all’ solution to define
the value a board should bring to the company. No board is the same
and even over time the functioning of a board may drastically change,
with new shareholders stepping in, new management in the leadership
role or new directors on board. Therefore, only a system approach that
translates the context factors into the intended board profile can create
a strategically relevant profile for a board vacancy.
Promoting Effective Board Decision-Making, the Essence of Good Governance
255
When defining a profile for a board vacancy it is important that a
new director will complement the existing board. To this end a skills
matrix gap analysis should be developed, detecting in the set of necessary competencies, skills and experiences which ones are missing
(Leblanc, 2009). Such gap analysis supposes that the existing board
composition is critically assessed in light of the necessary board profile. The nomination committee, with the support of management, will
have to identify the competencies, skills and experience needed in light
of the board’s role, the corporate strategic objectives and other relevant
context factors. A critical board assessment should help in identifying
the current skills as well as the missing ones. An interesting example in
this respect is the case of Belgacom. A few years ago, the board of directors has profoundly reflected on its composition and has set out the
competences required in relation to the specific nature of the company
and its defined strategy (see Tables 8.2 and 8.3). Next, the competences
mentioned were summarised and set out in a grid (see Table 8.4). The
Table 8.2
Competencies in function of the nature of the company
Nature of the company
Competence needed
NV quoted on the stock exchange
Corporate governance
Telecom
Understanding of telecom and ICT
Autonomous public sector company
Relation state – company
Political world in Belgium
Statutory personal
Table 8.3
Competencies in function of the company’s strategy
Strategy of Belgacom
Competence needed
Maintaining profitable
market share
Marketing in the consumer market
Pricing strategy
Customer service and call centres
Achieving operational
excellence
HR – competence management
HR – social relations
IT-systems
Telecom networks
Investing in profitable
growth
New technology (VoIP, broadband, e-services)
Media/TV
External growth
West European telcos (Netherlands, France, Germany)
Emerging markets (Northern Africa – Middle East)
Mergers and acquisitions
10
11
12
13
14
15
16
17
Available
competences
–
**
–
Consumer
Pricing
Ext.
Markets
Service
Experience
Customer retention
***
–
ICT
VoIP
Broadband
e-services
Social relations
Statutory
employees
–
New technology
Media
***
9
***
8
Strategy
7
Finance
6
***
5
Corp Gov
4
**
3
***
2
Public
sector company
1
Business author
Desired competences
Director
Table 8.4 Competencies grid
Promoting Effective Board Decision-Making, the Essence of Good Governance
257
individual directors’ profiles were evaluated by indicating the degree
the competences were available or rather lacking. The outcome of this
assessment enabled the board to detect possible overlaps and gaps. The
aim of this exercise was to develop a more long-term perspective on
director recruitment and to include the missing skills in the vacancies
for the mandates that come to an end in the following years. In the
meantime new appointments have been reoriented to complement the
missing competences. In this respect, the grid does no longer reflect
the current board composition.
In general, the vacancy profile should allow to optimally complement the existing board members. On the one hand complementarity
is linked to the need for diversity (visible and invisible factors) as a precondition for effective group decision-making. On the other hand complementarity is essential in light of the growing specialisation within
the board committees. Notwithstanding the fact that a board is a collegial body, there is more and more specialisation taking place within
boards and board committees (see also Chapter 7 on governance paradoxes). When defining the necessary board and individual director profiles, one should therefore carefully investigate the degree of diversity
and specialisation wanted, in order to define the necessary complementarities between board members.
Diversity is often defined in demographic and social terms (age, gender, nationality, etc.). How important such socio-demographic diversity
might be, the most relevant diversity stems from the need to install a
board with the right mixture of individual competences and experience, that is, the skills, abilities and resources resulting from the director’s leadership, past and current experience as well as his knowledge,
expertise and functional capabilities acquired through learning, training and experiences. Elements that count in this respect are given in
Figure 8.24.
As already highlighted before, skills are a necessary but not a sufficient
condition. Engagement and deployment of those skills is as important.
We fully agree with Finkelstein and Mooney (2003) when they state that
communication style of potential directors as well as personal attitude
and integrity should be taken into consideration. Core competencies on
personality are very fundamental for building the right board chemistry
and for promoting effective group dynamics. The relevant personality
core competencies contain individual characteristics as well as specific
group-oriented and interpersonal skills. A concrete example is provided
by Richard Leblanc (2009) and cited in Figure 8.25.
258
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●
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Lutgart Van den Berghe and Abigail Levrau
Understanding the business, its environment and business model:
someone with relevant experience to smell any smoke coming under
the door and able to offer contestable advice; this requires some members (of the board) with experience relevant to the industry, specific
skills in relation to customer or geographic segments.
Intelligence to assess the strategic issues, business plans, etc. (experience with developing corporate strategy; executive experience).
Leadership questions and monitoring management.
Monitoring results (understanding the financial and non-financial
results) and control (operational experience, view on internal control
and risk management; legal matters).
Experience in running a business such as CEOs or former CEOS.
However be aware that (ex)CEOs can make lousy directors because they
can’t adjust to an environment where theirs is not necessarily the most
important opinion and where they must listen more than they talk.
Some directors should have special empathy with the concerns of the
wider population.
Experienced directors (expertise in other relevant board of directors).
Governance expertise.
Figure 8.24
Elements of a board (vacancy) profile
The question of re-nomination
In principle directors are nominated for a limited number of years. The
term of a board mandate may vary from 1 (exceptional), to 3 or 4 (the
new norm) till 6 years or more. Most countries allow that a re-nomination can take place. In light of the more critical assessment of board
composition, the question of re-nomination and – more generally – of
keeping directors on board deserves special attention. In a much more
critical environment, we need to raise the performance bar for board
members.
Boards should learn a lesson from team sports, where mediocre players
are dropped and even those who are successful are sometimes moved
on to rebalance the skill mix of the team. (Carter and Lorsch, 2004)
We should therefore start to define performance standards for directors
and organise performance reviews at the moment of re-nomination.10
To reach the goal of board effectiveness, one should dare to ask directors to resign or not to stand for re-election, if their contribution is
under standard or does not fit any longer with the new board profile.
Promoting Effective Board Decision-Making, the Essence of Good Governance
259
Individual oriented:
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
Vision
Open minded
Courage, forthrightness
Inquisitive nature
Change-oriented
Integrity (ethical standards, truthful and honest)
Independent attitude (valid for all directors; however special attention
to independent directors, cfr. infra) => objectivity
Authority
Interest (in the company and its business)
Commitment (to contribute), responsibility, time
Judging
Helicopter view while also analytic
Deciding
Sense of urgency
Inspiring
Challenging
Context judging; Directors should realise that there are ‘horses for
courses’. Indeed, different boards are effective in different ways.
Making use of that versatility requires being grounded in the challenges of the organisation on whose board the director sits. The worst
notion to hold is of a success somewhere else, which makes success over
here impossible to achieve.
Group oriented:
●
●
●
●
●
●
Interpersonal relationships, teamwork abilities
Trust and integrity are critical to chairmen and to boards. Trust is the
essence of relationships at the level of top management and between
management and the rest of the organisation, with shareholders and
other stakeholders
Coaching
Likable, fitting in the group, absence of conflicts
Understanding others and the dynamics of groups
Decision-making skills and style.
Figure 8.25
Individual and group-oriented selection criteria
Through codes and legislation, tenure limits are identified as an important aspect of governance. The assumption is that if directors stay too
long, independent directors can get too cosy with senior management.
Tenure limits are also used as an indirect way of getting directors – who
are not contributing – off boards. Whereas a retirement age is important,
there are several caveats about tenure limits. The point is that director contribution improves with time. So a high-performing board is not helped
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by limitations to director tenure. A high-performing board requires anything between a 7- and 12-year period of tenure together (Kakabadse and
Kakabadse, 2008). Directors can be forced to retire while they are still
making a major contribution. Moreover, trust and confidence are built
up over extended periods of time. It takes new independent directors a
long time to learn about their company. Installing a tenure limit may
also be an excuse for not conducting meaningful performance evaluations. There is a case for not having term limits, but the price is a serious performance appraisal. In any case, boards need to be refreshed on a
regular basis: growing old together will become less and less effective.
Some conclusions
The principal work of boards revolves around complex decisionmaking. A board can only be effective if it is organised as a collective
decision-making body, composed of a group of peers, acting as a college. Although this might sound straightforward, numerous companies,
large (subsidiary companies) and small ones (unlisted companies) alike
do not organise active board meetings. Consequently, they are losing
the value added of a corporate body, dedicated to objective decisionmaking in the interest of the company. But also a more active board,
merely operating as an advisory body, will not reap the benefits of group
decision-making. In such cases, there is no need to take diverging opinions into consideration; the leader’s opinion will (probably) prevail.
Again, the company dares to lose the most valuable thing of a group,
that is, collective wisdom. It is only with active board members that
the essence of collective decision-making will be realised. Increasingly,
the governance codes emphasise the need for effective board decisionmaking. However, they do not develop a clear guidance on how to reach
that goal. Based on intensive research and practical board experience,
this chapter develops a first attempt for such a reference framework.
The discussion on how to reach effective board decision-making is
structured around six key components: board dynamics, professional
behaviour, board organisation, board information and board composition and last but not least board leadership.
Board dynamics
The legal assumption is that the board of directors is a collegial decisionmaking body that strives to reach consensus. This assumption is built
on the belief that in order to decide on the most important corporate
affairs, one needs a well-balanced reflection with sufficient ‘checks and
Promoting Effective Board Decision-Making, the Essence of Good Governance
261
balances’. This is in sharp contrast with the centralised power delegated
to a CEO but apparently offers quite some benefits in comparison to
individual decision-making. Yet, at the same time it is a very challenging
element that has not received the attention it deserves. In fact, decisionmaking through a ‘college’ is much more complex and challenging than
individual decision-making. Board decision-making not only suffers from
‘bounded rationality’ (and the more volatile the business environment,
the more difficult it becomes to judge beforehand the consequences and
risks attached to major corporate decisions) but at the same time board
dynamics pose numerous challenges. Context and group characteristics
as well as group behaviour mutually interfere and dynamically shape
the board meeting and hence effective decision-making. Therefore, we
need to unravel the steps in the board decision-making process and as
such shed a light on the inner workings of the board.
Influence of board members on each other is inescapable and this is
all the more clear in smaller groups of peers. Board effectiveness necessitates that we overcome group think and herding, with the danger of
misjudgement of risk, the prevalence of loyalty and unanimity over
valuable counter-opinions and critique, social pressure to conform,
emphasising group consensus over dissent, not opening one’s mind but
closing them. The danger of group think might increase with autocratic
leaders or when the group gets more closed and more isolated. To overcome the danger of group think and herding, it is opportune to look
for remedies that bring diversity of opinion and independent position
taking. The underlying rationale (also in the many governance codes)
is that (cognitive) diversity and independent opinion are the single best
guarantee to reap the benefits of group decision-making while at the
same time overcoming the danger of herding and group think.
Moreover, it is important to effectively promote candid board dialogue
and constructive dissent as a route towards effective board decisionmaking while at the same time preventing unconstructive dissent and
dysfunctional or affective conflicts. Open dialogue supposes that there
is sufficient time for discussion before decisions are taken and that directors are proactive, inquisitive and highly responsible people in search of
the best solution for the company. Well-positioned logic and constructive
criticism strengthen relationships and commitment rather than damage them. The challenge is to question but not hurting nor inquisitor, to
explore but not putting down anyone and to constructively interrogate
the argument. Such approach ensures successful adoption of the proposal,
reduces risk and safeguards the reputation of the organisation and also
increases the commitment of the board and management to a project.
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Lutgart Van den Berghe and Abigail Levrau
However good the debate might be, finally a decision must be made.
Directors have a shared destiny: as they are part of a collegial body, they
must align and live the collective results. Consensus building might
be all the more difficult the more diverse and independent the board
is and the more constructive dissent is searched for. The pivotal role
played by the chairman is key in this respect (cf. infra). Finally, expost assessment of individual director behaviour and group dynamics is
essential to make sure that the theoretical benefits of collegial decisionmaking are effectively realised in practice.
Professional behaviour
A critical condition for board dynamics being effective is that the
directors behave in a professional way. Although the codes pointed to
numerous aspects of board composition, insufficient attention has been
paid to the numerous aspects of professional behaviour of director, a
crucial element that is also shied away from the limelight of public
governance monitoring. However, we can observe an increasing interest especially from governance experts and directors themselves for
developing guidance for the professional director.11 Coupled with the
(scarce) relevant governance literature it is possible to detect a number
of professional director behaviour aspects that should be integrated in
any board assessment: time availability and commitment, active and
focused involvement based on appropriate insight and knowledge,
constructive dissent with respect for each opinion, honest and ethical behaviour, discretion, loyalty and focus on independent decisionmaking in the sole interest of the company. In modern boards, directors
have to become good decision-makers in their own right.
However, such factors are of a qualitative nature and consequently
measuring individual director behaviour is a complex exercise. It is
therefore important that each board explicitly agrees upon the norms
(shared beliefs) and (informal) rules (or the board’s culture) that should
guide the individual director in performing a professional board mandate. In practice evaluating individual director behaviour and performance is probably the most controversial topic today. More efforts are
necessary to further promote a professional assessment of directors.
But there is more, these behavioural norms should trickle down into
the recruitment process, where much more information must gathered
than just a mere CV. More and more is the attitude of the director what
ultimately determines the governance potential a person holds. Given
that the board should act as a college of complementary peers, the real
challenge is to find an optimal mix of behavioural characteristics of
Promoting Effective Board Decision-Making, the Essence of Good Governance
263
directors. Not in the recruitment of directors, or in the individual board
assessment is this shift towards the ‘soft skills’ of directors prevailing.
Organising effective board meetings
To get more value out of the board meetings, every board should critically assess its board organisation. It might be wise to screen the number
and format of the board and committee meetings. Effective agenda
planning supposes an achievable agenda with sufficient time devoted
to the real important issues. Effective use of time means that there is a
good balance between presentations and discussions while leaving sufficient time for clear decision-making.
The growing expectations towards boards of directors imply that the
engagement of directors goes beyond the regular board and committee
meetings. Those formal meetings represent the structured backbone of a
director mandate, while informal discussions, information sessions and
business visits complement the embedment of a non-executive director
in the evolution of the company. Besides a professional and independent behaviour, the new challenge is to have professional directors who
really know the business and the challenges it faces.
Director information
For a board to operate effectively, information is very essential. Besides
the material that supports the preparation of the board agenda, the minutes of the board meetings are crucial feedback on board discussions
and decision-making, while also serving as reference for the follow-up
of the execution of the board decisions. On top of this periodic pillar of
board material, non-executive directors increasingly receive additional
interim information. In important and sometimes controversial dossiers, it might be opportune that non-executive directors get additional
information from other sources than the executives or have access to
external support and information.
A gap may exist between what non-executive directors want to
receive and what management is able and willing to deliver (both in
quantity and in quality). Board information should be timely, consistent and relevant. In some companies (e.g. smaller ones) directors may
suffer from insufficient information, while in others (e.g. the larger
ones) information overload may pose problems. Even if directors are
overwhelmed with the volume of information, they may be underwhelmed by the content. Board material might focus too much on past
financial performance and on financial forecasts and too little on competitive performance, customer reactions and SWOT. We need to think
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Lutgart Van den Berghe and Abigail Levrau
more strategically about board information. It is essential that directors
understand the business model, the functioning of the organisation
as well as its strategic challenges, risks and opportunities. Companies
should make efforts to make board information more memorable and
accessible. Directors as part-time outsiders need summaries and frameworks to help them capture and hold on to the crucial elements in the
flood of information that comes their way. Companies should not be
reluctant to use technology, giving their non-executive directors access
to timely and easily accessible information. Last but not least, empowered boards need sufficient attention for director induction and education, tailored to the needs of the specific board and the individual
directors. On the occasion of a board assessment, directors along with
management can carefully define the information format and the education the board needs.
Board composition
Worldwide, governance codes have paid considerable attention to the right
board composition. However, the codes’ recommendations mainly focus
on specific composition elements, mostly ignoring the necessary aspects
in relation to director behaviour and group dynamics. Points of attention include the optimal number of directors, a majority of non-executive
directors (in case of unitary boards), a minimum contingent of independent directors, specific diversity elements (with great attention for gender
diversity) and a professional nomination process. As already pointed out
we need to think more strategically about the board composition and the
recruitment of non-executive directors. Effective board dynamics necessitate that the board acts as a team, with complementary competencies but
also with sufficient chemistry and behavioural fit. Moreover the board’s
role and board composition mutually influence each other. Developing
the profile for a board vacancy needs to be done in a professional way,
with reference to the required skill mix and the value add demanded (a
new board member should complement the existing board). Skills are a
necessary but not a sufficient condition. Engagement and deployment
of those skills is as important. In case of re-nomination a performance
review is essential as well as a reflection on tenure limits.
Notes
1. From a legal perspective, being a peer means that everybody has the same
set of rights and obligations as a board member, also during board meetings
(Meurisse, 2011).
Promoting Effective Board Decision-Making, the Essence of Good Governance
265
2. This kind of checklist is foreseen by the EU recommendations and even
mandated into law in certain European countries, like in Belgium and
Spain.
3. In society numerous types of coordination mechanisms exist, such as topdown authority and coercion (e.g. assembly line), more bottom-up liberal
or independent methods (e.g. queues in a supermarket, flock of birds) or
cultural norms and conventions (such as laws, e.g. driving on the right side
of the road).
4. This kind of decision-making rules are commonly found in a general assembly of shareholders.
5. For a detailed questionnaire on board behaviour, see Kakabadse and
Kakabadse (2008), pp. 107–108.
6. Prof. Dr. Martin Hilb leads the Centre for Corporate Governance at the
University of St. Gallen. The Diversity Optima Disk combines three dimensions of board diversity related to the individual directors: know-how, roles
and comparable competencies. For more information, we would like to refer
to the website: http://www.ifpm.unisg.ch
7. Delaware courts condemned a company for consistently sending out draft
minutes too late – months after the meeting.
8. The danger of conflicts of interest is most prevalent in setting executive
remuneration, transactions between the company and a major shareholder,
transactions with a company directed by one of the board members, etc.
9. In Europe, this topic is high on the agenda of the Commissioner for Justice
and Home Affairs, Viviane Reding. Her proposal on gender diversity was
leaked to the press in September 2012. In this proposal, she opted for a
directive introducing a binding objective of at least 40% of the non-executive board members being female (of the other gender) by 2020. The
directive excludes SMEs. State-owned enterprises should achieve the 40%
objective already by 1 January 2018. Member states have a broad discretion
which sanctions to choose. However, more than half of the EU member
states heavily protested against this proposal.
10. If no external assessment is done a minimum effort should be to have a selfassessment, checked by the chair and the other directors.
11. See for example the toolkit developed by GUBERNA.
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9
The Appropriate Board Chair:
A Reality Check
Abigail Levrau and Lutgart Van den Berghe
Already two decades ago, Parker (1990: 42) concluded in his influential
work on the chairmen of UK companies that the role of the board chair
‘has become increasingly demanding as the corporate environment has
become increasingly complex and internationally competitive’. This
statement sets the tone for what occurred in the years that followed.
Many corporate scandals and especially the global financial crisis have
triggered society at large to be more attentive and critical towards the
performance of boards. In addition, corporate governance codes are
strengthened in order to empower the board of directors in carrying
out their duties and to protect long-term shareholder wealth. The public
scrutiny as well as the corporate governance reforms put exponentially
more pressure on boards and their chairmen.
The board chair versus the CEO: the principles
As highlighted in the previous chapters, it is striking to observe that
most of the requirements for board leadership stress structural governance elements, or what Finkelstein and Mooney (2003) once called the
‘usual suspects’ of board effectiveness. Among these ‘usual suspects’ is
the demand to split the CEO and board chair roles in order to curb power
at the top of the organisation and to ensure an objective independent judgement of the board on corporate affairs. This simple requirement, however, underestimates the sensitivity of introducing this kind
of check and balance in practice. In the vast majority of continental
European countries as well as in the UK there appears to be a trend
toward non-executive chairs as the standard board leadership model
for large listed companies (Heidrick & Struggles, 2011). In contrast, in
some countries, such as the United States and France, there is still much
268
The Appropriate Board Chair: A Reality Check
269
In a number of countries with single tier board systems, the objectivity of
the board and its independence from management may be strengthened
by the separation of the role of chief executive and chairman, or, if
these roles are combined, by designating a lead non-executive director
to convene or chair sessions of the outside directors. Separation of the
two posts may be regarded as good practice, as it can help to achieve an
appropriate balance of power, increase accountability and improve the
board’s capacity for decision-making independent of management. The
designation of a lead director is also regarded as a good practice alternative
in some jurisdictions. Such mechanisms can also help to ensure high
quality governance of the enterprise and the effective functioning of the
board.
Figure 9.1
Extract from the OECD guidelines on board leadership
controversy on this matter and most companies remain attached to
unitary power (Dalton, 2012; AMF, 2010). The OECD Guidelines of
Corporate Governance (2004) have recognised this controversy and
have introduced the ‘lead director’ as a good practice in cases of joint
leadership structures (see Figure 9.1).
The dichotomy in views also reflects the underlying theories in governance research. Proponents of organisation theory and/or stewardship
theory argue that if the CEO also serves as the chairman, this duality
provides unified strong leadership, builds trust and stimulates the motivation to perform (see e.g. Muth and Donaldson, 1998; Finkelstein and
D’Avanti, 1994). Agency theory, on the contrary, provides the rationale for separation of roles. Splitting the roles of CEO and chairman
dilutes the concentration of power of the CEO, avoids CEO entrenchment and reduces the potential for management to dominate the board
(Jensen and Meckling, 1976). The public attention for board leadership
structures has triggered academics to study this topic more in-depth.
However, empirical research has not yielded strong results to support
the push towards CEO duality, neither with respect to improving board
effectiveness nor firm performance (Daily and Dalton, 1997; Daily
et al., 2003, Westphal, 2002). This feeds the criticism and not surprisingly the question arises if the debate on CEO duality has the right
focus or to quote Daily and Dalton (1997), ‘much ado about nothing?’
However, this dichotomy is a valid perspective for pointing to the
unique leadership challenges a chairperson of a board is faced with due
to the specific characteristics of boards. In essence, the board of directors can be considered as a multi-member governing body, standing at
270
Abigail Levrau and Lutgart Van den Berghe
the apex of the organisation (Bainbridge, 2002). The legal assumption,
underpinning the installation and operation of a board of directors
is that at the helm of the company, one needs a collegial body, striving to reach decisions in a consensus style. Put differently, in order to
decide on the most important corporate affairs, only a group of people
can deliver a well-balanced reflection while also installing a ‘checks
and balance’ culture within the organisation. This constitution reflects
the belief and trust in collective wisdom, once expressed by a classical
author as ‘Nemo solis satus sapit’ (no person can be wise enough on
his own) (Cadbury, 2002). This is in sharp contrast with the centralised
power delegated to a CEO, and has implications for the chairperson.
Being a leader of a board is much more complex and challenging than
individual leadership of a company. In fact, while the board of directors is the highest decision-making body in the organisation, the board
chairperson is not at the top of any decision hierarchy as is the CEO
(Gabrielsson et al., 2007). The differences between board chairperson
and CEO leadership is summarised in Table 9.1.
Table 9.1
Comparison of board chairperson and CEO leadership
Board chairperson
CEO
Accountable to shareholders and a
broader set of stakeholders together
with the other board members
Accountable to the board of
directors
The highest level of decision-making
in the firm together with the other
board members
Responsible for implementing
decisions made by the board
Leads a team of peers (formally and
socially)
Placed at the top of a hierarchy
(formally and socially)
Leads board meetings that generally
take place with infrequent intervals
and time constraints
Leads subordinates on a continuous
basis generally with frequent
contact with subordinates
Does not have instruction authority
over the other board members
Has instruction authority over
subordinates
Generally a part-time leader of the
board
Generally a full-time leader
Generally non-executive, facing
limited and incomplete information
and highly dependent on
management
Has insight information on the
daily operations of the organisation
and has access to all layers in the
organisation
Source: Gabrielsson et. al. (2007) and Conger (2009).
The Appropriate Board Chair: A Reality Check
271
Splitting the roles in practice
Similar to the Anglo-American countries, Belgium is characterised by
a unitary board model where executives and non-executives are sitting
together in one governing body. Following the international pressure
against CEO duality, the separation of roles of CEO and chairman is
also recommended by the Belgian Corporate Governance Code. The
Code reflects the assumption that the primary role of the chairman
is to run the board and that of the CEO is to manage the company,
encompassing fundamentally different tasks and activities.
Our research with Belgian listed companies1 reveals that only six of
those companies still pursue role duality (7%). All other companies
opted for a split of responsibilities. Further analysis indicates that 40%
of the board chairs are defined as independent chairmen, while 46%
can be considered as non-executive chairmen (see Table 9.2).
The distinction in nomenclature in Table 9.1 is based on compliance or non-compliance with the independence criteria set forward by
Belgian Company Law. Table 9.3 shows a more detailed overview.
Table 9.2
Board structure in Belgian listed companies
Executive
chair
BEL 20 (N = 18)
Non-executive
chair
Independent
chair
5%
55%
40%
BEL Mid (N = 31)
16%
52%
32%
BEL Small (N = 34)
18%
35%
47%
Total (N = 83)
14%
46%
40%
Table 9.3
Chairman nomenclature
Board chairperson
Definition
Executive chairman
Chairman and CEO roles are held jointly (CEO
duality) (or chairman is part of management)
Non-executive
chairman
Chairman and CEO roles are separated
Chairman has close ties with shareholder or
Chairman is former CEO
Independent
chairman
Chairman and CEO roles are separated
Chairman complies with independence criteria
of art. 524 of Company Law = criteria of Belgian
Corporate Governance Code for listed companies
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Abigail Levrau and Lutgart Van den Berghe
Although most Belgian listed companies comply with the Corporate
Governance Code, the division of roles at the head of the organisation
puts an additional challenge for the non-executive and independent
chairmen. The apparent simplicity that sharing the burden of responsibility (between the chairperson and the CEO) offers appears to be
somewhat illusory and sometimes difficult to implement in practice.
One of the most often cited comments that popped up during the interviews with respect to board chair leadership relates to the importance
of a well-functioning chairman–CEO in tandem. It was noted that the
relationship is successful in cases where the CEO and chairman have
complementary profiles and show mutual respect for their respective
roles. Nonetheless, the working relationship appears to be a delicate
exercise, depending on different factors such as the personality and
background of the individuals involved. Ambiguity in the division of
responsibilities can easily lead to tensions that radiate negative vibrations to the board–management relationships. Notwithstanding the
awareness of the importance and the dangers of the chairman/CEO
relationship, only a few companies have formally described the role and
responsibilities of the chairperson and the CEO in their board’s terms
of reference.
These findings are fully in line with previous qualitative exploratory
studies on the relationship between the chairman and the CEO. In particular, the often cited research by John Roberts (Roberts and Stiles,
1999; Roberts, 2002) also pointed to the need for a co-operative relationship between the chairperson and the CEO. He found that this is
the result of a process of dialogue and negotiation of power, a clear
recognition of the differences in roles, and avoidance of competition.
Besides, he concluded that the chairman–CEO relationship also has
a decisive influence on the quality of the wider set of relationships
between executives and non-executives. A similar conclusion was made
in a more recent study by Kakabadse et al. They found that clarification
and negotiation between the chairman and the CEO is required with
respect to different elements of the two roles in order to avoid tension
(Chapter 11). In addition it was stated that the chairman–CEO relationship has a major effect on boardroom dynamics.
But the board chair faces much more challenges
There is a growing awareness among academics as well as among practitioners that the inner workings of a board (Pettigrew, 1992; Hermalin
and Weisbach, 2000), the board’s ability to work together as a team as
The Appropriate Board Chair: A Reality Check
273
well as the leadership role and skills of the chairman are very critical
dimensions of effective board performance (Cadbury, 2002; Leblanc,
2005; Levrau and Van den Berghe, 2009). Moreover, practice shows that
the influence of the chairperson, irrespective of whether the position
is hold jointly or separately, may extend beyond the boardroom. Apart
from chairing the board meeting, the chairperson is expected to fulfil
various roles towards internal and external stakeholders. Referring to
this augmented role, it is argued that an effective chairperson has the
potential to contribute to the long-term success of an organisation (O’
Higgins, 2009).
There appears to be a growing awareness of the pivotal role of the
chairman for effective board governance and the sustainability of companies. Although the role of the chair is not defined by law, most corporate governance codes attach great importance to this matter and
spell out the responsibilities of the chairperson. They offer a good point
of reference in delineating the role of the chairperson. In particular,
they include distinct activities for the chairman inside and outside the
boardroom as summarised in Figure 9.2.
Nonetheless, as stated by Cadbury (2002) ‘the primary task of chairmen is to chair their boards. This is what they have been appointed to
do’. It is the job of the chairman to get the best out of his directors and
to ensure that the board provides the leadership to the company. In this
INSIDE THE BOARDROOM
OUTSIDE THE BOARDROOM
Oversee the
avtivity of the
board
Chair and
prepare board
meetings
Chair shareholder
meetings
Oversee the
board strategy
The role of
the
chairperson
Oversee
compliance with
legal and CG
requirements
Board
development
and evaluation
performance
Liaise with CEO
and
management
Liaise with
shareholders and
stakeholders
Figure 9.2
The role of the chairman
Source: Adapted from O’Higgins (2009).
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Abigail Levrau and Lutgart Van den Berghe
context, a chairperson is commonly compared with a conductor of an
orchestra, filled with world-class musicians. The challenge is to deploy
the talents of the musicians, let them play together in harmony, from
the same song sheet in order to create beautiful music. The major difference is that the ‘score’ for a board chair is a lot more dynamic and
complex (Beatty, 2012). Put differently, in order to make ‘great music’,
the chairperson must be aware of and deal with the particularities surrounding board leadership.
The chairperson has no statutory position. All directors have legally
equal responsibilities and as such the chairperson is no more equal than
any other board member. His authority is simply derived from that of
its board. The chairperson of a board of directors is in fact the ‘primus
inter pares’ (the first among equals). He is chosen among and by the
directors to lead the board. Lorsch (2009) defines boardroom leadership
as ‘the emergence of directors who are willing and capable to influence
their fellow directors to take needed actions’. In this respect, a board
leader must have the standing among its fellows as well as the will and
ability to shape decision-making. Even without the lack of former legal
power, McNulty et al. (2011) argue that chairmen can tapp into four
sources of power when fulfilling their leadership role:
(i) Structural power is the power inherent in the formal organisational
structure and hierarchy.
(ii) Ownership power is the power deriving from either owning a significant shareholding in the firm, or power gained from forging longterm relationships with significant owners or founders.
(iii) Expert power is the power that emanates from demonstrating an
ability to handle the firm’s key tasks and contribute to organisational performance.
(iv) Prestige power is the power related to personal prestige or status.
Possessing these power sources can be an indicator for the potential
power that a chairperson brings to its responsibilities.
Boards of directors are there to take governance decisions. Decisions
are made by people, and in the case of a board, by people acting together
as a college. The chairperson has to lead the board in this task of complex decision-making which is based on collective reflection and group
decisions. In addition, board decision-making depends upon effective
interaction and dynamics among its members. It is the job of the chairman to assure that board members work together and leverage the practices of a good team. According to Pettigrew and McNulty (1998), the
The Appropriate Board Chair: A Reality Check
275
will and skill of individual board members, and the interpersonal and
group processes through which their energies are combined, determine
to a larger extent the effectiveness of a board rather than its composition and structure. At the same time, literature points out that boards,
like any other group, are vulnerable to negative group dynamics which
may hamper their working (Bainbridge, 2002; Surowiecki, 2004).
Moreover, a chairperson faces the need to resolve apparent paradoxes
inherent in board decision-making. From literature, we learn that collective decision-making is successful if some remedies are in place to
cope with the danger of negative group dynamics. In particular, diversity of opinions is perceived to be the best guarantee to reap the benefits
from face-to-face board discussions, questioning evidence, revealing
uncertainties etc. (Schweiger et al., 1986, Surowiecki, 2004). However,
capturing the value of diversity is quite a complex process. In fact, it is
the role of the chairman to stimulate open candid discussion, to support
directors to speak up and express their opinions but at the same time
he should be able to manage conflicting or dissenting views. The more
diverse opinions are uttered, the more pressure is put on maintaining
coherence among the group and on the possibility to reach a consensus in the decisions. However good the debate, finally a decision has
to be made. The difficulty of facilitating a good cooperation between
a group of ‘high caliber’ individuals, leveraging expertise, preserving
high standards of openness while fostering effective ‘collegial’ decisionmaking underlines the importance of the leadership skills of the chairperson in the conduct of board meetings. In this respect, it is noted that
the chairperson influences the performance of the board in the way
he manages the group’s tasks, structures discussions, handles internal
conflicts and displays more subtle leadership behaviours (Hackman and
Morris, 1975; Cadbury, 2002; Leblanc, 2005, Levrau, 2007).
Undoubtfully, the interest in the role of the board chairperson and
his impact on decision-making is increasing. Still, our knowledge on
the work of today’s chairman is limited and largerly (mis)understood,
despite the bulk of empirical research on board leadership structure
(see Daily and Dalton, 1997 for an overview). Moreover, mainstream
board research focuses on the antecedents and outcome of the decisions without taking into account the quality of the decision-making
process. Only the last decade, some scholars were able to overcome the
access difficulties that is the main source of constraints in studying
‘managerial elites’ (Pettigrew and McNulty, 1998). Several of these valuable studies focus on board chairmanship and enhance our insights on
(i) the disciplines that a world-class chairman has to master (Kakabadse
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Abigail Levrau and Lutgart Van den Berghe
and Kakabadse, 2008); (ii) the functional director’s typology to serve
as a chair (Leblanc and Gillies, 2005); (iii) the general characteristics
of effective chairs and their perceived impact (Harrison and Murray,
2012); (iv) a typology of chair power and influence (McNulty et al.,
2011), as well as on (vi) different models of chairman–board relationships (Roberts, 2002) and (vii) the roles of the chairperson vis-à-vis the
CEO (Roberts and Stiles, 1999; Stewart, 1991).
The decision-making style of the chairman: in theory
An important duty is attributed to the chairman with respect to effective board decision-making. Sir David Walker has again emphasised this
responsibility when drafting the final recommendations after reviewing the corporate governance in UK banks and other financial industry
entities (see Figure 9.3).
The Belgian Corporate Governance Code for listed companies, for
example, includes the basic principles, as set forward by Sir David
Walker. In addition, it highlights the need for a constructive board climate, stimulated by the chairman:
The chairman should take the necessary measures to develop a climate of trust within the board, contributing to open discussion,
constructive dissent and support for the board’s decisions. (Belgian
Corporate Governance Code, 2009)
Clearly, the chairman has to lead the discussion and assure that the
board engages in collegial decision-making, focusing on the long-term
interest of the company. The chairman, as the leader of the board, has
The chairman is responsible for leadership of the board, ensuring its
effectiveness in all aspects of its role and setting its agenda so that fully
adequate time is available for substantive discussion on strategic issues.
The chairman should facilitate, encourage and expect the informed
and critical contribution of the directors in particular in discussion
and decision-taking on matters of risk and strategy and should promote
effective communication between executive and non-executive directors.
The chairman is responsible for ensuring that the directors receive all
information that is relevant to discharge of their obligations in accurate,
timely and clear form (recommendation 9)
Figure 9.3
Extract from the Walker report regarding board leadership
The Appropriate Board Chair: A Reality Check
277
to draw to the surface what board members really feel about the operations of the board, the collaboration with management, the way issues
are dealt with, etc. Hereby, he has to take into account the unique challenges of the board on the one hand and balance the interest of shareholders and stakeholders on the other.
As elaborated in the previous paragraphs, the main paradox in group
decision-making is that groups, such as boards of directors, generally
have the potential to produce more adequate decisions than individuals
but at the same struggle with engagement of their members in reaching effective decisions. This gave the impetus to Jay Hall and his colleagues to develop a conceptual framework to study decision-making
behaviour in order to facilitate theory building on decision-making.
Their Decision-making Grid reflects the relationship between two basic
dimensions that are considered to be critical in group decision-making:
(i) the concern for decision adequacy experienced by the individual
decision-maker and (ii) the concern for commitment of others to the
decision which individuals experience when working on a joint decision-making task (Hall et al., 1964). Each dimension forms the axis of
the grid and has been scaled from 1 to 9 in order to reflect the degree of
a particular concern which individuals possess. In particular, the value
1 denotes minimal ‘concern for’ while the value 9 denotes maximal
‘concern for’. Based on the relationship between the two dimensions,
five decision-making styles are derived:
Self-sufficient decision-making: this decision-making style is characterised by a maximum concern for decision adequacy and minimal concern for commitment (9/1 position on the grid). The assumption is that
a group does not have the capacity for good decision-making. The 9/1
decision-maker does not get involved with others and is most confident in his personal assessment of the problem concerned. He prefers to
push the others in the direction of his own solution, which seems ‘best’
to him. This decision-making style can also be labelled as ‘authoritarian’ leadership. The success rate of this kind of leadership depends on
the amount of power the person possesses over the group.
Good neighbour decision-making: This decision-making style is characterised by a minimal concern for decision adequacy and a maximum
concern for commitment (1/9 position on the grid). The assumption
of mutuality and trust, fair play and peaceful co-existence forms the
rationale for this style. The 1/9 decision-maker attaches great importance to maintaining harmony and understanding among the group
members. He has a kind of aversion to disagreement and tries to avoid
conflict. He shifts his personal opinion to correspond with the rest of
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Abigail Levrau and Lutgart Van den Berghe
the group, or he does not tackle touchy areas in favour of the well-being
of the group.
Default decision-making: This decision-making style is characterised
by a minimal concern for decision adequacy and minimal concern for
commitment (1/1 position on the grid). This style reflects a passive,
non-participating role of the decision-maker. This behaviour occurs
in situations where the decision-maker shows no interest in the topic
under discussion. In other cases the decision-maker may feel threatened
by the others in the group, triggering the role of ‘silent member’.
Eye-to-eye decision-making: This decision-making style is characterised
by a maximum concern for decision adequacy and maximum concern
for commitment (9/9 position on the grid). This style is based on the
assumption that better decisions can be reached if all available resources
in the group are utilised. This is only possible if all groups members are
involved and make a contribution to the task at hand. Typically, power
by the 9/9 decision-maker is shared among the group members in order
not to stifle creativity and expression of different views.
Traditional decision-making: This decision-making style reflects the
central 5/5 position on the grid. The underlying assumption is that
both concerns (adequacy and commitment) are necessary but mutually
exclusive. Put differently, the 5/5 decision-maker is convinced that if
he emphasises one concern more, the less emphasis can be put on the
other. In this respect he is willing to share some of his individual power,
confer with the group members and modify his own position to reach a
decision that is supported by the majority of the group. Put differently,
this style is characterised by the attempt to reach a compromise.
The decision-making style of the chairman: in practice
Although this framework is well developed from a conceptual point of
view, it has to our knowledge never been used to empirically study the
work of the board chair. This offers a unique opportunity to further
enhance our insights and complement existing studies in the field. We
included this framework in our qualitative survey on board practices
of Belgian listed companies.2 The Decisions-making Grid was used to
capture the perceptions of the listed companies on the decision-making
style of their chairman (Figure 9.4).
A general observation is that there exists a considerable diversity
among the perceived decision-making styles of the chairmen of the BEL
20 and Bel MID companies (the number of observations are indicated
by xxx in Figure 9.4). A considerable amount of chairmen in our sample tends towards the eye-to-eye decision-making style (quadrant A),
The Appropriate Board Chair: A Reality Check
High 9
Concern for Commitment
8
7
279
(1/9)
Good Neighbour Decision Making
(9/9)
Eye-to-eye Decision Making
The important thing is for members to support the
group position. The task should not be allowed to
destroy the group because without cooperation
there would be no group to work on problems.
Involvement of all group members in the dicision
results in both maximum support and a higher
quality decision through an increase in resources.
6
(5/5)
Traditional Decision Making
5
People must realise they have to give a little and
take a little to get a job done. Push for the best
decision but make sure there is enough agreement
to get a decision and to insure implementation.
4
3
2
Low 1
1
Low
(1/1)
Default Decision Making
Disagreement and emotional thinking go hand in hand
with group situations. It is better to rely on precedent or
experts outside the group, and not feed the conflict. Just
go along and ‘mark time’ until the group sees the light.
2
3
(9/1)
Self-Sufficient Decision Making
Group-centred action is a bid for mediocrity. The
quality of decisions comes first, and the demands
of the group detour decisive though to irrelevant
issues.
4
5
6
7
Concern for Decision Adequacy
8
9
High
Figure 9.4 Decision-making styles of chairpersons of BEL 20 and BEL MID
companies
meaning that they attach great importance to decision adequacy as
well as to the involvement of the board members. The study participants explained that their chairman is offering the other directors the
opportunity to intervene in the discussion and share their opinions
and views. They emphasised that there is room for deliberations but
that the chairperson also ensures that decisions are made and that they
are clear for all board members.
In second order, there are a number of chairmen who are perceived
to expose a more ‘authoritarian’ or self-sufficient decision-making style
(quadrant B). Although these types of chairmen also attach great importance to the concern for adequacy of the decision, they care less about
the involvement of other board members. The comments added by the
study participants explained that the chairman has a ‘natural authority’
with a strong view on the outcome of the decisions and strictly keeps
reins in decision-making. There is some room for input of other board
members but in the end it’s the opinion of the chairman that prevails.
Thirdly, in some cases the perceptions of the study participants revealed
a good neighbour decision-making style (quadrant D) of the chairman.
In these cases, the chairman attaches great importance to involving
the board members but pays less attention to decision adequacy. Study
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Abigail Levrau and Lutgart Van den Berghe
participants noted that looking for compromises is not feasible at all times.
The chairman shows a striking diplomacy and lets the board members
speak. Discussions are allowed but he is concerned to make sure all points
are cleared up and to resolve potential conflicts in order to safeguard the
harmony in the group.
In an equal number of cases the chairman is perceived to look for
compromises. This coincides with the traditional decision-making style
in the centre of the grid (5/5 position). The study participants explained
that the chairman has his own opinion but waits to express his point
of view. He opts to give other board members first the opportunity
to enter into the discussion and share their comments. Afterwards he
will add his opinion and the debate will continue until the board has
reached a compromise.
Finally, there appears to be a few cases of chairmen who are perceived
to tend towards the default decision-making style or expose a decisionmaking style that is situated in between the models.
And the other aspects of decision-making
The decision-making grid also facilitates to get insights into the decision-making process within the board and the way this process is led by
the chairperson in particular. Two attributes of the chairperson leadership emerged from the data.
The chairman as time manager: An often cited comment by the study
participants is that the chairman manages the board meeting time, in
order to make efficient use of the available time. The challenge for him
is to keep an eye on the clock but in such a way that board members do
not feel the meeting is rushed or too rigid. In this respect, he presses for
discipline among his fellow directors during board meetings. His concern is to have a balanced attention for presentations made by management and room for discussion on the agenda points at hand. He strives
to come to a conclusion within the scheduled and limited time frame
without important discussions being truncated.
Our board meetings commonly last 3 to 4 hours. A specific moment
in time the chairperson says: ok, good we’ve heard various opinions
now it’s time to make a decision; so at the end of the discussion he
will try to summarize the essence of the debate and ask the board
members: do we agree on this point?
The board has limited time so the chairman introduces the
topic, gives management the opportunity to present and then the
The Appropriate Board Chair: A Reality Check
281
chairman takes back the topic and states: look, we need to take a
decision. After some debate the chairman puts forward a proposal
for decision. If nobody contests, the decision is made. That is the
common procedure.
The chairman as decision-facilitator and consummate listener: Study participants commonly point to the fact that the chairperson facilitates decision-making. For this purpose he uses different techniques, irrespective
of the individual decision-making style. Apparently, chairmen have precontacts with other board members. During these brief exchanges ‘behind
the scene’ sensitive topics are being ‘demined’ before they are openly
tackled during the board meeting. The pre-meeting conversations help
to understand the differences in point of views as well as the concerns of
the directors that apparently are hard to express in a full board. It’s the
chairman’s role to actively manage these sensitivities in a subtle way and
ensure that the different perspectives that were uttered beforehand are
taking into account in the final decisions. Of particular interest are the
contacts between the chairman and the CEO (in cases where these roles
are split) before and in between board meetings. Although the frequency
and format of these contacts differ among the BEL 20 and BEL MID companies, they are perceived by the study participants to be influential on
board decision-making. One frequently cited element was the interaction
between the chairman and the CEO in setting the board agenda and as
such on the topics that will be tackled during the board meetings.
Another tactic used by various chairmen during board meetings is
‘polling’ of directors, although this does not seem relevant nor necessary for every agenda item or discussion issue. In relevant cases the
chairman calls on directors to express their personal opinion or concern on the topic. The rationale for doing so differs. Sometimes the
director involved has a particular expertise that can add value to the
discussion. Some directors are also less vocal than others or feel less
comfortable raising comments on a topic that is not directly their field
of expertise. By this ‘polling’ technique the chairman safeguards that
most, if not all directors have an input in the discussion and the decision-making. However, our findings reveal that not all chairmen are
in favour of this tactic. In contrast they simply assume that if directors
want to add something to the discussion they will do so. Their role is to
make sure that there is room and occasion to contribute.
In addition, study participants pointed out that the chairperson
is aware of his responsibility to lead the board to a decision. Taking
into account that in practice board decisions are commonly taken by
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consensus, this requires specific skills of the chairperson. In order to
reach a decision that is supported by the board, the chairman must
strike a delicate balance to make sure he receives and consolidates different perspectives, while also integrating them with his own point of
view. It is perceived to be an ‘art’ to frame the input of directors within
their respective backgrounds, to anticipate, spot and manage (potential)
tensions, to stimulate interaction between executives and non-executives, to keep the discussion task-oriented etc. Moreover, the chairman
has ’to feel’ whether a consensus is likely be obtained or not. Consensus
should not come at the cost of meaningful decisions and sometimes it
feels more appropriate to postpone decisions in order to revisit issues at
a next board meeting. Some chairmen try to undermine wide diverging opinions by having individual and informal side-talks before or in
between meetings. In some cases, when no consensus can be reached,
the chairman decides to put the topic to a vote or has a casting vote in
the final decision.
When the chairman has heard all points of view, he will collect
them and summarizes the main points. Out of this he will suggest
a decision… in a company like ours, he is well aware of the fact that
the board must come to a conclusion and needs to take a decision,
but he is not dominant in this approach.
The chairman of the board strives for a neutral position to ensure
that all the interventions are taken into account and that exchanges
are sufficiently open. He has a facilitator role, he brings opinions to
the surface and makes room for divergent opinions …
He perfectly knows how to make sure the various board members
express themselves in order to reach a decision … how to lead complex decision-making, without manipulating things.
The difficulty of being a chairman is that he has an own opinion,
as part of the board of directors, that he should be able to express this
opinion without acting as a ‘guerrilla leader’ towards other directors … therefore this chairman attaches attention to give others the
opportunity to intervene, to hear different opinions as well as to add
his own arguments… next, all will be balanced and of course the
interest of the company is taking into account when finally taking
a decision.
These findings confirm the results of other empirical studies on chairmen and touch upon various issues. Firstly, chairpersons vary in their
ways and approaches in fulfilling their job. A common feature is that
The Appropriate Board Chair: A Reality Check
283
in carrying out their board leadership role they are involved in two
key sets of relationships: (i) interaction with the board as a whole as
well as with individual directors and (ii) interaction with the CEO. The
chairman, as the board leader, forms the nexus of these relationships.
Relationships also encompass an emotional dynamic. Various conscious
and unconscious forces can be identified which make board chairs reluctant to share power or can hamper building high-quality relationships
between the chairman and other actors. The importance of establishing and maintaining these relationships is recognised by other scholars
(Harrisson and Murray, 2012; O’Higgins, 2009; Roberts and Stiles, 1999).
It also complies with the conviction to approach a board as a social and
political system, with boundaries, interdependence among the members
and defined roles (Crainer and Dearlove, 2007; Cascio, 2004).
Secondly, we found many different pictures of individual decisionmaking styles exposed by the chairmen. Hall et al. (1964) state that each
decision-making style is designed to deal with three by-products of decision-making: (1) time-loss resulting from endless discussion points not
strictly related to the decision; (2) lack of assurance that a decision once
reached will be implemented; and (3) inability of the group to profit
by its experience in future work sessions. In this respect, the eye-to-eye
decision-making style is put forward to be the most effective one, especially for a collegial body. Although in our sample various chairmen
adhere to this preferred model, the findings suggest that application in
practice requires specific techniques of the board leader. This is also recognised by Katharina Pick (2009) when studying first-hand the behaviour of board chairs of US companies. She identified four roles of the
chairperson in leading boardroom discussions: (i) managing the ‘status
dilemma’ of leading a group of equals; (ii) managing the ‘tension’ in the
interaction between the board and senior management, (iii) sustaining
the cohesion in the board while encouraging debate, and (iv) managing the ambiguous nature of the board’s role. This role set addresses
the unique challenges the board chair faces while each role includes
a range of tactics that are used by the chairperson. In their impressive
study on chairmen in 12 countries throughout the world, Kakabadse
and Kakabadse (2008) identified six common disciplines of board leadership. One of the disciplines refers to the skill of ‘influencing outcome’
in order to realise a particular goal. They found that skilful influencing
is a subtle art which requires appropriateness of style. Various techniques
were identified which allow a chairman to focus board energy towards
a decision, which takes into account the perspectives of each director,
despite the unique nature of each circumstance.
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Abigail Levrau and Lutgart Van den Berghe
Finally, the findings suggest that leading board decision-making also
requires personal (behavioural) competencies to work effectively in
practice. Not formally embedded in law, the position of the chairman
of the board appears to be a very personal and subjective one. This is
in line with the study of Harrison and Murray (2012). Their qualitative
part revealed three categories of perceived characteristics of effective
and less effective board leadership: (i) the chair’s motivation for taking on the role (ii) features of the chair’s personality and (iii) typical
ways that chairs behave in the role. They conclude that chair leadership effectiveness is influenced by the personal qualities the leader
brings to the position. They support this conclusion by referring to the
notion of ‘emotional intelligence’. Board leaders with emotional intelligence tend to have a higher degree of self- and social awareness and
are able to better manage themselves and others in relationships than
those without. Gabrielsson et al. (2007) rely on the team production
approach to understand board leadership. The rationale is that each
chairperson faces the challenge to create and maintain a constructive team production culture in the board room because this culture
contributes to value creation. To this end a chairman has to possess
various attributes that are decisive towards a team production culture.
These include among others creativity, criticality, preparedness and
commitment.
The future for the board chair
Taking into account the fact that the decision-making style is highly
correlated with the chairman’s personality, it is relevant to provide
instruments supporting the development of leadership skills of those
who are appointed as the chairman of the board. The latter is of utmost
important in case the individual has no previous experience with chairmanship. Moreover, a change in chairperson implies a change in decision-making style, which can have a major impact on the effectiveness
of a board.
Development opportunities such as leadership training, mentoring or peer-learning circles can help chairmen to transcend the challenges inherent in personality and board collegiality in order to evolve
towards the most effective decision-making style. Kakabadse and
Kakabadse (2008) correctly perceive this as one the largest domains for
improvement, that is, the specific development of directors to take over
the position of chairman of the board. Traditionally, new chairmen
have had to make the transition by developing themselves. Nor have
The Appropriate Board Chair: A Reality Check
285
business schools and other external training suppliers developed effective
programs for new chairmen. If boards are to become more effective –
and more Enrons are to be avoided – there is an urgent need to find ways
of supporting the development of chairmen. He therefore proposes to
run a series of master classes, getting people who are considered outstanding chairmen to run the master class with those who have the
ambition and insight to become chairmen and give people insights on
what it means to be chairman, what kinds of issues to face, what kind of
problems to face and how to deal with people. Sir David Walker also follows on this track when he states that ‘an appropriately intensive induction and continuing business awareness programme should be provided
for the chairman to ensure that he or she is kept well informed and
abreast of significant new developments in the business’. Taking these
suggestions to heart, GUBERNA, the Belgian Director Institute, has successfully launched a ‘chairmen’s forum’, where mature and new chairmen meet in a confidential setting to discuss the numerous challenges
a modern board chair is faced with.
Furthermore, we also advocate for a regular assessment of the chairman. As pointed out in the literature, feedback can be a powerful tool
in enhancing individual and group performance. Dunne (1997) noted
‘[l]ike with musicians or sportsmen, they all know that whenever they
think about their technique they improve their performance’. A worthwhile example in this respect is the self-assessment exercise by a Belgian
chairwoman. She was appointed two years ago as board chair. It was a
new role as she had no previous experience with chairmanship. Her
personal lessons learned are reported in Figure 9.5, described as 10 tips
and tricks for a non-executive chairman.
In addition, we have introduced the concept of strategic board
recruitment. More in particular, we have argued that the people who
are responsible for recruiting directors, should think differently about
the type of people who make good board members and about the ways
they are encouraged to live up to their potential, once on the board. A
similar plea can be made towards the selection criteria and process of
the chairman. Given the unique challenges and complexity of board
chair leadership, the process of choosing the right person for the job is
a delicate exercise and deserves more attention. Our research into board
practices of Belgian listed companies reveals that boards pay some attention to the specific selection criteria for the chairman, but these criteria
vary substantially among the companies involved. Furthermore, these
criteria are not commonly made explicit into a profile. Figure 9.6 provides some examples.
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Abigail Levrau and Lutgart Van den Berghe
The non-executive chairman as leader of the board room meeting:
know, speak and make change
1. Know the company’s by-laws/articles of association: read the formal
obligations and learn about the expectations of the various governing
bodies.
2. Know your people: make a list of the directors and other actors
(management, auditor, experts etc.) who attend the board meetings.
Learn about their responsibilities, personalities, their professional
affinities/interests.
3. Be aware of your responsibilities: know for what kind of files your board
has to make a decision and who will implement the decision.
4. Indicate priorities in the board agenda: make a distinction between
strategic and monitoring or more technical points on the agenda, make
sure to prepare thoroughly the files that you consider as priority.
5. Formulate: have frequently (min. 1 hour) contact with the CEO/
management to systematically discuss the board issues, projects,
communication, actuality. Express your expectations but keep the
roles district and show respect for the responsibilities of the CEO.
6. Demand: ‘stand on your stripes’, claim the required support and
develop your own prerogatives: determine the agenda, prepare and
lead the board meeting, follow-up on execution of board decisions
and to do’s.
7. Decide: determine the number of board meetings and organise only
additional meetings if necessary or of additional value. Consider
informal appointments as ‘preparatory’ and formalise decisions in
board meeting.
8. Be accountable: explain what you do and why in a transparent way, take
accountability for your initiatives, frame them within the working of
the board and (implementation of) the decisions that are taken.
9. Change: have the courage to make changes to ‘old habits’ by means of
introducing new standards/rules/norms. Observe the resistance to each
change but concentrate on the ones who show a constructive attitude.
10. Trust: consider each experience as a learning process for improvement
and as an opportunity to increase performance while keeping your
objectives in mind. Share your experience with others and listen to
their feedback.
Figure 9.5
Ten tips and tricks for a non-executive chairman
Finally, taking into account the many challenges of being an effective
board chair as well as the increasing expectations towards boards and
their chairs in particular, questions about the required time investment
will rise. It is obvious that the practice of ceremonial board chairman
has come to an end. On the other end of the spectrum is the chairman
who acts as an executive. It is a thin line to find the appropriate degree
The Appropriate Board Chair: A Reality Check
•
•
•
•
•
•
•
287
Strong character/personality
Authority/status, track record, experience
Broad network
Organisational talent
Charisma
All-round expertise
Knowledge of the business
Figure 9.6
Selection criteria for the chairman
The chairman of a major bank should be expected to commit a substantial
proportion of his or her time, probably around two-thirds, to the business
of the entity, with clear understanding from the outset that, in the event
of need, the bank chairmanship role would have priority over any other
business time commitment (so better not having an executive function).
Depending on the balance and nature of their business, the required time
commitment should be proportionately less for the chairman of a less
complex or smaller bank, insurance or fund management entity. The
higher time commitment should be recognized in the fee level.
Figure 9.7 Extract from the Walker Report regarding time investment by the
board chair
of involvement that fits the needs of the board and the organisation.
Nevertheless, there appears to be a consensus that sufficient availability
of the chairperson should be expected in order to fulfil its role in an
effective way. In general one can state that the more complex the sector
and the company, the more time will need to be invested in the board
chair function. Illustrative in this respect is the far-reaching recommendation for the financial sector as included in the Walker Report in the
UK (Figure 9.7).
Some conclusions
Company boards and their decision-making process have largely
been shielded from both business community and academic circles.
Consequently, many researchers and code developers (who are outside
the company) have remained at a considerable distance from actual
board practise and rely on board characteristics which can be easily
retrieved and assessed from an external point of view. In particular,
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Abigail Levrau and Lutgart Van den Berghe
board leadership is commonly looked at from a rather narrow approach,
deducing the attention to the appropriateness of a choice between separating or combining the roles of CEO and chairman. The emerging
norm of increased transparency will undoubtfully include and affect
the role of the board chair. By pulling back the curtain, at least to some
extent, we have tried to shed some light on the behaviour and heterogeneity of board chairmanship. Not formally embedded in law, the
position of the chairman of the board appears to be a very personal and
subjective one. Taking into account the distinctive features of a board of
directors, the chairman, besides being a team leader needs to be a relational leader. The relationship with the CEO as well as the interactions
with other board members in and outside the board room are perceived
as critical. This highlights the importance of role clarity of the board
chairman. In this respect, the plea by Leblanc (2012) for a formal position decryption for key governance actors such as chairman and CEO is
justifiable. These job descriptions should delineate responsibilities and
accountabilities related to each role, as well as competencies and other
attributes required.
Besides, optimal decision-making implies the use of specific techniques and appeals to personal competencies of the chairperson
involved. Moreover, the position of the chairman is not neutral. The
way he takes position in board room deliberations influences intendedly or unintendedly the outcome of the decision-making. Although
in practice, various decision-making styles exist, the eye-to-eye decision-making model is perceived to be the most effective one, both in
theory and in practice. In order to reach the path towards optimal decision-making, one of the most crucial elements of board effectiveness,
it is advisable to put more effort into the professional selection and
development of board chairmen, a clear engagement as to their commitment and time investment, a periodical assessment of the ‘room for
improvement’ as well as to foresee sufficient support for this crucial
board function.
Notes
1. Our research of ‘listed companies’ refers to those listed companies that are
part of the BEL 20, BEL Mid and BEL Small indices. They represent the largest
part of the market capitalisation.
2. The findings that are reported with respect to the Decision-making Grid
stem from interviews with company secretaries of BEL 20 and BEL Mid
companies.
The Appropriate Board Chair: A Reality Check
289
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10
The Leadership Attributes of
the Chairman of the Board:
An International Study
Andrew Kakabadse, Nada K. Kakabadse, Chris Pierce and
Frank Horwitz
Introduction
Board composition and its impact on board performance has been an
area of significant corporate governance research activity (Dulewicz
et al., 1995; Leblanc and Gillies, 2005; Charan, 2005; Nadler et al., 2006;
Ehikioya, 2009). Boardroom dynamics has also been identified as both
positively and adversely effecting boardroom performance and, in turn,
organisational performance (Abor and Biekpe, 2007). In particular, the
issue of CEO duality (i.e. the CEO performing chairman of the board
functions) has been a focus of research due to CEO duality increasing agency problems and leading to poor firm performance (Maharaj,
2009). This position has found support among some academics, who
propose splitting the position of CEO and chairman as a way to control
the scale of the agency problem (Jensen, 1993; Coombes and Wong,
2004). Despite the fact that no clear indication has emerged concerning
the impact of role separation or duality on firm performance (Moyer
et al., 1996; Schmid and Zimmermann, 2008; Saibaba and Ansari,
2012; Wong, 2010), most studies emphasise the dominance of the CEO
role. Drawing upon role theory, leadership theory and agency theory,
Roberts and Stiles (1999) have argued that there is no clear line separating the roles and responsibilities of chairman and CEO and that their
strategic relations are particularly prone to role overlap, contingent on
context. Roberts (2002) agreed and found that the role of chairman
positively contributes to CEO performance, but only when the two roles
are scrutinised from the view of identifying role complementarities.
Kakabadse et al. (2006) found that nature of the chairman–CEO relationship impacted on board effectiveness. The chairman’s contribution
was identified as first creating a platform for participation, and second,
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The Leadership Attributes of the Chairman of the Board
293
respecting the division of roles between the chairman and CEO, both of
which deeply influence boardroom dynamics. Their study highlighted
the criticality of the chairman–CEO relationship by calling attention
to ‘personal chemistry’’ and the need for a ‘sharing of philosophy’’.
However, the study equally emphasised that it is up to the chairman to
initiate high-quality interaction with his/her CEO, and that this interaction acts as the spur to work through boardroom tensions. Confident
in the quality of the chairman–CEO relationship, ‘an outstanding
chairman is able to comfortably raise submerging concerns to the
realm of evident and workable dynamics’’ (Kakabadse et al., 2006: 147).
Unlike the Nadler et al.’s perspective (2006) that the leader of the board
should be seen as a facilitator and first among equals, Kakabadse and
Kakabadse (2008) emphasise the importance of the chairman initiating the debate on clearly delineating roles and responsibilities between
themselves, the CEO and the senior independent directors. Building
on role delineation, the other leadership skills of the chairman are to
gain the trust and respect of board members, to be an independent
thinker, to challenge the CEO when necessary, to build a constructive
working relationship with the CEO, to foster a broad environment of
open communication to conduct effective meetings, to have good listening skills and to be knowledgeable about the company, its business
and industry. Too cosy a relationship between CEO and chairman can
adversely affect both boardroom and top team performance (Ong and
Wan, 2008; Kakabadse and Kakabadse, 2008).
Sir Adrian Cadbury (2002) was one of the first to recognise the contingent context that chairmen work within:
The role of a chairman is a personal one. It will vary with the individual chairman, with the boards for which they are responsible,
with their chief executives, if they do not hold both posts, and with
their companies. It will also vary through time. There is no straightforward job description to which chairmen can work. Chairmen
have to decide for themselves just what they are able to do for their
boards and for their board colleagues which no one else can and just
what it is that their boards expect of them. (p. 101)
Early research into board leadership focused upon individual board
competences that the board as a whole should possess (Dulewicz et al.,
1995). However, more recent research has begun to emphasise specified director attributes being associated with different board roles. An
investigation into the competencies critical for success as a chairman
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Andrew Kakabadse et al.
or CEO (Dulewicz and Higgs, 2002, 2003) has provided evidence that
emotional intelligence attributes (self-awareness, emotional resilience,
motivation, interpersonal sensitivity, influence, intuitiveness and conscientiousness) are perceived as ‘vital’’ or ‘highly relevant’’ to the two
leadership positions, chairman and CEO, by a majority of directors.
Leblanc and Gillies (2005) were among the first to propose that:
[t]here is no more significant factor in determining effective board
governance than the leadership qualities of the chair. The chair
of the board is not like other directors. The chair is primus inter
pares – he or she is first among equals. Chairs have the same responsibilities and the same legal obligations as all directors, but, in
addition, they have the responsibility of running the board – of
managing its operations. Not all directors can be effective chairs,
but every effective board has one. Board leadership is a critical
and determinative predictor of board process and overall board
effectiveness. Functional boards have strong chairs; dysfunctional
boards have weak ones.
The focus upon the leadership role of the chairman is now being
reflected by policy makers in the revisions that are being made to corporate governance codes around the world. The influence of the King
Reports of Corporate Governance in South Africa (King, 1994, 2002,
2006, 2009) has been and continue to be profound. The reports cover,
amongst others, risk management, auditing, compliance, integrated
sustainability reporting board configuration, the independence of
the chairman and other board directors, and other issues such as ethics, integrity and disclosure. In particular, King (2009) recommendations focus on clarifying the duties and responsibilities of the role
of chairman in relation to the role and contribution of other board
directors and effective boardroom performance. Core functions for a
high-performing chairman are identified that include:
●
●
●
●
setting the ethical tone for the board and the company;
overall leadership to the board;
identifying and participating in selecting board members and overseeing a formal succession plan for the board, CEO and certain senior management appointments such as the chief financial officer;
formulating the yearly work plan for the board against agreed objectives and playing an active part in setting the agenda for the board
meetings;
The Leadership Attributes of the Chairman of the Board
●
●
●
●
●
●
●
●
●
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●
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295
presiding over board meetings and ensuring that time in meetings is
used productively;
managing conflicts of interest;
acting as the link between the board and management and particularly between the board and the CEO;
being collegial with board members and management while at the
same time maintaining an arm’s length relationship;
ensuring that directors play a full and constructive role in the affairs
of the company and taking a lead role in the process for removing
non-performing or unsuitable directors from the board;
ensuring that complete, timely, relevant, accurate, honest and accessible information is placed before the board to enable the board to
reach an informed decision;
monitoring how the board works together and how individual directors perform and interact at meetings;
mentoring to develop skill and enhance directors’ confidence and
encourage them to speak up and make an active contribution at
meetings;
ensuring that all directors are appropriately made aware of their
responsibilities through a tailored induction programme and ensuring that a formal programme of continuing professional education is
adopted at board level;
ensuring good relations are maintained with the company’s major
shareholders and its strategic stakeholders and presiding over shareholders meetings;
building and maintaining stakeholders trust and confidence in the
company;
upholding rigorous standards of preparation for meetings;
ensuring that the decisions by the board are executed.
The King III Report also recommended that the chairman’s role and
functions should be formalised and recognised that this formalisation
will be influenced by matters such as the life cycle or circumstances of
the company, the complexity of the company’s operations, the qualities
of the CEO and the management and the skills and experiences of each
board member.
Over the last decade, the directorships held by black people of listed
South African companies have slowly but progressively increased
(Commission of Employment Equity, 2008). However, a comparable increase of female directors has not taken place in South Africa.
Yet, the research identifies that despite the fact that there is an
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emerging tendency to appoint black people to non-executive director
(NED) roles, there remains a paucity of appointments of black candidates to the role of chairman.
The UK Code of Corporate Governance (2010) published by the
Financial Reporting Council states that ‘the chairman is responsible for
leadership of the board and ensuring its effectiveness on all aspects
of its role’. The Code specifies a chairman’s responsibilities for: setting
the board’s agenda and ensuring that adequate time is available for discussion of all agenda items, in particular strategic issues; promoting a
culture of openness and debate by facilitating the effective contribution
of non-executive directors and ensuring constructive relations between
executive and non-executive directors; for ensuring that the directors
receive accurate, timely and clear information; and ensuring effective
communication with shareholders (Principle A.3).
Overall, it is the more recent literature that emphasises the need for
a sound relationship between the chairman and CEO and for a board
to not do so would give rise to a negative culture and dynamics on
the board. In effect, the corporate governance codes are integrating the
research findings that emphasise the functionality of roles, with boardroom dynamics being the essence of chairman leadership (Kakabadse
et al., 2008a). Building a capability at board level that combines insights
and skills with a productive style of directors’ interaction, irrespective
of the diversity and magnitude of challenges that the organisation may
face, is considered to be the nature of high-performance stewardship
(Heracleous, 1999; Kakabadse and Kakabadse, 2001, 2007; Roberts,
2002; Kakabadse et al., 2008a).
Research questions
The analysis and evaluation of the leadership attributes of chairmen
is of considerable importance, since the chairmen are responsible for
leadership of the board and ensuring board effectiveness. This chapter
poses the following propositions concerning a chairman’s effectiveness
in leading the board which builds upon the earlier research work of the
authors as outlined in Kakabadse et al. (2008a).
Proposition 1: The roles of the Chairman, the Deputy Chairman and the
CEO are clearly delineated
Kakabadse et al. (2008a) have particularly emphasised the importance
of the chairman initiating the debate on clearly delineating roles
and responsibilities between themselves and the CEO. The research
The Leadership Attributes of the Chairman of the Board
297
described in this chapter identifies the scale of clarity concerning the
delineation of roles between the chairman and CEO.
Proposition 2: Chairmen have additional responsibilities above
managing Board performance
The research by Kakabadse et al. (2008a) emphasised the importance
of the chairman initiating the debate on clearly articulating their roles
and responsibilities. More recent changes in corporate Governance
Codes such as the South African Code King III (2009) and the Walker
Report in the UK (2009) have recommended that the chairman’s role
and functions should be formalised. This research focuses upon clarifying the chairman’s additional responsibilities above managing board
performance.
Proposition 3: The self-evaluation concerning chairman effectiveness
is aligned with other board members’ perceptions
This research sets out to identify whether the self-evaluation concerning chairman effectiveness is aligned with other board members’ perceptions.
Proposition 4: Chairmen encourage open communication among board
members
Kakabadse et al. (2008a) identified the importance of the chairman
in fostering a broad environment of open communication to conduct
effective meetings and to have good listening skills. This research sets
out to identify how the chairmen’s contribution to this process is perceived by the other board members.
Research method development
Initial development of survey instrument
The survey instrument was initially developed in 2007 for UK organisations in both the private and public sectors to analyse board activity
and was described in Kakabadse and Kakabadse (2007). Demographic
information was collected to include information about the respondent’s role, type of organisation and turnover. The questionnaire was
divided into a number of sections. The first set of questions focused on
demographic information about the respondent (e.g. age, gender, role,
etc.) and the operation of the board (e.g. the number of directors on
the board, the frequency and length of meetings, etc.). The second part
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Andrew Kakabadse et al.
of the questionnaire invited participants to give their opinions of the
chairman using a Likert rating scale (1=Not at all true to 9=Very true)
in a number of key areas that included strategic decisions, governance,
risk, style, qualities and performance.
In further sections, participants also were given the opportunity to
rate the performance (using the 1 to 9 scale) of the CEO and the board.
United Kingdom survey results (2007)
The survey instrument described above was subsequently sent to all
board members from the UK FTSE 350 who were invited to participate
as part of an international, non-attributable survey examining the role,
contribution and performance of chairmen and other key members of
the Board. A tailored questionnaire was sent out to 2,678 individuals
(discarding duplicates where individuals were members of more than
one board). In total 286 questionnaires were returned, representing a
response rate of approximately 11%. Considering the levels of responsibility held by the respondents and the time pressures that they face,
this was deemed to be an excellent response.
The UK sample had the following demographic profile:
●
●
●
Boards tend to be male-dominated, with 1 in 10 respondents (9.1%)
being female. This figure corresponds with similar other research
(Pye, 2011).
The majority of respondents (71.4%) were well-qualified and held
either undergraduate, postgraduate or master’s degrees.
The age profile differed according to the area of responsibility. Around
two-thirds of the Chairmen and Senior Independent Directors were
aged 60 or over. The youngest, however, were more likely to be in the
role of Finance Director or Chief Financial Officer.
International surveys (2008)
A number of international studies were undertaken with large listed
private sector organisations in the United States, UK, Australia, Turkey,
Ireland, Germany, Russia, Belgium, China and France. The studies
involved semi-structured interviews with over 350 Non-Executive
Directors, CEOs, Chairs and Executive Directors in the United States,
UK, Australia, Turkey, Ireland, Germany, Russia, Belgium, China and
France. These interviews provided the researchers with a greater understanding of boards and existing inter-relationships. Following the
outcomes of these interviews, a survey instrument was developed to
The Leadership Attributes of the Chairman of the Board
299
determine how well boards were perceived to be performing, especially
with respect to the chairman, the CEO and the board itself.
In comparing differences between the chairman and views of others, T-tests were used to statistically compare mean scores. To assess the
relationship of demographic variables to perceived performance of the
chairman, an ANOVA technique was used. In addition, a triangulation
approach using the UK survey results of 2007 was used.
The demographic findings were consistent across the countries in
that the majority of respondents were male and were well-qualified.
The age of the chair was consistent across countries apart from Russia
where chairmen tend to be younger.
The background of individuals can have a significant influence on
their opinion with respect to business issues. When taking demographic
variables such as age, gender and education level into account, there
were found to be no significant differences of view between age groups
and education level when analysing the performance of the directors
and chairman, the directors of the board and the CEO/MD. Looking
at variables such as position on the board, size of the board, number of
board meetings per annum and the typical length of these meetings,
there were found to be no significant differences of view. Views were
found to differ in relation to the performance of the chairman, directors of the board and the CEO/MD in that chairmen were more positive
about themselves and the directors than those in other positions.
South African survey (2010)
Board members from a sample of South African companies, who were
either members of the Institute of Directors (IoD) based in Johannesburg
or from a University of Cape Town (UCT) Graduate School of Business
(GSB) library database, were invited to participate in an international,
non-attributable survey on the role and contribution of chairmen and
directors of the board (Kakabadse et al., 2010). A questionnaire was
sent out to the South African board members and staff within the IoD
and UCT GSB helped collate the responses. Respondents were asked to
complete the questionnaire with respect to one board that they were a
member of. The questionnaire was divided into a number of sections.
The first set of questions focused on demographic information about
the respondent and the operation of the board. The second part of the
questionnaire invited participants to give their opinions of the board
directors and the chairman using a rating scale (1=Not at all true to
9=Very true) in the key areas that were identified in the initial UK study
in 2007 outlined above namely: strategic decisions, governance, risk,
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Andrew Kakabadse et al.
style, qualities and performance. In further sections, participants also
rated the performance (using a 1 to 9 scale) of the board, the CEO/MD
and the deputy chairman (where applicable). A triangulation approach
using the UK survey results of 2007 and the international survey of
2008 was used.
In total 100 questionnaires were completed. Considering the nature
of respondents and the lack of board data available within South Africa,
this is deemed to be a good response, but care needs to be taken regarding
making generalisations about the broad population of company directors
as a whole, as views of non-executive directors were under-represented.
Table 10.1 shows a breakdown of respondents to the survey – a sizeable
proportion held the position of CEO/MD or executive director (80%).
The sample of non-executive directors is small (3%) and it is therefore not
possible to analyse the views of these directors.
The South African sample had the following demographic profile:
●
●
Gender
Boards in South Africa are male-dominated and 1 in 7 (15%) of the
respondents were female. This is broadly consistent with the findings
of the 2007/8 Annual Report of the Commission for Employment
Equity (CEE), which found that 15.2% of top and senior level managers were white females and a further 9.7% were black females. Our
comparative research shows that gender representation on the boards
of Australian, UK and Russian firms is not much different from that
found in South Africa.
Education
The majority of respondents (82%) were well-qualified and held
either an undergraduate or a master’s degree.
Table 10.1
South African response segmentation
Current position held
Chairman
CEO
MD
Chief Financial Officer/Finance Director
Executive Director
Company Secretary
Non-Executive Directors
Other
Total
Number of responses
9
20
15
14
31
5
3
3
100
The Leadership Attributes of the Chairman of the Board
Table 10.2
Age
Under 40
40–49
50–59
60 or over
Total
●
●
301
Age and board position of respondents in South Africa
Chairman
0.0
25.0
50.0
25.0
100.0
CEO/MD
21.2
30.8
36.5
11.5
100.0
Executive
Directors
18.5
40.8
37.0
3.7
100.0
Other board
members
28.7
19.0
33.3
19.0
100.0
Race
Top and senior executive positions held by black people amount to
32.4% (Commission on Employment Equity, 2008).
Age
The average age of respondents differed slightly according to responsibility. Table 10.2 shows the age split of board members. Chairmen
tend to be slightly older and executive directors younger overall.
Two out of three respondents (67%) worked on a board that had
between 6 and 11 members and 21% had between 12 and 14 members. On average the respondents’ companies had around five board
meetings a year and these meetings typically lasted for up to half a day
(66%), or a day (33%), but rarely longer.
Analysis of research
UK survey results (2007)
Proposition 1: The roles of the Chairman, the Deputy Chairman and the
CEO are clearly delineated
The UK survey responses identified that the roles of the chairman, the
deputy chairman and the CEO were clearly delineated and understood
by the respondents. In particular the chairman’s role in the following
activities was highly rated by board respondents: utilising the skills and
experience of board members, evaluating the performance of the CEO,
evaluating the performance of the board, determining the spread of
skills and experience required on the board, evaluating the performance of the board members, clarifying the skills and experience required
for each board member, encouraging feedback on each board members
performance and evaluating the performance of the deputy chairman /
senior independent director.
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Andrew Kakabadse et al.
Proposition 2: Chairmen have additional responsibilities above managing
board performance
The UK survey responses identified that the chairman’s responsibility
for managing board performance was of critical importance. However,
other activities were identified as being important attributes of a chairman that included utilising the skills and experience of board members;
evaluating the performance of the CEO, the deputy chairman, the senior independent director, the board and board members; determining
the spread of skills and experience required on the board; clarifying the
skills and experience required for each board member; and encouraging
feedback on each board member’s performance.
The chairmen were rated highly by all the UK board respondents with
respect to their contribution to effective board functioning, integrity and
trustworthiness and a concern for shareholders and for stakeholders.
Proposition 3: The self-evaluation concerning Chairman effectiveness is
aligned with other board members’ perceptions
The chairmen of UK companies were rated highly by all the UK board
respondents with respect to their ability to clearly delineate the role
of the board from that of management. When analysing the performance of the chairman and the CEO, there were no significant differences (p>.05) between responses concerning the gender and education
level of the chairman and the CEO; however, age emerged as a significant demographic variable. Older chairmen (60+) were rated as more
effective than younger chairmen with respect to their ability to clearly
delineate the role of the board from that of management.
Chairmen of UK companies rated themselves significantly higher
(p<.05) with respect to their contribution to strategic decisions, governance thinking and application, risk, personal style, personal qualities and performance. Other board members gave a lower rating for
their chairman in all of these areas. Chairmen rated themselves significantly higher (p<.05) with respect to: encouraging feedback on the
chairman’s performance; clarifying the skills and experience required
of each board member; and evaluating the performance of the board as
a whole. Executive directors, rather than the non-executive directors,
were the least positive in their opinion of their chairman.
Proposition 4: Chairmen encourage open communication among
board members
Although the chairmen rated themselves significantly higher (p<.05)
with respect to encouraging feedback on the chairman’s performance,
The Leadership Attributes of the Chairman of the Board
303
the executive directors gave the chairmen a significantly lower rating.
In particular they focused their criticism of chairmen on the following
activities and attributes:
●
●
●
●
●
Encouraging open debate
Raising and handling tensions and sensitive issues
Promoting teamwork
Encouraging challenge
Acting as a role model for others.
International surveys (2008)
Proposition 1: The roles of the Chairman, the Deputy Chairman and the
CEO are clearly delineated
The chairman and the CEO As in the initial UK study discussed above,
the international survey responses identified that the roles of the chairman, the deputy chairman and the CEO were clearly delineated. In particular the role of the chairman in the following activities was highly
rated by board respondents:
●
●
●
●
●
●
●
●
Utilises the skills and experience of board members (Australia had
the highest ranking at 7.15 on a scale of 1 to 9; Kakabadse et al.,
2008b)
Evaluates the performance of the CEO (Russia had the highest ranking at 7.42 on a scale of 1 to 9; Kakabadse et al., 2009)
Evaluates the performance of the board (Russia had the highest ranking at 7.31 on a scale of 1 to 9; Kakabadse et al., 2009)
Determines the spread of skills and experience required on the board
(the United Kingdom had the highest ranking at 7.02 on a scale of
1 to 9)
Evaluates the performance of the board members (Russia had the
highest ranking at 7.20 on a scale of 1 to 9)
Clarifies the skills and experience required for each board member
(the United Kingdom had the highest ranking at 6.39 on a scale of
1 to 9)
Encourages feedback on each board members performance(the United
Kingdom had the highest ranking at 6.64 on a scale of 1 to 9)
Evaluates the performance of the deputy chairman / senior independent director (Russia had the highest ranking at 6.50 on a scale
of 1 to 9)
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Andrew Kakabadse et al.
The chairman and the deputy chairmen role. The international survey
respondents were clear that the deputy chairman understood his or her
role. On a score of 1 to 9, the UK rated the deputy chairman as having
clearly identified tasks and responsibilities at 6.43, in Australia it was
5.52, in Russia it was 6.65 and in South Africa it was 5.70. On a score of
1 to 9, the UK rated the deputy chairman’s understanding of his or her
role as 6.76, in Australia it was 6.20, in Russia 6.86 and in South Africa
it was 5.70. The survey also considered deputy chairman’s attributes
in the following areas: having the confidence of the directors and the
board, acting as the link between directors and the chairman, leading
the search process for a new chairman, being the person directors can
approach when difficulties can arise, being the person shareholders can
approach when difficulties can arise and holding separate board meetings with board members.
Proposition 2: Chairmen have additional responsibilities above managing
board performance
The survey responses identified that the chairman’s responsibility for
managing board performance was of critical importance.
Proposition 3: The self-evaluation concerning chairman effectiveness is
aligned with other board members’ perceptions
The Australian, South African and Russian survey results relating to
chairmen provided significant evidence that chairmen tend to rate
their performance in their role higher than other board members do. In
South Africa, in particular, other board members tended to have a lower
opinion of the chair’s effectiveness compared to the UK, Australian or
Russian survey responses.
Proposition 4: Chairmen encourage open communication among board
members
The international survey responses identified that board members felt
able to challenge the chairman where necessary. On a score of 1 to 9,
the UK rated this ability to challenge the chairman at 6.98, in Australia
it was 7.06, in Russia it was 6.80 and in South Africa it was 6.34. In general, the respondents were very content with their board’s performance
and effectiveness. On a score of 1 to 9, the UK rated board performance
effectiveness at 7.55, in Australia it was 7.54, in Russia it was 7.22 and in
South Africa it was 7.00.
The Leadership Attributes of the Chairman of the Board
305
South African survey (2010)
Proposition 1: The roles of the Chairman, the Deputy Chairman and the
CEO are clearly delineated
The chairman and the CEO The South African survey responses identified that the roles of the chairman, the deputy chairman and the CEO
were in general clearly delineated and well understood. In addition, the
relationship between the chairman and the CEO was found to be strong
at a personal level. In their responses, both the chairman and the CEO
believed that they are of a like mind; have an open relationship; and
have a high degree of respect for each other. While other members of
the board (the executive and non-executive directors) generally concurred with the shared views of the CEO or the chairman, they did
not rate this relationship as highly. Other aspects of the relationship
between the chairman and the CEO again showed that chairmen scored
themselves significantly higher (p < .05), especially in terms of: working well with the CEO to realise the goals of the organisation; clearly
delineating their role from that of the CEO; being professional in the
search for a CEO replacement; and effectively evaluating the performance of the CEO.
Several significant differences between the opinions of CEOs and
chairmen were identified. The interview responses provided significant
evidence that CEOs believed that they as CEOs determined the vision;
however, the chairmen’s responses indicated that chairmen believe that
CEOs merely drive the vision once the board has determined the vision.
Also, the chairmen’s responses indicated that the board determines the
organisational strategy and both the chairmen and the CEOs believe
that the CEOs subsequently drive the strategy. This difference in the
delineation of role concerning vision determination and the board’s
ultimate responsibility of determining strategy, unsurprisingly, suggests
that CEOs feel disempowered by the chairman and this may lead to
feelings of being undermined by the chairman.
These findings support previous research (Kakabadse et al., 2008a)
that highlighted the importance of delineating boundaries and boundary roles in respect to responsibility for governance, the CEO mandate,
the contribution of board members, role duality combining executive
(insider) position with the role of independent chairman, clarity between
the chairman and CEO as to who sets the vision and responsibility for
building the right mix of skills of the board and assessing the level and
quality of director contribution. Our previous studies highlight the
contribution of the chairmen in effectively addressing these issues. This
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Andrew Kakabadse et al.
survey raises concerns about the capability of South African chairmen to
address these critical issues which affect board performance.
The chairman and the deputy chairman. Deputy chairmen are less
prominent in the South African business landscape with organisations not always having this role represented on the board. Our findings show that their potential contribution is nonetheless important.
The South African survey responses identified that the roles of the
chairman and the deputy chairman were clearly delineated. Although
there were only 10 responses to the section on the deputy chairman
(where the role existed), their role is seen to be potentially an important one in that they have the confidence of directors, work well with
the board directors and act as the ‘link’ between the directors and the
chairman.
Proposition 2: Chairmen have additional responsibilities above managing
board performance
The South African survey responses identified that the chairman’s
responsibility for managing board performance was of critical importance. Additional attributes and activities of the chairman were also
considered to be of importance by the respondents and these included:
utilising well the skills/experience of directors (average score = 6.19) and
effectively evaluating the performance of the CEO/MD (6.14).
Proposition 3: The self-evaluation concerning chairman effectiveness is
aligned with other board members’ perceptions
The responses from the survey indicated that South African chairmen
consistently rated themselves higher in terms of performance than
other board members rated the chairman (Figure 10.1) particularly with
reference to encouraging feedback on their performance, clarifying the
skills/experience required of each director, effectively evaluating the
performance of the CEO/MD and the performance of the board as a
whole.
The responses also provided evidence that chairmen of South African
companies consistently scored themselves higher than the other board
members in terms of taking a long-term view, being inclusive, encouraging challenge, promoting teamwork, being easy to talk to and being
robust in their arguments. It is not clear why these differing views exist
between the chairmen and other board members – possibly the chair is
out of touch with what is happening with respect to the directors, or perhaps they may want to put a positive spin on their own performance.
The Leadership Attributes of the Chairman of the Board
307
Performance
The Chair ...
Effectively evaluates the performance of the Deputy Chairman
Effectively evaluates the performance of the CEO/MD
Encourages feedback on his/her performance
Evaluates the performance of the board as a whole
Determines the spread of skills/experience required on the board
Utilises well the skills/experience of directors
Clarifies the skills/experience required of each director
Effectively evaluates the performance of directors
Displays little concern for shareholders
0
1
2
3
4
5
6
7
8
9
[1 = Not at all true, 9 = Very true]
n = 100
Figure 10.1
Chair
Other Board roles
South African chairman performance
Proposition 4: Chairmen encourage open communication among
board members
The survey responses identified that board members believed that chairmen of South African companies encouraged open communication
among board members. In particular, directors felt that they were able
to: discuss sensitive issues with the chairman, encourage the chairman to
intervene when necessary and challenge the chairman when necessary.
Discussion and conclusions
The results from the various surveys show that generally speaking boards
within South Africa, the UK and the international samples are perceived by board members as performing fairly effectively, and the views
expressed concerning board performance and effectiveness do not differ greatly amongst board members. The only exception to this finding
involves the chairman’s performance. The findings support previous
research (Kakabadse et al., 2008a), which highlighted the importance
of delineating boundaries and boundary roles in respect responsibility
for governance, the CEO mandate, discretionary choice on relative contributions of board members, role duality combining executive (insider)
position with the role of an independent chairman, clarity between
the chairman and CEO as to who sets the vision and responsibility for
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Andrew Kakabadse et al.
building the right mix of skills of the board and assessing the level and
quality of director contribution.
The research also highlights the tenuous question of perceived power
or ‘social distance’ between chairmen and CEOs and the substantively
stronger association of board members with the latter. In spite of the
little attention on better understanding the role of the chairman in
comparison to the often heroic leader status of the CEO, the chairman
is pivotal in influencing outcomes and the long-term direction of the
firm (Kakabadse et al., 2008a).
These findings have implications for:
●
●
●
●
The future role and responsibilities of the chairman, the board and
the CEO.
The articulation of the chairman’s contribution and performance
which emerges as requiring specific attention.
Understanding the decision-making process at board level.
Board member development.
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11
CEO/Chairman Role Duality
Desire: Resistance to Separation
Irrespective of Effect
Nada K. Kakabadse, Andrew Kakabadse and Reeves Knyght
Introduction
Pre-19th-century notions of the governance of the enterprise were
based on trust, namely that the stewards of the firm could be trusted
to make best use of the assets of the organisation on behalf of the
owners (Kakabadse and Kakabadse, 2008). At that time, governance
processes were informal by nature but that soon changed. The birth
of the joint stock corporation was accompanied by the registering of
companies and the establishing of rules for corporate conduct, overseen by a body known as the Board. The reason for such stringency
was the emergent misalignment between the interests of shareholders
and that of the management (Shleifer and Vishay, 1997). In effect, the
‘manager’ agenda was viewed as differing from that of the shareholders
(i.e. owners). In order to minimise such differences a number of actions
have been taken tying managers’ actions tightly to shareholders’ goals
through incentive-based mechanisms such as direct managerial share
ownership (Jensen and Meckling, 1976) and the use of a variety of
managerial remuneration schemes (Murphy, 1998). These levers have
been central to Anglo-American (English) corporate governance practice (Roe, 2003: 1). Thus, the emergent purpose of corporate governance
mechanisms has been to bring about greater alignment between owner
(i.e. shareholders) and agent (i.e. managers).
In essence, corporate governance has converged toward the delivery
of sound corporate performance within the confines of the ‘accepted’
rules and norms of corporate behaviour. In doing so, governance
practice itself has pursued to two main principles: corporate performance and/or corporate conformance (Cadbury, 1992). Yet, irrespective
of whether boards have adopted a more performance or conformance
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perspective to their governance practice, the measurement of the effectiveness of the board has, for a considerable time, focused on the capture
of ‘hard’ measures (Roe, 2003). The ‘hard side’ of corporate governance
has revolved around considerations of finance, legalities and economics. In contrast, corporate governance was historically conceptualised
as a system of relationships between the shareholders, the management
team represented by the chief executive officer (CEO), and the board of
directors, all for the purpose of sharing the responsibility for realising
the success of the corporation on behalf of its shareholders (Levrau and
Van den Berghe, 2009). The shock waves from governance debacles such
as Enron, WorldCom, Tyco and the sub-prime mortgage crisis global
financial crisis highlight that the ‘hard side’ of corporate governance was
never sufficient focus for board performance measurement. Inevitably,
‘soft side’ considerations of culture, board dynamics and interpersonal
politics would sooner or later have to be taken into account in determining sensitive governance practice.
A critical aspect underlaying this web of governance interrelationships has been the appointment and monitoring of the performance of
the CEO. It has long been recognised that the board has had the primary task of selecting the CEO and the singular responsibility of holding the CEO accountable for the accurate reporting of the corporation’s
financial health and of its overall performance (McNulty and Pettigrew,
1999). An additional but important responsibility of the board is that
of holding the senior executive team accountable for the execution of
strategy (Higgs, 2003). In order to do so, board members have been and
are expected to ask penetrating questions that go beyond the information presented by management (Keasey et al., 2005). In order to better
ensure the exercise of these two accountabilities, research shows that
the chairman of the board is central to nurturing a culture of sound
debate between board members and between the board and the executive team (Kakabadse et al., 2010). Engaging management in meaningful
dialogue on strategic planning, direction and execution, confronting
an unresponsive CEO and intervening if it is identified that change is
required at the individual, team and organisational level are necessary
elements of the board’s oversight role. Kakabadse and Kakabadse (2007:
62) argue that ‘a good chairman is the best safeguard against executive
dictatorship’.
It is no surprise therefore that the literature points to the fact that the
oversight function of the board has grown in importance (Levrau and
Van den Berghe, 2009). As US corporations have begun to dominate
world markets, CEOs have accumulated power. As corporations have
CEO/Chairman Role Duality Desire
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become larger and more powerful, the position of CEO has grown both
in status and public recognition. Thus although the board of directors is
invested with the stewardship responsibility for the company a number
of commentators point to the fact practical reality is that the CEO is
very much in charge of both corporation and the board (Useem and
Zelleke, 2006; Lorsch and MacIver, 1989; Useem, 1996). As Useem and
Zelleke (2006: 2) aptly state, the problem is that ‘until recently, management’s power in large American companies reflected less a deliberate
delegation of authority by a sovereign body than a de facto reality in
which management had become dominant, effectively controlling the
agenda of the board to which it was only nominally subordinate’. In the
US culture, the CEO’s embrace of celebrity status is viewed as a valuable and intangible asset of the firm. As a result US CEOs enjoy broad
discretion and can assert greater control over the firm, which in turn
reinforces both the efficacy of the CEO as well as supposedly the firm’s
performance (Hayward et al., 2004). American corporate governance
has evolved within the formative context of the pioneering spirit and
the values of hero leaders, which has now become deeply imbedded in
the psyche of American entrepreneurialism (Kakabadse and Kakabadse,
2001).
However, a number of writers emphasises that the concentration of
management power is compromising the board’s abilities to monitor
and discipline management (Mallette and Fowler, 1992; Finkelstein and
Hambrick, 1996). In fact, CEO duality is identified as an impediment
to the board’s monitoring of top executives (Fama and Jensen, 1983;
Mallette and Fowler, 1992; Jensen, 1993; O’Sullivan, 2000; Aguilera,
2005; Dalton et al., 2007; Tuggle et al., 2010). This is due to vesting the
power of the CEO and the chairman of the board in one person which
is viewed as eroding the board’s ability to exercise effective control
(Finkelstein and D’Aveni, 1994; Millstein, 1992). ‘The over-centralisation of power in the CEO is evident in the gap between the CEO’s salary
and that of other executives’ (Aguilera 2005: 45). Research highlights
that CEOs almost always set the agenda and control the information
given to the board (Jensen, 1993). Moreover, CEO role duality signals
that ‘the board is not an effective device for decision control unless it
limits the decision discretion of individual top managers’ (Fama and
Jensen, 1983), as the CEO can steer the boards’ attention away from the
monitoring of issues towards topics that suit their own interests through
setting detailed and rigid agendas (Tuggle et al., 2010) and through
low voluntary disclosure of information to the board (Cadbury, 1992;
Cheng and Courtney, 2006; Adams and Ferreira, 2007; Dalton et al.,
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2007). Aguilera (2005: 45) poignantly concludes that in the US corporate governance system, the CEO, ‘who usually also exercises the role of
chairman of the board’, enjoys the immense power and that ‘the split of
these two roles is generally perceived as a transitional arrangement or
a sign of weakness’ whilst the ‘over-centralisation of power in the CEO
is evident in the gap between the CEO’s salary and that of other executives’. Over-centralisation of power can lead to CEO overconfidence
and further US studies (Hayward and Hambrick, 1997; Malmendier and
Tate, 2005) suggest that overconfident top managers are more likely to
destroy value.
However, a string of corporate scandals and the resounding and
damaging impact of the global financial crisis (GFC) brought matters
to a head concerning the quality and effectiveness of the governance
of US corporations in particular, and large-sized firms in general. As
a result, various laws are under consideration in Congress. If passed
these will introduce new measures constraining executive pay (i.e. no
more than 100 times the firms average wage unless 60% of shareholders approve), inhibiting ‘golden parachutes’ for public firms, pushing
for the separation of the roles of chairman and CEO, annual election for all board members and the establishment of a risk committee
for every board (The Economist, 2009). The Securities and Exchange
Commission (SEC) is also expected to introduce new rules allowing
large shareholders to nominate candidates for board election. Further a
‘new rule introduced by the New York Stock Exchange will end discretionary voting by brokers who hold shares on behalf of clients as these
votes have tended to be cast consistently in favour of the incumbents’
(The Economist, 2009: 70).
Within this whirlwind of change initiatives, three issues have
attracted media attention: (i) the separation of the functions of the CEO
and chairman of the board, (ii) the independence of the board and (iii)
the extent of CEO pay (Felton, 2004; Keay, 2006; The Economist, 2009).
Bearing in mind the increasing pressure for the governance reform of
the US corporation, and also considering the three focal points of media
concern, this chapter explores the attitudes and opinions of a sample of
CEOs/chairmen of US corporations towards these three issues. This is
preceded by a literature analysis examining the case for the separation
of roles of the CEO and chairman, the nature of board independence
and the reasons for and likely future trends concerning CEO pay. The
chapter concludes by highlighting the unwillingness to change by the
present role incumbents leading major US corporations.
CEO/Chairman Role Duality Desire
315
Separation of chairman and CEO Roles
In the United States ‘one of the most contentious issues in public debate
about the role of boards of directors’ is the long-standing controversy
of combining the tasks and responsibilities of the CEO and the chairman of the board (Finkelstein and Hambrick, 1996: 213). This has been
pursued despite calls for their separation by a notable opinion former,
Conference Board, through various reports such as the Bacon Report on
Corporate Boards and Corporate Governance (1992) and the Report of the
Conference Board Commission on Public Trust and Private Enterprise (2003).
Firms also face shareholder pressure to reconfigure their governance
structures as concern has grown that the combining of the CEO and
chairman roles reduces both the risk and monitoring abilities of the
board. Providing the firm with a clear focus and unity of command at
the top is no compensation for two governance deficiencies. In effect,
Fama and Jensen (1983: 3044) purport that role duality can increase
the likelihood that the CEO will ‘take actions that deviate from the
interests of residual claimants’. Scholars (Jensen and Meckling, 1976;
Finkelstein and D’Aveni, 1994; Rhoades et al., 2001) arguing from an
agency theory perspective suggest that CEO duality increases agency
problems and leads to poor firm performance because role duality promotes CEO entrenchment by reducing board independence.
Yet, irrespective of the pressure for change, the percentage of US firms
with combined functions has remained at approximately 80% over the
last two decades (Kakabadse et al., 2010). Of those firms who boast a separation of functions, some are and have been in a position of transitioning
to a new CEO. Thus for certain corporations, the separation of these two
prime functions has only been temporary, namely for the duration of the
succession process (Brickley et al., 1997; Dahya and Travlos, 2000).
Studies also indicate that the phenomenon of role duality in the US
corporation has given licence to the CEO/chairman (sometimes also
president) to freely stamp their personality on the corporation and to
pursue their personal goals in the arena of corporate decision making
(Keay, 2006). With that as a long-standing practice, the management
and leadership literature in the United States has progressively focused
on praising the ‘hero’ CEO/chairman, eulogising their wielding of power
to reallocate resources, holding in awe their exercising of their personal
influence to motivate others to achieve the CEO/chairman’s goals and
emphasising their building of a vision of the corporation’s future that
is inspirational and shared with enthusiastic followers (Mintzberg,
2006). Implicit in this literature is the suggestion that remaining within
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boundaries is for ‘losers’; winners bend or break with protocols, as rules
and procedures constrain. Hence the message that seeps through is that
what is needed is more ‘heroic’ leadership, or ‘transformational change
driven leadership’ in order to turn companies around, and that the
inspiration to do must emanate ‘from the top’. In fact, notable pundits
have emphasised that the heroic leadership perspective dominates much
of American management thinking where ‘the great one who rides in on
the white horse to save the day, [changes] everything at will, even if he
or she only arrived yesterday, with barely any knowledge of the organisation, its history or its culture’ (Mintzberg, 2006: 1).
Analysis of US corporate scandals strongly suggests that corporate practices have suffered from CEO dominance, weak boards, information misalignment and deeply flawed executive compensation schemes (Felton,
2004; Keasey et al., 2005; Keay, 2006). Various studies also reveal that an
emergent view amongst US investors is that they look forward to the separation of chairman and CEO roles, the enhancing of board accountability
and executive compensation reforms (Felton, 2004; Keasey et al., 2005;
Keay, 2006). The established US practice of the CEO and chairman (sometimes also the President of the company) as one person is in stark contrast
to the traditions of the UK and other Anglo-American countries such as
Australia and South Africa, where the separation of chairman and CEO is
now the norm. Drawing on non US experience, a number of scholars have
called for the systematic evaluation of the CEO, the establishing of independent nominating committees and the appointment of lead independent directors (LIDs: Alderfer, 1986; Hambrick and Jackson, 2000). Lorsch
and Graff (1996), for example, have argued that leadership duality results
in the incumbent CEO/chairman dominating meetings and controlling
the agenda and flow of information. In support, Fama and Jensen (1983:
314) argue that granting the CEO dual-role responsibilities ‘signals the
absence of separation of decision management and decision control’. This
leads to self-interested and inefficient behaviour (Finkelstein and D’Aveni,
1994: Jensen and Meckling, 1976), ultimately reducing shareholder value
as well as the value of the other employees of the firm.
Additionally Fama and Jensen (1983) purport that agency costs in
large organisations can be reduced by separating decision management
from decision control, and that the board of directors is only an effective device for decision control if it limits the decision discretion of top
managers. In support of this perspective, Jensen (1993: 36) states that
the function of the chairman is to run board meetings and oversee
the process of hiring, firing, evaluating and compensating the CEO.
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Clearly the CEO cannot perform this function apart from his or her
personal interest. Without the direction of an independent leader, it
is much more difficult for the board to perform its critical function.
Therefore, for the board to be effective, it is important to separate the
CEO and chairman positions.
As highlighted both from the academic and more popular literature,
there is a growing sentiment that the CEO should not simultaneously
hold the office of the chairman of the board (Dalton et al., 1998). Some
go further and argue that a serious conflict of interest arises in having the CEO sitting as a voting board member let alone function as
the chairman of the board (Rechner and Dalton, 1999; Taylor, 2000).
International study advocates that effective governance is only likely
under non-dual arrangements (Kakabadse and Kakabadse, 2008). This
view is strengthened by Norburn et al.’s (2000) study where it was
emphasised that separating the chairman and CEO roles strengthens
the monitoring and scrutiny functions of the board, thus ensuring for
greater CEO accountability.
However, a vociferous counter case has been put forward. Boyd
(1995), for example, found the dual leadership structure to be appropriate for firms that operate in uncertain environments, characterised by
low resource abundance and high complexity. Ugeux (2004) has argued
that role duality suits many US companies due to cultural fit reasons,
and to alter that would induce unwelcome and unmanageable disruption. Similarly, Faleye (2007) pursued the cultural argument emphasising that coercing firms to separate out the CEO and chairman functions
would be counterproductive. Similarly Donaldson and Davis (1991)
consider that the stewardship aspect of the CEO’s role is best facilitated
through governance structures that provide this top executive position
with high levels of autonomy and managerial discretion. Brickley et al.
(1997) also suggested that a leadership structure with combined roles is
efficient and in general consistent with meeting shareholders’ interests,
particularly for large US companies. On this basis, legislative reform
forcing the separation of chairman and CEO roles would be misguided.
Becht (1997: 11) aptly summarised the debate in favour of a governance structure of role duality as being ‘about the mechanisms that can
ensure that powerful managers run companies in the interests of their
owners’.
Overall, the cost/benefit of role separation vs. role duality has induced
mixed empirical evidence. From the perspective of the external director,
some scholars (Wei Shen, 2005: 84; Useem 1984) indicate that ‘among
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large US corporations there are strong disincentives, rather than incentives, for non-executive directors to challenge executives or to adopt
corporate governance reforms that will limit managerial autonomy.
These disincentives come from the social pressure to maintain managerial autonomy and authority for the elite of corporate leaders’. Further
Westphal and Khanna’s (2003: 387) study found that non-executive
directors experience social sanctions from their peer directors (of Forbes
500 companies) if they are perceived to threaten their elite position by
advocating the separation of CEO and chairman positions or that of
independent nominating committees.
Some contend that firms with separated functions outperform firms
with combined functions, whilst others find the opposite (Donaldson
and Davis, 1991; Pi and Timme, 1993). Still others conclude that there
is no statistically significant difference in performance between firms
with role separation against those with combined roles (Baliga et al.,
1996; Brickley et al., 1997). Further, Faleye (2007) drew attention to
the fact that with ever greater organisational complexity and with an
organisational performance dependency on CEO reputation, the likelihood is that role duality will continue and even become more popular.
The combination of functions is also more likely to be favoured when
insider ownership is dominant and the board is small in terms of membership size. But from whichever perspective, the literature confirms
that the strong hero leader is deeply embedded in the US culture and
strongly influences thinking on governance, board and organisational
configuration and performance (Kakabadse and Kakabadse, 2008).
Independence of the board
Despite the arguments highlighting the pervasive effect of role duality,
one underlying principle has not changed in US corporate governance
thinking and practice, namely that the purpose and function of the
board is to protect the principals (i.e. shareholders), particularly against
agent indiscretion (Dooley, 1992).
The question therefore remains as to why sentiments as, ‘boards can
arguably retain power pursuant to a Madisonian conception of corporate governance that allows contracting parties to agree in advance
via the corporate charter to allow the board to entrench itself’ (Kahan
and Rock, 2003: 473), continue to be held dear. Why indeed when
the American classic school of economic thought is perched on the
Hamiltonian idea (Ben-Atar and Oberg, 1998; Martin, 1999) of maximising the authority of the shareholders’ representatives particularly
over the approval to sell the company (Kihlstrom and Wachter, 2002)
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and that has failed to produce the desired results: that of a sustainable
corporation (Easterbrook and Fischel, 1981). The Madisonians model of
governance views shareholders as capable of making intelligent decisions on acquisition offers but who in turn have chosen to accord decision-making powers to the board of directors because of their superior
ability to determine and implement a value-maximising sales strategy
(Coates, 2001). In this sense, the Madisonian model of corporate governance calls for appreciate checks and balances that are currently lacking in the combined role of CEO and chairman as one person.
The history of corporate governance in the United States is better
appreciated when viewed from the thinking underlying the securities
exchange laws introduced in the 1920s, captured by the Berle and Means
(1967) corporate model of the separation of ownership from management and dependence on the principle of external control through
the ‘free market’. Through these laws, US corporations are subject to
rules and regulation with regard to proper business and management
conduct, as well as to the perennial threat of takeover when found to
be underperforming. United States determined corporate governance
centres on the struggle between the stringent enforcement of legislative requirement and codes of conduct protocols, and a management
focus on financial performance as much induced by incentive-based
compensation schemes. With numerous corporate scandals undermining the trust in management to pursue the best interests of shareholders through financial incentivisation, the trend today is for the greater
monitoring of enforcement duties through the independent directors of
the board (Blair, 2003; Veasey, 2003).
Bearing in mind the notion of independence, it is common practice
for US boards to be composed of none or a limited number, of ‘insider’,
executive directors (i.e. ‘those directors also serving as the firm’s officers’; Johnson et al., 1996: 417). The majority of the members of the
board are ’outside’ appointments, whether they are formally independent and/or are ‘gray’ (those with some current or previous association
with the firm; Donaldson, 2000). Yet, despite the predominance of
external directors, observers have noted a decline in board oversight,
board intervention and a diminution of recognised voices of independent authority (Donaldson, 2000). As a result, the rationale of agency
theory, namely that outside directors are able to more rigorously monitor management than inside members, is under serious scrutiny (Denis,
2001). Not that the US notion of having boards with the majority being
independent directors is unique. Such configuration is wide spread
across many countries, notably those supposedly well governed, such
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as Switzerland, Germany and France (Ugeux, 2004). However, board
composition is also vulnerable to endogeneity due to an interlocking
membership of boards and the development of personal relationships
between independent directors with each other and with management,
both of which blur the lines of independence (Denis, 2001).
Thus, when accounting for cultural considerations and the corporate scandals of the last decade and despite the influence of the United
States across the globe, the overall rubric of role duality remains under
attack. The volatility resulting from a ‘one person rule’ in terms of scandal, temptation and an idiosyncratic approach to strategy determination and execution has now become a clarion call for ‘truly’ instituting
board independence. A cacophony of voices are urging to keep the two
roles apart (Mintzberg, 2006).
CEO pay
As highlighted one historically, distinctly held assumption in the
United States is that linking director performance to remuneration
better ensures for effective governance (Berle and Means, 1967). Dana
(2006) reported that policies that closely tie short- and long-term executive remuneration to shareholder return are indicative of strong and
effective governance as remuneration aligns the interests of both of the
parties of agent and principle. Furthermore, linking performance to pay
is congruent with the recent demands for governance reform (Norburn
et al., 2000). Norburn et al. (2000) have argued that high base executive
remuneration with low performance-linked bonuses is counterproductive, as that can be used by the CEO to guarantee loyalty, or worse still,
passivity from the directors, therefore hampering the monitoring role
of the board.
Overall, boards of directors have been criticised by the media/press
and scholars for overpaying CEOs; that CEO pay is out of step with
organisational performance reality and that boards are dominated by
their CEO (Kaplan, 2008). For example, the average CEO pay according to the S&P 500 stood at $14.2 million in 2007 which some consider as too much in relation to the mediocre performance of firms
(Walsh, 2008). In keeping with this line of argument, Jensen et al.
(2004) purport that disproportionate increases in CEO pay are nothing new and have been taking place since the 1970s. In similar vein,
Bebchuk and Fried (2005) show that substantial increases in CEO pay
accelerated after 1995, but with no parallel increase in organisational
performance. Yermack’s (2005) study of the severance agreements of
179 instances of CEO turnover in Fortune 500 companies reported a
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mean separation payment of $5.4 million. (compared to average pay
of $8.1 million). Also research shows that US executive pay for the top
managerial positions has been considerably higher than that of their
counterparts abroad (Bogle, 2008). In 2005, the CEOs of the 1,000 largest public firms (ranked by sales) in the United States took home $9.025
billion, approximately equivalent to Bolivia’s GDP ($9.71 billion) and
on average 7% of the firm’s total sales (Walsh, 2008). The fact that from
2003 to 2005, CEO salaries and bonuses increased by 35% in the UK
and only 14% in the United States (White and Patrick, 2007),illustrates
that US pay started from a higher base and that the desire for extensive
CEO remuneration is spreading across the Anglo-American economies.
Bogle (2008: 25) concluded that ‘CEO compensation is seriously out of
line, and too often has provided excessive and unreliable lottery-type
rewards based on evanescent stock prices rather than durable intrinsic corporate value.’ However, despite public disgust, executive pay has
continued to rise, reaching a peak within the last decade (The Guardian,
2010). The FTSE 100 companies’ top executives pay rose by more than
160% between 2000 and 2010. Britain’s bosses pay rose by 55% between
2009 and 2010 and only registered a 1.5% drop among the FTSE 100
Top Chief Executive Officers during the recession peak between June
2008 and 2009 (The Guardian, 2010). To date, pay for the directors of
the UK’s top FTSE 100 businesses rose 50% over the past year (2011)
(BBC News, 2011), whilst in the United States, the ‘CEOs’ 2010 median
pay jumped 27% in 2009, one of the largest increases in recent history’
(US Today, 2011: 1). The US manifestation of Anglo-American corporate
governance has afforded CEOs of large corporations’ inordinate power
and wealth.
The study
Relatively few have explored the relationship between boardroom
dynamics and emergent corporate behaviour (Forbes and Milliken,
1999; McNulty and Pettigrew, 1999; Oliver, 2000; Ibrahim et al., 2003).
As Kahl (1957: 10) poignantly noted, ‘those who sit amongst the mighty
do not invite sociologist to watch them take the decisions about how
to control the behaviour of others’. Zald (1969: 98) noted that boards
of directors are hard to study as they, ‘often conduct their business
in secret, their members are busy people; the processes themselves
are sometimes most effectively described by novelist’s’. Others (Pahl
and Winkler, 1974; Norburn, 1989) also report practical difficulties in
becoming close to the top management of large organisations. In effect,
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access difficulties have and continue to remain a source of constraint in
examining boardroom dynamics effects on corporate performance and
governance thinking and practice. This is especially the case at a time
of business scandal and fallen business heroes, where the aim of this
study is to better understand how the combined functions of the CEO
and chairman of the board impacts on the independence of board, the
governance of the corporation and the nature of CEO remuneration.
Our aim in this study was to explore the views held by dual-role occupants of role duality and its impact on board independence, the governance of the corporation and the nature of CEO remuneration. In doing
so, we attempted to understand how dual-role occupants perceive their
role within the board and to appreciate their sentiments for or against
role duality within US listed companies. Due to the latent difficulties
in reaching ‘difficult-to access’ populations such as elites who by nature
are few in number and where high levels of trust are required to initiate
contact (Rhodes et al., 2004), we chose a qualitative approach through
purposeful sampling, relying on substantial trust as the mechanism to
secure interviews. We conducted confidential and guided interviews
of 60 minutes in length with 12 US CEOs during a two-year period
(Bryman and Stephens, 1996; Conger, 1998). The themes pursued in
interview were a capture of the critical concerns facing US CEOs with
special reference to their experience of holding and balancing the dual
roles of CEO and chairman of the board (Zald, 1969; Zahra and Pearce,
1989; Leighton and Thain, 1997).
A list of organisations with combined chairman and CEO roles was
compiled through a database of organisations with whom the authors
of this chapter were already familiar. From the 30 organisations
approached, 12 US-based CEO/chairmen agreed to participate in this
exploratory study. Although it took 24 months to collect data, considerable time spent gaining agreement for interview with the participants.
The greatest challenge was that of matching diary dates and balancing
of workloads in order to squeeze into busy schedules. On reflection we
consider that the data was collected reasonably fast.
While there are no specifically defined rules for sample size in
qualitative research (Baum, 2000; Patton, 2001), this study followed
the well-established argument that qualitative investigation relies on
small sample sizes with the aim of scrutinising the topic of inquiry in
depth and detail (Miles and Huberman, 1994; Patton, 2001). The 12 top
executive that participated in our study were drawn from the services
‘supersector’ (North American Industry Classification System, NAICS)
of which six of the participants worked in the finance and insurance
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sectors and six within professional and business services. Eleven of the
participants who agreed to be interviewed were male and one female.
Eight of the participants were experienced CEO-chairman who had for
the last 5 to 15 years held dual roles in two or more companies. Four of
our participants were first time CEO-chairman but with considerable
executive line experience.
In order to avoid the danger of prescriptive interview with a list of
questions ‘written in stone’ (Thomas, 1993: 40), we, the authors, pursued guided discussion. Guided conversation facilitates understanding
of the complex phenomena under scrutiny, in this case, the mindset of
the particular participants towards role duality, without limiting the
field of inquiry (Fontana and Frey, 1994). Hence, we drew on ‘grand tour
questions’ (Spradley, 1979), offering the respondents the opportunity to
answer in their way with content and experience relevant to them, not
the inquirer. The participants were asked a series of open-ended questions such as ‘How do you work with your board? What have been some
of your challenges with your board?’; in this way ensuring for commonality across interviews whilst encouraging the participants to expand
on points they viewed as important. The interviews lasted on average 60
minutes and were conducted face-to-face. Most of the interviews were
hand recorded with only a few tape-recorded, as that was the desire of
the participants. Most of the study participants expressed discomfort
at being taped verbatim. However, we were prepared for note taking as
earlier experience surfaced that US participants expressed discomfort at
being recorded, from the perspective of possible liability at some future
date. We are certain that if our participants had not known us from previous engagements they would not have granted us an interview. Even
they indicated that our pervious interaction was the reason access was
allowed based on their trust of us. All interviews were then transcribed
in order to capture the meanings in detail and so facilitate easier data
manipulation.
The analysis of empirical material followed a cyclical process in which
‘data-text translation, coding, and conceptualising occurred at the
same time, albeit at different rates of progresses’ (Lindlof, 1995: 215).
The preliminary reading of each script was followed by a data reduction
step analysis, whereby the data was coded into manageable categories
(Marshall and Rossman, 1989). We used a cross-case process of analysis,
which grouped together responses from different interviewees (Patton,
2001). Through successive cycles of coding four categories emerged,
the nature of board director talent, the criticality of leadership at the
level of CEO and the importance of trust (rather than independence) at
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the CEO level and CEO remuneration. Interestingly, discussion began
with an examination of the CEO/chairman role duality but in all cases
migrated to the four above mentioned findings.
Study findings
Talent
The study participants considered that high-performing managers
appointed to the role of CEO should hold requisite expertise and experience of particularly industries, or geographic area, and preferably
should already have been a CEO. While some have argued that board
directors should possess due diligence abilities, have board experience
and display personal qualities such as strong personal values and relationship skills to ensure for effective governance (Taylor, 2000), the
study participants more emphasised the importance of displaying a
granular understanding of the leadership challenges facing the CEO.
In this sense, the study participants most favoured external director on
the board is the CEO of another company on the basis that only such
a person can deeply understand the challenges facing the CEO/chairman. Any interference (perceived or otherwise) or curtailment of the
CEO’s leadership reach was viewed as preventing the CEO from doing
his or her job in a fast changing and ‘over competitive market’. In support of this argument, Nadler (2004) has emphasised the importance
of top managers holding the right mindset. Nadler (2004) argues that
corporate governance reforms unduly emphasise paying attention to
several narrow aspects of board composition driven by Sarbanes-Oxley
prescription in order to have director independence, and all that hides
the real issue, which is ‘performance competence’.
By the time you reach a board position you have all the skills and
competencies you will ever need. More importantly, you need the
right mindset for a particular board. It’s a quality of mind that that
you need in the boardroom and that, I think, is the toughest quality
to find … Yes, that is the reason I am looking for a current or former
CEO to join my board. Someone who knows what it means to be a
leader.
(Participant 3)
You want on your board a director who is a current or a former
CEO. … Why is a sitting CEO the most sought after board candidate?
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– Because he understands what it means to be a CEO and because you
can assess the performance of his company by the stock price, companies’ reputation and the attitudes of its customers and employees. …
The market will tell you all that you need to know about him.
(Participant 10)
OK, the selection process must be made on the basis of the nominee’s competencies and character and particularly on his moral and
spiritual capacity. In this place, personal integrity is the single most
important factor for selecting a CEO. How a CEO perceives and manages his privileged leadership position reveals much about his character. Evaluating the CEO’s character is most difficult. You must go
by his reputation and trust your network.
(Participant, 7)
Further discourse revealed the importance of highlighting the skill
areas that are lacking on the board and how these might be met by new
members. Equally the study participants raised the question of how a
diverse group of directors could enhance the company’s performance
and the challenges of leveraging diversity to positive effect. Yet overall,
emphasis was given to appointing a director who was a former or current CEO. The individual’s and company’s reputation was considered as
counting for a great deal. Further, the character and values of the individual was given emphasis but so was the opinion held by the relevant
networks of the individual, particularly if members of the network held
close friendship ties with the CEO in question. Drawing on such opinions better guaranteed insight into the candidate’s character.
Criticality of leadership
All participants acknowledged that the pace of change in the corporate world has accelerated dramatically, with the forecast that this pace
will increase. Equally acknowledged was that the firms’ well-being will
increasingly depend on strong leadership particularly with the shift to
emerging new and alternative technologies.
You need all the power you can marshal in order to deliver results.
Remember, no one is irreplaceable. If the results are not being delivered, or even if they are, the pressure to continuously improve performance is enormous.
(Participant 11)
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The buck stops with you. You are the CEO and you need everything
it takes to get results. Play differently and you will not be sitting in
this chair!
(Participant 5)
This is the United States of America, and if you want to be successful
here, you must first understand fundamentals, our laws and market
forces. Yes, you may say that we are a litigious bunch, but we are also
very entrepreneurial. … To run a successful board you need to observe
two principles, have a single leadership role of CEO/Chairman and
have the confidence of the board of external directors. The rest is up
to your abilities. You are the rain maker.
(Participant 2)
Whether the company is facing a financial squeeze, or an adverse
economy, or experiencing rapid growth or being dragged screaming
and kicking through change, you need a strong leader. The combined
CEO and Chairman role provides that structure and if you have a
talented person in that role, then both management and shareholders are on a winning side. The CEO/Chairman will move himself
and their firm ahead of the pack, and the marketplace will reward
these firms. There is no better way to achieve sustainable competitive advantage than having a strong CEO/Chairman.
(Participant 9)
The study participants narrated a sense of pride about the importance
of their dual leadership role. In contrast to the positive comments
of the study participants, Lorsch and Graff (1996) positioned dual
leadership structures as resulting in the incumbent CEO/chairman
inducing negative effects such as dominating meetings and controlling the agenda and the flow of information. In support, Hayward
and Hambrick (1997: 106) noted the ‘exaggerated sense of pride or
self confidence’ is common feature of CEOs. The irony is that on
points of detail the study participants concurred, but from a positive
perspective. Dominating ‘the agenda’ and controlling information
flows was recognised by the study incumbents as necessary levers for
achieving positive results. The participants expressed the view that
the board and the CEO need to have a clear understanding of the markets, a clear view of the competitive advantage of the firm and clear
understanding of the leadership that differentiates the firm from its
competitors.
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To do well, take charge of the board and the executive team. Meetings
are where this is done.
(Participant 7)
The phenomenon that certain commentators have highlighted of CEO
arrogance and the unwillingness of the CEO/chairman to obtain the
approval of the board for certain strategic actions, or to follow established procedures (Lorsch and Graff, 1996), were dismissed by most of
the study participants. The interviewees considered this to be an incorrect perception held by others who do not understand the nature of the
CEO leadership role, or in the small minority of cases as the exceptional
and idiosyncratic behaviour of just certain CEOs. The separation of the
CEO from the chairman role was strongly resisted on the basis that
that added new risk to strategic thinking and action. The greatest fear
expressed by the study participants was of the possible changes that
could be made in Congress, or in the Department of Justice and other
enforcement agencies.
To separate out the CEO from the Chairman role is unwelcome.
Control of the firm is critical. I know so much depends on the values
and nature of the person in charge, but that still is the case if you
have a CEO and Chairman as separate positions.
(Participant 12)
In fact, the participants perceived role duality as an enabling feature:
Yes, obviously it helps me in terms of the management of the …
(name of organisation) and obviously it helps me in board meetings
and how certain decisions are made because I have full control of
things I think that that helps.
(Participant 11)
None of our participants perceived conflicts of interest through occupying dual roles. The majority of participants were explicit that they
would not have joined the company had the CEO and chairman roles
been separate.
There is no conflict. No not really, I have to show some social etiquette and board room etiquette and business etiquette in terms
of how I bring things to board. Having a separate Chairman would
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prevent me from doing that. You’ve got to do things in the right way
and you need that freedom to do it.
(Participant 3)
Further the participants clearly emphasised the sort of board/corporation they would wish to join.
I wouldn’t ever choose to be a director of a company where the CEO
is not the Chairman. I just think those are the types of companies
that I would not want to be a part of. I think that I want to run
company that I feel am interested in, where I like the business and
where I think I can add value. Most importantly, I have to feel I add
value. I don’t think I can add value to a company where my role is
constrained.
(Participant 7)
Other studies have equally captured this point of view concerning
the competitive culture of the United States and the incessant drive
for market leadership (Krishnan and Visvanathan, 2008). However,
these studies also highlight that in doing so less regard is given to risk
management and reliable forms of financial reporting (Krishnan and
Visvanathan, 2008: 36–47).
Trust rather than Independence
Although scholars have argued that independence is critical for ensuring effective governance (Shleifer and Vishny, 1997; Archambeault,
2000; Charu, 2005; Dalton and Dalton, 2005) on the basis that outside directors be rigorous in monitoring the CEO and the management
(Denis, 2001), the study participants expressed a strong preference for
trust rather than independence. The expressed reason for this view was
the need to work with board directors who understand the nature of
the challenges the CEO/chairman faces in achieving the objectives set,
rather than having board members who are actively engaged in strategy
formulation, which implicitly was considered as interference.
My board operates on the basis of complete confidentiality. I am the
CEO-Chairman-President of this company and if, I have a problem
with my board, I can just deal with it. This is a tough market. There
is no room for nice stuff. We need to be focused on results. … I have
people that I can trust. Trust is very important in the board. There is
always a danger of giving away competitive advantage or disclosing
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premature or misleading information that can adversely effect investors’ decisions. All our deliberations are conducted behind closed
doors in complete confidentiality.
(Participant 1)
If the board is to work with you and act as your primary advisor, then
you need people who know you well and understand you and your
business. That may be through business, the golf-course or personal
ties. They also need to be trusted and have the lustre of a well-known
name.
(Participant 4)
All my directors have my trust. I also give them all that they need
to exercise their independence; nearly all of our decisions are ratified through unanimous vote and reported via the lead independent
director.
(Participant 6)
I would rather have on my board another CEO who knows what it
takes to run a company rather than a retailer or a lawyer or banker.
These talents we already have and we can also get them from outside.
(Participant 12)
Probing further into why another CEO is so important to have as an
external director on the board, Participant 9 explained, ‘if you know
what it means to lead the company, you do not interfere by asking stupid question. The CEO as board director on my board will know that
what I am proposing is the best way for the firm’. The point of trust over
‘seeming interference’ was emphasised.
Put it this way, if there was a decision that had a bit of controversy
then I don’t want, to get 6 votes for and 4 votes neigh and the
motion passes. I don’t think I want that. I want total support from
my board.
(Participant 1)
The respondents again emphasised that boards perform a better monitoring role if their directors hold or have held top managerial positions
and understand, ‘what it means to run the company’ (Participant 2).
Interestingly, certain of the study participants such as participant 4
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viewed the function of monitoring as synonymous with that of advice.
This finding is in line with other studies that report that, ‘American
CEOs serving on those boards because the dominant model here is a
supportive board. The function of a board member in the U.S. is basically to counsel and support the CEO’ (Jensen in Walkling, 2008: 139).
As noted by Monks and Minow (2008: 379) ‘in America a board does
pretty much what the CEO wants it to do’, which in turn leads to situation where, ‘even senior directors can get shut out of a debate when
“airtime” is constricted in tightly choreographed board meetings’
(Finkelstein and Mooney, 2003: 111).
Research has highlighted that best-in-class boards are much more
than a roster of prominent names and that effective boards are wellbalanced bodies that harness the diverse experiences, skills and intellects of their directors to pursue the strategic objectives of the company
they serve (Kakabadse and Kakabadse, 2008). In contrast, the participants of this study placed greater emphasis on CEO expertise and trust
in order to realise outstanding company performance. Few would dispute the Pearce and Zahra (1991: 135) comment that powerful boards
are the ‘brain and soul of the organization, as well as the guardians of
shareholder interests’, and, ‘powerful boards’ are considered necessary
for ‘organizational effectiveness’ (Pearce and Zahra, 1991: 136) as board
directors strengthen the links between the organisation and its environment by providing useful business contacts (Pettigrew, 1992; Meyer,
2000). However, the point of contradiction is that the study participants
described such boards as, ‘being more progressive and more encouraging and supportive of CEO efforts’ (Pearce and Zahra, 1991: 136), as
long as the trust between the CEO and the board directors resulted in
a supportive relationship and not one of being challenged. Supporting
the study participants viewpoint, Salanicik and Pfeffer (1977) posit that
power reflects the capacity of the directors and the CEO/chairman to
bring about the outcomes they desire through formal and informal
means.
CEO remuneration
The cost of not recruiting the best CEO available for the company
was considered as outweighing paying any market price for the highperforming CEO. The punitive costs of hiring the wrong person was
presented as inducing greater risk than overpaying the ‘effective CEO’.
The overwhelming view to emerge from this study was that success in
the marketplace and having satisfied investors and shareholders justified CEO remuneration levels. The consistent comment from the study
CEO/Chairman Role Duality Desire
331
participants was that boards need to have a clear understanding of the
range of leadership talent in the marketplace and be prepared to pay
market price for the best talent they can attract.
It is sort of taken for granted. They all knew my background, my
knowledge of the business and my ability. That is the reason I got
the job … Yes I come with a certain price tag, but that is my market
value. Think, what is the cost of not recruiting the best CEO available for your company?
(Participant 4)
Of course American CEOs make much more money than the average American worker. And yes, the growth and magnitude of CEO
pay is newsworthy and subject to Congressional inquiry, but so is
the work the CEO does. These are tough times and you need a lot of
talent and stamina to manage risks, seize opportunities and satisfy
shareholders.
(Participant 12)
Pay in the US is market-based. For example, if you have a poor performing firm and you can find someone to make it perform well for
only $20 million per year, and lead that firm to generate a return on
assets of 20–25% in this labor market, well that is a bargain.
(Participant 7)
In my view, CEOs are properly and appropriately paid in most US
top firms. If you do not want a risk that that the firm will slip into
default or bankruptcy, then you have to be prepared to pay market
price for a talented CEO.
(Participant 10)
The sentiments expressed in interview are supported in the academic
literature. Kaplan (2008: 17) has argued that ‘increasingly difficult and
less pleasant CEOs may not be overpaid but in fact, may be underpaid’. Whilst, Kaplan (2008) questioned the wisdom of calling for the
increased regulation of CEO pay through the US government’s ‘Say
on Pay’ bill, Monk (in Walkling, 2008: 145), on the other hand, has
suggested that corporations in their striving for profit ‘at any price’
waste considerable resources in terms of unnecessary transactional
costs. This latter perspective was firmly rejected by this group of study
participants.
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Nada K. Kakabadse et al.
There is absolutely no need for more regulation. There are very formal structures in place, the formal remuneration committee, audit
committee, a formal agenda, and the agenda is read with a sense of
formality and board members have their say.
(Participant 1)
The participants did not acknowledge the contradiction that may arise
as a result of role duality. Participant 1, for example, expressed the need
for full support from the board but did not feel any need for regulating
CEO’s remuneration. Similarly, participant 7 expressed that ‘you have
in a remuneration structure to try and ensure that you’ve got fairness,
that’s fairness to the individual and fairness to the firm which show
concern for the individual in the first place and the organisation second. This is typical of the American individualistic culture’. This view
is in line with Asma’s (1996) conclusion that American corporations
place greater emphasis on individual based reward systems rather than
group rewards. Bebchuk and Fried’s (2005: 13) review of reports of compensation committees in large companies reveals that a large majority
use ‘peer groups to determine pay and set compensation at or above the
50th percentile of the peer group’. They conclude that ‘such ratcheting
is consistent with a picture of boards that do not seek to get the best
deal for their shareholders, but are happy to go along with whatever
can be justified as consistent with prevailing practices’ (Bebchuk and
Fried, 2005:13).
Conclusion
The Anglo-American governance debate has given considerable attention to the ‘responsibility and accountability of corporate managers’
(Becht, 1997: 10). The reason for this is the long-standing argument
that investors have a keen interest to focus on financial accountability, particularly on the actions of one person, that of the CEO who is
legally recognised as being accountable for the affairs of the company.
Both the literature and these study participants views confirm that US
governance concerns ultimately home in on the conduct of the CEO.
Such a perspective results from holding dear broader considerations
such as investor safeguards and enhancing the wealth creation processes on behalf of the nation. It is also considered that both social and
political structures are highly influential in terms of corporate governance thinking and application. In this sense, the supreme office of
President is replicated in the US corporate structure, but without the
CEO/Chairman Role Duality Desire
333
Congressional checks and balances in place. Since 1787 the President
according to the US Constitution can use his or her executive powers
to issues executive orders (i.e. rules and regulation that do not require
Congressional approval), to veto proposed bills, but can only return
to Congress a veto message offering suggested changes to proposed
legislations and make nominations to the judicial branch of government but which require Senate confirmation. The dual CEO/chairman
(often president) however chooses his or her executives, chooses the
board and chooses the external auditor. The dual role of CEO/chairman
allows for greater powers than Madison had envisaged. Despite this, the
notion of leadership is deep in the American culture. National cultural
values arguably infiltrate corporate structure, governance practice and
corporate ways of working (Light, 2001: 191–203). It does seem that
the phenomenon of the one man/woman in charge is deeply etched
into the American psyche. Similar cultural influence is found in other
governance regimes where the formative context of the nation then
become the accepted norms, laws and governance practice of the firm
(Kakabadse and Kakabadse, 2001). The question is raised as to whether
the original Madisonian logic of ‘power is widely distributed [and]
“ambition” is “made to check ambition” so there is less need to rely on
“enlightened statesmen” and “higher motives”’ (Rabkin, 1987: 199) is
now undermined. Certainly, the study participants desired supportive
boards in order to ‘cheer them’ in their endeavours rather than question their activities let alone control their actions. Participant 4 so aptly
captured this sentiment, ‘I need a board that is one hundred per cent
behind me and can cheer me in my endeavours’. The danger is of having board composed of ‘business cheerleaders’.
Not surprisingly, many voices have come to question the efficacy
of reliance on the one person. The relationship between the top management and the board of directors, as well as between the board and
shareholders in US firm, has historically been precarious (Kanter, 2002).
Critics complain that all too often US boards operate with inaccurate/
deficient and late information provided to them by management, and
despite such insights nothing is done to improve the situation (Kanter
2002). Moreover, US boards operate on the promise of power (not its
delivery), which is evident in the leadership structure as well as the
relationship between the board, management and shareholders (Pound,
1995). In fact, the emphasis placed by the study participants reported
in this chapter on the necessity for continuing with the CEO/chairman
duality and the expectation of having a ‘non interfering’ board, is testament to that.
334
Nada K. Kakabadse et al.
We conclude that there is need for structural change in order to
effectively reshape corporate governance practice in the United States.
This is particularly so as separate studies emphasise that the role of
chairman is increasingly important and requires significantly higher
commitment than that and of other board directors (Kakabadse and
Kakabadse, 2008). To just make the CEO/chairman relationship ‘work’
is a task of itself and then of course there are the relationships with the
other directors, the organisation as well as attending to critical external
relations (Kakabadse et al., 2010).
Yet, whatever the evidence and logic for role separation, this study
highlights the embedded nature of role duality in the US corporate
mind. The antipathy to the splitting out of the roles of CEO and chairman runs deep:
Whatever happens, let the CEO run the company and by all means
censure that person if they do not do that well. But at least give them
a chance to do that! In order to do that, in today’s market, the CEO
and Chairman positions need to be combined. The managers and
the board need a strong binding relationship.
(Participant 9)
Our study reveals that many CEO’s ‘taken for granted’ assumptions
expressed as a rational view of the legitimacy of their role needs to be
further explored and tested. Although scholars such as Proimos (2005)
argue that in order to ensure the effectiveness of corporate governance
principles, these principles must become requirements that are prudently monitored by law, we conclude from our exploratory study that
the United States is country with a rule-based corporate governance
system where rules are in abundance, yet these rules have not cured the
‘boom and bust’ culture of crisis prone American corporations (Perrow,
1984; Pauchant and Mitroff, 1992; La Porte, 1996).
On 2 November 2011, several dozen students walked out of an
introductory microeconomics course at Harvard University taught by
Professor N. Gregory Mankiw, a former economic adviser to President
George W. Bush and current advisor to Republican Presidential candidate in the 2012 presidential elections, Mitt Romney. The student
walk-out was an expression of discontent over the bias inherent in the
introductory economics course, stating that ‘we are walking out today
to join a Boston-wide march protesting the corporatization of higher
education as part of the global Occupy movement. Since the biased
nature of Economics 10 contributes to and symbolises the increasing
CEO/Chairman Role Duality Desire
335
economic inequality in America, we are walking out of your class today
both to protest your inadequate discussion of basic economic theory
and to lend our support to a movement that is changing American discourse on economic injustice’ (Concerned Students of Economics 10,
2011: 1). It will probably not take long for further questioning of deeply
embedded American values, such as the ‘hero leader’ and ‘winner takes
it all’ to take place. Once that happens the leadership of and the structural platform of the American corporation will come under penetrating and forceful scrutiny.
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12
High-Performing Chairmen:
The Older the Better
Nada K. Kakabadse, Reeves Knyght and Andrew Kakabadse
Introduction
The field of leadership, both in terms of academic and practitioner contribution, has attracted substantial attention since the beginning of
the 20th century. The debate has fluctuated between understanding
what capabilities of leadership can transform the status quo versus the
recognition that situations restrain leaders’ discretion and despite the
qualities and skills of any one person only transactional outcomes are
feasible (Kakabadse and Kakabadse, 1999). Further, the study of leadership has not just focused on the upper echelons of the organisation but
has also examined the leadership challenges of ensuring operational
activities are undertaken in a manner that leverages that extra edge in
order to better realise competitive advantage.
Yet despite the popularity of the topic, leadership at board level (the
ultimate upper echelon strata) has not been a major focus of study.
This is surprising as the literature points to the antecedents and consequences of great and poor leadership according to organisational level/
position, degree of differentiation in function, geographic location and
environmental and cultural and societal complexities (Zaccaro, 1998).
In effect it is acknowledged that the performance demands on leaders
vary considerably according to context, thus requiring the person to
draw on a contrast of leadership capabilities. Yet, to have so omitted the
pinnacle of accountability in the organisation draws into question the
value of other studies. Having limited insight on how boards work suggests only transactional understanding of how the rest of the organisation functions.
However, interest in board leadership is growing. Due to the multitude of scandals that have arisen over the last two decades and the
342
High-Performing Chairmen: The Older the Better
343
inordinate attention given to governance regulations and protocols, one
particular role has recently come under scrutiny and that is the role of
the chairman. Historically, the chairman has been the pivotal position
of influence and authority (Kakabadse and Kakabadse, 2008). It was the
chairman who was the guardian of financial contracts drafted for the
purpose of trade. As early as 1250 AC, the Bazacle Milling Company
(Société des Moulins du Bazacle, Toulouse, France) was underwritten by
a group of local seigneurs (feudal tenants) who shared profits according
to the number of shares they possessed. The guardian of such agreement was the chairman (NYSE Euronext, 2008). By 1654, the role of
chairman meant the occupier of the chair of authority. Whether artisan
or gentry, it was the person with ultimate signature rights concerning
contractual documents. By 1730, the role of chairman has expanded to
being the focal member of a corporate body chosen to preside over the
meetings determining the performance and future of the enterprise.
Historically, the chairman of the board was independent of management and additional to the contractual responsibilities of the firm. The
chairman was the senior member of the board responsible for the hiring
and firing of management. Yet, with the separation of the ownership and
control of the company in the 1920s and 1930s in the United States, management became the driving force of the corporation and through their
ever greater control of the corporation the CEO progressively assumed the
role of chairman. In effect the board became less of a monitoring body
and more of an advisory group to management (Berle and Means, 1932).
Even now in the United States, it is the prevailing practice for the CEO
and chairman of the board to be the same person. This has allowed US
management to ‘handpick’ board members who essentially act as advisors
rather than the scrutinisers of the corporation (Blair, 1995; Kristie, 2010).
In other English speaking countries, and to a certain extent in Continental
Europe, the roles of CEO and chairman were and continue to be separated
and the board more monitors than mentors the management.
The emergent dominance of the CEO, particularly in the United
States, did not go unnoticed. The CEO was challenged. Ever greater
managerial power ignited shareholder activism in the 1950s and the
independent director movement of the 1970s. A further counter to the
managerial domination of the corporation was championed by the
Securities Exchange Commission (SEC) in stipulating that public companies establish audit committees composed of independent directors
(Blair, 1995; Kristie, 2010).
Yet, despite these developments, the question remains as to whether
boards make a substantial contribution to firm performance, especially
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Nada K. Kakabadse et al.
as the CEO continues to capture the headlines (Nonaka and Takeuchi,
2011). The one individual popularly attributed with glorifying the
CEO and consolidating executive influence over both the board and
management was Lee Iacocca. Lido Anthony ‘Lee’ Iacocca accepted the
job of President and Chief Operating Officer (COO) of the Chrysler
Corporation in late 1978. He championed performance above all else by
requesting a dollar-a-year salary, with the remainder of his remuneration in stock options and bonuses. By 1980 Iacocca earned $868,000
placing him 100th on the Forbes’ annual Best Paid CEOs list (Forbes,
2002). By 1986, his total compensation stood at $25.5 million as he
exercised his stock options (Forbes, 2002: 1).
However, with the rise of hostile takeover activity in the 1980s, the
Delaware courts demanded board independence. By the early 1990s the
issue of the independence of the board became a mainstream concern.
The accounting scandals that lead to the enactment of the SarbanesOxley Act spawned further SEC requirements namely that the audit,
compensation and nomination committees be instituted and these be
composed entirely of independent directors. So, over time, and despite
the dominance of the ‘hero CEO’, independent directors became the
majority members of the board. Ironically, the notion of independence
has not extended to the role of chairman, where still some 76% of US
corporations have the CEO, chairman and president as one and the
same person.
With the financial services meltdown of 2008/2009, the role of the
chairman has come to prominence. The rise of the influence of the
chairman does not extend to a usurpation of the executive function,
but rather a re-affirmation that in addition to the traditional requirement of the board to ‘govern’ (monitor the corporation through applying regulatory rigour), the board should also contribute to realising the
company’s competitive advantage (Kakabadse and Kakabadse, 2008).
Studies have shown that the involvement of the board in shaping
strategy has been increasing. Overall, the greater and more focused the
level of board involvement in the strategic decision process the better
the strategic and operational outcomes (Nadler et al., 2006). Board contribution and purpose has been captured as shifting from that of control
(agency perspective) to that of the board as a social phenomenon (social
exchange perspective; Nicholson and Kiel, 2004; Kaplan and Norton,
2006). In effect, the board is tasked with drawing heavily on its intellectual capital in order to enhance the performance of the firm. Thus,
in order to ensure the board’s effective functioning, the chairman is
required to develop a clear and shared perspective with the other board
High-Performing Chairmen: The Older the Better
345
directors of what the board is aiming to accomplish (Lorsch, 2005). In
leading the board and coming to a clear understanding of the role of
the board, effective chairmen, now more than ever, hold prolonged and
sensitive discussions with board members (both executive and non-executive directors) concerning the value proposition underlying the firm
and the role of the board in enhancing that value. In so doing, research
shows that it is the chairman’s responsibility to clearly delineate the role
and contribution of the board vis-a-vis the management (Kakabadse
and Kakabadse, 2008). Thus, with the re-emergence of the chairman,
evidence indicates that boards define their role anywhere from that of
‘watchdog’ to ‘helmsman’ (Kakabadse and Kakabadse, 2010). The traditional three board roles of monitoring, advising (including strategy) and
accessing resources (Pfeffer and Selznick, 1978; Zahra and Pearce, 1989;
Nicholson and Kiel, 2004) have expanded to include entrepreneurial
leadership, shaping strategy, ensuring for capable human and financial
resources to achieve objectives, promoting talent, reviewing management performance, determining the company’s values and standards
and being satisfied over the integrity of financial information and the
robustness of financial controls and risk management (IoD, 2007). With
such a spread of tasks and responsibilities, one emergent but critical discipline required of chairmen is to clearly define the role and spread of
tasks of the chair against those of the CEO in relation to the challenges
facing the organisation (Kakabadse et al., 2010).
Bearing in mind the cacophony of demands for better governance and
the need for greater diligence from the board, this chapter explores an
under-examined area of governance and leadership, namely the role,
contribution and quality of performance required of the chairman. In
order to be consistent with the literature, we have made the decision to
retain the generic term chairman when referring to the occupant of the
role irrespective of gender. This chapter first explores the literature scrutinising the chairman’s role and contribution. What follows is a detailed
qualitative, exploratory analysis examining the characteristics of highperforming chairmen. The study results highlight that understanding
board, organisational and environmental context is critical to appreciating the challenges facing the chairman. It is shown that each role of chairman is unique, and each chairman needs to find their own configuration
through the myriad of concerns they face. Despite the fact that idiosyncrasy of approach to problem-solving predominates, one demographic
in particular stands out and that is age. Analysis indicates that the older
the chairman the more likely the individual will effectively find pathways through the contrasting perspectives of strategy, vision, direction
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and purpose of the board and the organisation, and through the tensions that arise from discussions concerning the role and contribution
of the board and its directors in the strategy determining process. The
implications of these findings and recommendations for the performance improvement of the role of chairman concludes this chapter.
Role of chairman
In the UK’s self-regulatory model of governance, the power accorded
to the chairman is that of ‘strong persuader’, whilst also being the first
amongst equals. The UK Combined Code of Corporate Governance
supporting principle holds that the chairman ‘should also facilitate
the effective contribution of non-executive directors in particular and
ensure constructive relations between executive and non-executive
directors’ (FRC, 2008: A2). In being the one ultimately accountable for
the health of the corporation, the role of the chairman has become
increasingly demanding requiring ever greater teamwork for effectively
dealing with the governance and issues of future direction of the corporation.
Yet, as noted by Cadbury (2002), the chairman’s role in leading board
discussion is routinely taken for granted, although it is this aspect
that is recognised as most challenging and exceedingly important
(Kakabadse and Kakabadse, 2008). The study emphasises that it is the
chairmen’s ability to nurture dialogue and to deal with all issues on the
agenda that unlocks the value that each director is capable of contributing (Lorsch, 2005). Failure to do so deprives the board from not only
providing advantage to the functioning of the organisation, but also
from instituting effective governance (Kakabadse et al., 2010). It is the
chairman’s skill to hold sensitive discussion with board members in
order to encourage directors to express their views and reach consensus.
Only when a culture of open conversation and meaningful discussion
is attained can the board determine its contribution to the company,
particularly in terms of realising firm competitive advantage.
It is no surprise therefore that certain scholars argue that the chairman’s role is considered as the most critical in the managerial hierarchy,
particularly in terms of controlling the boardroom agenda, the nomination of non-executives and the appointment and dismissal of the CEO
(Garratt, 1999; Roberts, 2002). Parker (1990: 36) describes the role of the
chairman as ‘making tomorrow’s company out of today’s’, where through
actively leading the board, the company can realise a sustainable, longterm strategic direction. Moreover, Parker (1990:42) emphasises that ‘the
High-Performing Chairmen: The Older the Better
347
chairman should first ensure that the company’s culture is robust and
adaptive, second enhance the motivation and morale of the people who
work for the company and third that the chairman be capable of leading the company to effectively pursue acquisitions and equally defend it
against other acquirers’. For Parker (1990) the chairman is the ultimate
discretionary role, whereby each successful chairman is such by his or her
appropriate reading of circumstances and acting accordingly. Kakabadse
et al. (2006) concur and emphasis that ‘an outstanding chairman is able
to comfortably raise submergent concerns to the realm of evident and
workable dynamics’. Others agree and argue that in an increasingly politicised context where the firm’s purpose changes to reflect the shifting
interests of the company, or its members, or various stakeholder coalitions, the primary role of the chairman is that of chief negotiator where
(Haspeslagh et al., 2001: 89), ‘purpose and policies that drive corporate
performance requires the subtle trading of the quid pro quads with the
partisans in the enterprise…’
A brief summary of the literature capturing the role, purpose, contribution and skills of the chairman is provided (Table 12.1).
The overview of the literature emphasises that chairmen need to
exhibit a broad range of skills and capabilities necessary for effective
performance. Although this reflects a requirement to perform in a broad
range of contexts, the emergent theme is that the chairman should be
accomplished in behavioural complexity and social intelligence, which
mediate the translation of cognition into action in complex environments. According to Pratt (1998, 2000) board level work requires that
directors are engaged in sense making, sense breaking (drawing on alternative senses) and sense giving, or direction setting, on behalf of the
organisation as well as for a multiplicity of stakeholders. In so doing,
directors generally and the chairman in particular have to be equally
cognisant of the financial and moral consequences of their deliberations. However, many social exchange models obscure the importance
of the leadership contribution of knitting together information acquisition, sense making, sense-breaking, sense giving, systematic social
networking, boundary spanning, long-term strategic decision making
and short-term operational follow through (Fleishman et al., 1991).
The drawing together of such a broad range of facets emphasises the
idiosyncratic nature of the chairman’s role. So much is dependent on
interpretation of context and the ‘make up’ of each single role occupant. Such a rich and unpredictable combination shapes the nature of
trust and the relationships that are formed and emotions that are displayed in the boardroom (House, 1998). House’s (1998) reflections on
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Nada K. Kakabadse et al.
Table 12.1
Chairman’s attributes for effective performance
Author
Study
Performance characteristics
Parker
(1990)
Interviews with 15
chairmen
• Make tomorrow’s company out of
today’s
• Outward/forward looking.
Stewart
(1991)
Periodic interviews
over two years with 20
GMs and 29 chairmen
in the National Health
Service (NHS), UK
• Interdependent, complimentary –
partnership with CEO
• Balancing activities amongst key
figures.
Cadbury
(1995)
Experiential practice
• Leadership of the board
• External face of the company (e.g.
investors).
Garratt
(1999)
Case studies
• Boss of the board
• Designee and chair of the process
of the board’s meetings/activities
• Inducts new board members
• Develops competencies of board
members
• Develops the board.
Kakabadse
et al.
(2001)
35 in depth, semistructured interviews
and three focus
group of 20 (i.e. 95
encounters) NEDs/
chairmen, CEOs – FTSE
100, UK
• Maturity
• Relational skills
• High political and social
competence
• Meetings skills
• Coaching capabilities
• Managing boardroom dynamics.
Roberts
(2002)
35 interviews with
chairmen, CEOs and
NEDs, UK
• No ambition for executive power
• Complimentary to CEO (i.e.
supporting role of executive) in:
- Skills
- Experience
- Knowledge
- Temperament
- Business focus
- Values
• Chairing meetings (e.g. focusing,
stimulating discussion, openness,
trust)
• Replacing CEO.
Kakabadse
and
Kakabadse
(2008)
Over 500 interviews –
international study
• Six disciplines of chairman
º Delineating boundaries
º Sense making
º Interrogating the argument
º Influencing outcomes
º Living the values of the company
º Developing the board.
(Continued)
High-Performing Chairmen: The Older the Better
Table 12.1
349
Continued
Kakabadse
et al.
(2008)
Questionnaires, 286 of
FTSE 350, UK
• Delineating roles of chair/CEO;
board from management
• Contribution to strategic decisionmaking
• Encouraging of feedback
• Leading the board
• Board and executive succession
• Qualities of leadership, wisdom,
sensitivity, resilience.
his 15 months as chairman of three companies highlights that trust
plays an important part in the determination of board directors feelings
towards the chairman. From the chairman’s perspective, his or her feelings towards other board members varied over time. The House (1998)
study emphasises that trust cannot be taken for granted in terms of
board relationships, but that trust is one of the most critical binding
forces that determine board effectiveness.
The literature emphasises that the role and the responsibilities of
the chairman varies from one company to another, depending on the
external environmental and internal contextual influence and on the
subsequent boundary negotiation between chairman and CEO, and
board and management (Roberts, 2002; Kakabadse and Kakabadse,
2007). Certainly, one point clearly made is that only when boundaries are delineated can one of the key principles of the Combined
Code of corporate governance in the UK be practised, that of, ‘no one
individual should have unfettered powers of decision making’, (FRC,
2007: A2).
The study
Preliminary exploratory interviews with chairmen from both private
and public sector organisations and of both genders identified one particular theme affecting the performance of the chairman, namely those
over 60 years were consistently considered as more effective across a
range of chairman performance dimensions. With this insight, 20 further semi-structured interviews were held with chairmen, CEOs and
NEDs from both private and public sector organisations. The interview
data was transcribed and through thematic analysis, distinct items
were identified and clustered together to form a structured survey
instrument. The instrument was then utilised to survey FTSE 100–250
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Nada K. Kakabadse et al.
companies investigating the role, contribution and performance of the
chairman of the board.
A total 286 responses were received, in effect an 11% response rate.
Thirty-eight per cent of these respondents were aged 60 or over; 87%
male; 71% had either an under graduate or post-graduate qualification;
90% were British; 54% sat on between two to four boards. The role
profile of the respondents was 26% non-executive directors (NEDs),
28% chairmen, 9% senior independent directors (SIDs), 22% executive directors who sat on boards and 11% CEOs. The others comprised
of company secretary, legal counsel and other board members. The
respondents were asked to rate the chair in terms of performance effectiveness, particularly concerning their capability to lead the board.
Study findings
Overall, the findings are consistent with an earlier study reported by
Kakabadse et al. (2008), namely that the chairman is critical to providing the necessary leadership for the effective functioning of the board
and to ensuring that the organisation has a sustainable future. In order
to do so, displaying integrity and being trustworthy were identified as
key qualities that the chairman needs to display.
Those in the 45–59 age group were identified as being less positive
than those in the 60+ age group (Figure 12.1). Those aged 60 or over were
scored significantly higher on the following aspects; the chairman
●
●
●
●
●
●
●
●
effectively evaluates the performance of the CEO,
effectively evaluates the performance of the senior independent
director (SID),
effectively evaluates the performance of other board members,
encourages feedback on his or her performance,
clarifies the skills and experience of each board member,
calls upon the SID to intervene,
supports the intervention of the SID, and
discusses sensitive issues with the SID.
Those chairmen in the age group 60+ (male and female) were consistently scored higher (significant at p<.001) on each of the questionnaire
items when compared with the under 60 age group.
Our findings suggest that older chairmen are considered to be more
effective, not by the issuing of commands or by imposing their will
on the board, but by being able to surface and deal with negative
High-Performing Chairmen: The Older the Better
351
sentiments and promote a robust and meaningful dialogue. In the
words of one director,
Our Chairman has a talent for consensus and dialogue with this
group of people of which most of them are his equals as some are
chairmen of other boards. He knows how to deal with complex and
conflict issues in a most humane way. I think that his humanity as
well as his clarity is his most disarming quality for when he opens
the meeting our guards go down and we talk freely. Thinking about
it, it is perhaps our easiness to talk that makes us an effective board.
(The Chairman referred to here was over 60).
(P3-NED)
Scholars have shown that ‘dialogue is clearly suited to providing opportunity to generate alternative perspectives over any issue or to challenge the vocabularies of dominant ideologies’ (Heidlebaugh, 2008:47).
In small groups this is particularly effective as ‘participants with different power and knowledge, [are] dealing with complex and conflictive
issues’ (Innes and Booher, 2003: 55). It has been recognised that dialogue allows for the expression of emotion which entices collaboration
(Barnes et al., 2007). If ‘deliberation has to be based solely in reason,
which is usually defined as neutral and dispassionate, and conducted
solely through rational argument it will exclude many people’ (Barnes
et al., 2007: 38). A complaint of certain of the NEDs in this study was
that they were not ‘given’ the opportunity to contribute. This was
particularly prominent amongst female directors who felt that if they
showed enthusiasm and asked too many questions, they felt themselves
labelled as ‘clueless’, ‘high maintenance’ or plain ‘difficult’. In the word
of one female study participant (P9-NED),
In the boardroom, signals easily get crossed due to different reasons,
but once a label is on, it can be all but impossible to remove it.
The emergent findings of thus study are not unusual as separate studies have shown that inhibited dialogue in the boardroom is the norm
(Kakabadse et al., 2006). Thus, if dialogue, deliberation and feeling free
to contribute are necessary elements of effective boardroom functioning, but with the reality being that an unwelcome boardroom context
is one of the key reasons for tension between actors, how then can such
contrasts be bridged? It was Aristotle (1941) who noted that practical
wisdom (phronesis) is embedded in the older statesman and in so being
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Nada K. Kakabadse et al.
Under 60
60 or over
Effectively evaluates the performance of the
CEO
6.58
7.48
Effectively evaluates the performance of the
Senior Independent Director
6.01
6.81
Effectively evaluates the performance of the
board members
6.29
7.01
6.19
Encourages feedback on his/her performance
Clarifies the skills/experience required of each
board member
7.36
6.11
6.85
Calls upon the Senior Independent to
intervene where necessary
6.5
7.18
Respects the intervention of the Senior
Independent Director
6.85
7.61
Discuss sensitive issues with the Senior
Independent Director
6.39
7.38
0
1
2
3
4
5
6
7
8
Average scores
Not at
all true
Figure 12.1
Very
true
Performance: the chairman
the individual, who exhibits an essentially moral form of knowledge, is
guided by the habits of virtue that come through experience. Aristotle
(1941: 1033) noted that over time the individual acquires an ability
to identify certain kinds of worthy action, and in so doing is able to
develop contextually appropriate approaches that satisfactorily address
the challenges leaders face. Since the time of Aristotle (1941), one question has repeatedly been raised and that is whether people matured by
life are better able to work their way through conflicting tensions than
they were able to do when younger (Schalk, 2004).
Boardroom leadership requires not only sense making, or the interpretation of current circumstances taking in consideration past, present
and possible future trends and influences, (Weick, 1995), but also sensebreaking, namely the act of discarding alternative narratives or routines
from the past (Pratt, 1998, 2000). Shaping consensus in the boardroom
requires the chairman to capture the more disabling overt and underlying sentiments of board members and redirect them to focus on positive outcomes through providing values, priorities and clarity about
the issues at hand. ‘Clarity on values clarifies what is important in
High-Performing Chairmen: The Older the Better
353
elapsed experience, which finally gives some sense of what that elapsed
experience means’ (Weick, 1995: 28). Hence, leadership in the boardroom has a moral dimension and as such requires the capacity to discern through conflicting data but in so doing demands fairness in the
treatment of those involved.
It is the chairman’s in-depth appreciation of the particular challenges
facing the key members of the board and his or her display of understanding of their context that enables the surfacing of sentiments,
which, in turn, allows for meaningful dialogue.
It’s the Chairman’s instinct to see and feel what I was going through
in my role as CEO that made the difference to handling a particularly
heavy issue. The guy seemed to feel for me and also the other board
members. When he spoke to us he appreciated our perspective and
could see the limitations of what we could or could not do. The fact that
we were coming from different angles and were all over the place didn’t
fluster him. That more than anything was the reason he was then able
to bring us together. (The Chairman discussed here was over 60)
(P11-CEO)
My role is particularly problematic. I’m the SID (Senior Independent
Director). If I act too early I cause a problem. If I wait for others
to approach me and then say or do something, its too late. But the
Chairman of that Board felt that it was how he handled me and recognised my predicaments. That, and his very personal style allowed
for a necessary but uncomfortable conversation that had been put
off for ages, to take place. That had the cathartic effect the board had
needed for a long time. (The Chairman discussed here was over 60)
(P14-SID)
According to Aristotle (1941) practical wisdom provides the framework for
accessing how individuals understand the issues at hand and how then to
communicate with them in order to apply consequentially derived principles within their context. Thus only when the chairman’s experiential knowledge becomes embedded in the individual’s character is action
effectively applied. Phronesis, as a moral form of knowledge, is learnt and
re-learnt from one particular boardroom to the next. Such learning is the
nurturing that Aristotle (1941) referred to and the study reported in this
chapter identifies that as occurring from 60+ years of age.
Research in neuroscience has found that with age, older people
develop the skill of bilateralisation, namely the use of both sides of
the brains instead of just one (Strauch, 2010). Moreover, research in
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neuroscience reveals that the amount of myelin, the fatty (80% lipid,
20% protein) substance that insulates nerve fibres, continues to increase
well into middle age, peaking at the age of 50 and in some cases in the
sixties. It is this substance which boosts the brain cells’ processing
capacity (Strauch, 2010). In fact, increases in myelin have been found
to boost the brain’s ability to process experiences and information
by up to 3,000%, which suggests that older people are much better
at controlling and balancing their emotions as the elderly brain is
less dopamine-dependent, thus enabling people to be less impulsive,
more controlled and less prone to reactions of a dramatic emotional
nature (Jeste, 2010). Hence, older people are identified as able to get
to the point of an argument faster than a younger person, are able to
appreciate the rational, emotional and political nuances in situations
more insightfully and thus better able to work through emotionally
demanding concerns, context by context (Jeste, 2010). Research shows
that the greater the increase in myelin, the greater the individuals’ use
of the frontal lobes of the brain which control emotion, risk-taking
and decision-making as well as the temporal lobes which are responsible for responsiveness to language, music and mood (Jeste, 2010).
Equally, the neuroscience study clearly indicates that with the age,
‘fluid intelligence’ (i.e. ‘native mental ability’ – the information system processing), or the ability to speedily think and reason logically
tends to decline and thus impacts on attention and memory capacity.
The individual becomes slower at mental calculation or recall of facts.
‘Crystallized intelligence’ however, or the ability to use skills, knowledge, reasoning and experience all of which are the product of educational and cultural experience, improves with age (Cattell, 1987; Blair,
2006; Jaeggi et al., 2008). In effect, neuroscience strongly suggests that
older people display greater capacity for reasoning about, and working
through social dilemmas and conflicts (Grossmann et al., 2010). In
fact, the Grossmann et al. (2010) study shows that relative to young
and middle-aged people, older people make greater use of higher-order
reasoning schemes, adopting multiple perspectives and recognise the
limits of rational knowledge, all of which more easily allow for compromise. Thus social reasoning improves with age, despite the decline
in fluid intelligence (Grossmann et al., 2010). For example, a study
of 118 pilots aged 40 to 69 showed that the older participants outperformed their younger colleagues when avoiding traffic collisions
whilst not performing as well in terms of mathematical calculation
(Strauch, 2010). New research suggests that assigning older individuals to key social roles involving legal decisions, counselling and
High-Performing Chairmen: The Older the Better
355
intergroup negotiations produces more sustainable results (Grossmann
et al., 2010).
The Chairman’s role is one of consolidator and for that reason he is
able to create cohesive board that can come to consensus on issues
under consideration. Otherwise you have bunch of oversized egos or
one super large ego running the board.
(Participant 4, NED)
Highly effective chairmen are able to develop board norms where
issues are logically considered and morally moderated.
(Participant 15, Chairman, aged over 60)
I need a Chairman with whom I can sit down to share thoughts,
ideas, fears and aspirations, and at the same time have him/her interrogate my assumption. Such chairmen are few and far between, but
the one I have now, especially because of his age makes me feel comfortable and yet scrutinises me intensively.
(Participant 18, CEO was referring to his Chairman
who was aged over 60)
The results reported in this study parallel those reported from neuroscience, namely that effective chairmen are so because of the particular
strengths they have developed as a result of ageing. Older chairmen
deal better with matters where doubt infects the debate and where
deliberation is required, such as the handling of sensitive but critical
relationships, where individual ego can distort the reaching of rational
decisions with which all could identify and support.
Conclusion
The study results emphasise phronesis, namely practical wisdom as an
attribute of the outstanding chairman. What is only just beginning to
be understood is the impact of phronesis as the mean that enables the
achievement of board goals and responsibilities, as well as minimising
the potential threats that could jeopardise the achieving of those goals.
The study results highlight that effective chairmen need to be able to
know how to recognise and avoid (or at least minimise) threats and
whether the orientation of each individual board members presents a
threat or opportunity to board functioning. Knowing how to determine
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Nada K. Kakabadse et al.
appropriate action, when and how to improve relationships with the
others on the board and with stakeholders, as well as knowing when
to take a long-term or short-term view and generally how to deal with
major challenges and dilemmas, differentiates the outstanding chairman from the rest. What is highlighted in this study are the chairman’s
skill to work through tensions, yet still focus on the salient points in the
debate and as a result align expectations (Kakabadse and Kakabadse,
2008). The chairman’s most potent tool is ‘practical wisdom’ through
dialogue.
Although our study confirms the Kakabadse et al. (2008) findings,
further research is required. One particular theme for exploration is
whether older chairmen act more independently and hold more of an
independent mind-set than do their younger counterparts. The results
of this study suggest that older chairmen may well be able to muster the necessary emotional resilience to act independently, but this
assertion requires further scrutiny. Such examination is necessary as
studies at lower levels of the organisation suggest that older employees
display higher levels of obligation, namely they feel obliged to work
extra hours, to work well with others, to provide good service and
to deliver good work in terms of quality and quantity. However, the
older employee is shown to feel that their employer is more obliged
to provide them with a sound working environment with bonuses
based on performance, all emphasising a ‘stronger’ psychological
contract between employer and employee than is the case with the
younger counterpart (Huiskamp and Schalk, 2002; Schalk, 2004; van
der Heijden et al., 2008). Such results suggest a dependency need for
approval.
Further study will be useful in informing retirement policy design as
well as exploring whether older people are less productive. Certainly
recent trends emphasise the importance of such research as the
Creditsafe group, the business intelligence forum, reports 10,000 directors over 65 have been appointed to newly incorporated enterprises (in
the UK) in the six months prior to April 2011 (Clarke, 2011).
These silverpreneurs, i.e. over 65’s, are not only starting their own
businesses but that the UK already has 360,000 or so directors at pensionable age who still work (Clarke, 2006). Further, the reported average
age of the top 20 billionaires in the world is 67.4 years (Clarke, 2011).
The need to examine the leadership and managerial characteristics of
this population is overwhelming. The ‘silverpreneurs of Creditsafe’ are
simply not going to go away.
High-Performing Chairmen: The Older the Better
357
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13
Aligning the Board: The
Chairman’s Secret
Nada K. Kakabadse, Reeves Knyght and Andrew Kakabadse
Introduction
Whilst government response to corporate scandal and market failure
has been to spawn ever greater regulation and/or comply or explain
protocol, it has also been long recognised that a formulaic approach to
governance codes limits the contribution and value the board can offer
the business (Steiner, 1972). Even the proponents of role duality, namely
the combining of the CEO and chairman roles, argue that adopting
an over-structured, rules-driven perspective to the governance of the
enterprise limits the board’s stewardship of the firm (Charan, 1998).
Equally, the champions of role separation (Leblanc and Gillies, 2005;
Lorsch and Zelleke, 2005; Hossack, 2006) acknowledge that keeping
the CEO and chairman as two distinct entities is a necessary but not a
sufficient condition for board effectiveness. Both the role duality and
role separation schools concur that the contribution of the board to the
continued future of the organisation is principally dependent on the
behaviour, experience and skills of its members.
Moreover a growing number of scholars have identified that the leadership provided by the chairman is fundamental to encouraging ever
higher levels of board performance (Leblanc and Gillies, 2005; Kakabadse
and Kakabadse, 2007). Leblanc (2004), for example, argues that research
needs to focus on the ‘black box’ of how boards actually work in order
to understand the behaviour and contribution of the chairman and the
value provided by the individual directors. In the same vein, McNulty
et al. (2003) argue that a better understanding of boardroom dynamics
as well as sensitivity towards the quality of relationship between executive and non-executive directors (NEDs) will enable boards to enhance
their performance. In support, Sonnenfeld (2004) concludes that the
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Aligning the Board: The Chairman’s Secret
361
missing element to board research is the ‘human side’, a perspective
echoed by a number of commentators (Brass and Burkhardt, 1993;
Dalton and Dalton, 2005; Dalton et al., 2003; Hermalin and Weisbach,
2003). The point being made is that greater understanding of the internal working processes of the board is needed in order for the board to
add value to the organisation it monitors. Thus, attention to the behavioural side of the board work is the pertinent concern when examining the vexed question of alignment, first between board members and
second between the board and the rest of the organisation. This is especially the case over the issue of reaching a shared view concerning the
purpose, vision, mission and strategy of the enterprise (Watson, 2008).
Despite the continued calls for in-depth behavioural, soft analysis the
evidence to date indicates a bias towards a structural/systems scrutiny
of corporate governance and board performance, with only a minority of studies examining the relationship aspects of board functioning
(Gabrielsson and Huse, 2004).
Bearing in mind the concern to penetrate the ‘black box’ of boardroom relationships (Gabrielsson and Huse, 2004) and the recognition
that chairmen wield particular influence, this chapter explores how
boardroom tensions can be minimised and/or resolved through realising alignment between the board and the management. Particular
attention will focus on the chairman’s capability to find pathways
through boardroom differences especially through surfacing and working through the deeply held sentiments board members hold concerning their inter-relationships with each other and with the board.
Preceding such examination is a review of the chairman’s role and
the necessary capabilities to effectively exercise this position. In this
analysis, attention is given to examining the purpose of the board and
the need to realise alignment between the board and between internal
and external stakeholders. This is followed by an in-depth examination
of the qualitative data captured in this study. The chapter concludes
that the chairman’s leadership in encouraging the sharing of director
experiences is a critical factor in shaping positively inclined boardroom
behaviour, which in turn is fundamental to the board adding value to
the organisation.
Chairman; role, contribution and capability
There is growing evidence that the chairman is critical to the monitoring of individual and collective managerial performance (Cadbury,
2002; Hossack, 2006). Particularly from the agency theory perspective,
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the reason monitoring is given such emphasis is the concern over realising alignment of interests between owners and managers (Jaskiewicz
and Klein, 2007). Alignment, or the capacity to demonstrate a positive
relationship between organisational purpose/strategic objectives and
the achieving of financial targets, has long been considered a critical
leadership challenge facing boards (Barnard, 1938). It has also been
recognised that the greater the level of alignment between the staff
and management on how the resources of the firm are to be leveraged,
the greater the level of job satisfaction for those concerned (Dennison,
1992; Kotter and Heskett, 1992), the fewer the number of conflicting
goals to pursue (Perrow, 1961), and as a result the greater the competiveness of the firm (Semler, 1997).
The concept of alignment draws heavily from both agency theory and
stewardship theory (Sundaramurthy and Lewis, 2003). Agency theory
steers governance in favour of control through instituting vigilant, externally dominated boards, drawing on their discipline and detachment in
order to achieve distinct structural alignment and thereby incentivise
management (Jensen and Murphy, 1990). In this sense, agency theory
searches for that one solution to reduce conflicts of interest and, in
turn, tie managers wealth to realising shareholder wealth (Jensen and
Murphy, 1990). Agency theory holds that incentivising the CEO in particular enhances alignment through decreasing the need for monitoring and encouraging the use of social capital ties. On this basis, the
CEO is more likely to be willing to take measured risk through seeking
the advice, support and the loyalty of the board (Sundaramurthy and
Lewis, 2003). Stock option based rewards have been and continue to be
considered a deep sharing of interests between management and shareholders, thus reducing agency costs (Jensen and Meckling, 1976; Jensen
and Murphy, 1990) and contributing to the increased performance of
the firm. All these characteristics combined means that shareholder
wealth is enhanced (Jensen and Murphy, 1990; Rosenberg, 2004).
In contrast, adopting the rent extraction perspective indicates that
stock options may increase the conflict between management and
shareholders (Hernandez, 2008). In fact, it is postulated that firms that
grant stock options exhibit a lower stock return than firms that do
not extensively adopt such remuneration measures (Melle-Hernandez,
2005).
Moreover, irrespective of stock option adoption larger firms, in general, are recognised to be more complex to manage and to monitor,
especially as they exhibit greater potential for agency conflict (Jensen
and Meckling, 1976; Williamson, 1967). Yet despite the more formulaic
Aligning the Board: The Chairman’s Secret
363
approach of agency theory, studies suggest that the leadership skill of
the chairman to ensure for comprehensive monitoring remains the
critical factor in ensuring for effective governance (Kakabadse and
Kakabadse, 2008).
Stewardship theory, on the other hand, steers governance in the direction of collaboration favouring the governance of collective decision
making in order to achieve goal alignment (Sundaramurthy and Lewis,
2003). In effect, stewardship theory combines a values-based philosophy with economic rationalist notions of wealth creation in order that
success can be achieved even in the most challenging of circumstances.
Through so integrating two contrasting strands of thinking, stewardship theory draws on leadership process theory which holds that
influencing the key managers in the organisation to realise strategic
alignment is only likely to occur when account is taken of the reality of
their context and their motivation to be more cohesive (Mohrman
et al., 1995). If the uniqueness of context and the idiosyncrasy of top
manager interaction are not taken into account then influence attempts
are likely to be less than successful. Study also emphasises that central
to influencing board members to become better aligned is the chairman (Lorsch and Zelleke, 2005). Thus from both the stewardship or
agency perspective, the contribution of the chairman to nurturing a
cohesive board is pivotal.
Still, there is reason for further study and that is based on the recognition that there is still too little understanding of how chairmen influence director behaviour and motivation in order to determine effective
boardroom performance (Kakabadse and Kakabadse, 2008). Towards
this end, the need for the chairman to direct and lead the board and
be held accountable for the performance of the board has been increasingly noted in the literature (Cadbury, 2002; Lorsch and Zelleke, 2005).
One line of inquiry already pursued is that capable chairmen lead by
example, empowering and involving fellow directors in decisionmaking processes (Bloch, 2005). Others agree and add that the chairman influences through being a role model, acting as the guardian of
the values of the firm and upholding the highest standards of probity
and integrity (Higgs, 2003; Hossack, 2006). Through qualitative analysis, Roberts et al. (2005) concluded that board effectiveness depends on
the behavioural dynamics between the executive and non-executive
directors, and the quality of those interactions considerably depends on
the mediation skills of the chairman. Research (Roberts, 2002; Hall and
Rolfe, 2005) further shows that board effectiveness is positively related
to the quality of interpersonal relationships between board members,
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where trust and openness are essential to generating commitment
between the directors. The leadership of the chairman is prerequisite to
nurturing these behavioural qualities (Roberts and Stiles, 1999).
Further studies (Pettigrew and McNulty, 1995; Leblanc, 2004;
Kakabadse and Kakabadse, 2008; Levrau and van Den Berghe; 2007)
confirm the chairman’s influence in shaping the dynamics of the board.
Particular commentators (Westphal, 1999; Hackman and Wageman,
2005) focus on the chairman’s ability to ensure receipt of relevant information to board directors, thus enhancing autonomy of decision making, reinforcing board independence and reducing NED reliance on the
executives in order to be informed. Other researchers more concentrate
on the leadership contribution of the chairman in acting as a counter
weight to the influence of the CEO and the executive directors in order
to guarantee board independence (Alexander et al., 1993; Hambrick and
Fukotomi, 1991; Mace, 1971; Pfeffer, 1981). It is postulated that through
sound leadership the chairman increases the effectiveness of the monitoring function of the board, thus better ensuring that managers run
the firm according to shareholders’ interests (Hillman and Dalziel,
2003). An Egon Zender International survey of 66 CEOs and chairmen across 12 European countries identified that almost two-thirds of
the expected skills of the chairman are on the ‘soft side’, with leading
and motivating people being at the top of the list, even above business judgment, risk analysis and sector knowledge (Hollanders, 2004).
Similarly the Kakabadse and Kakabadse (2008) study reveals that effective board performance depends on the chairman’s ability to exercise
the necessary leadership in order for the board to positively influence
firm performance. In so doing, the chairman nurtures a ‘psychological
understanding’ amongst board members in order for the board to be
able to freely consider how to add value to the organisation (Kakabadse
and Kakabadse, 2008). Thus, study emphasises that it falls upon the
chairman to continually assess the boards capacity to both monitor and
steward, and consider how to act between competing tensions posed
through environmental turbulence in an increasingly globalised world
(Kakabadse and Kakabadse, 2008).
The study
In keeping with previous studies examining the role and contribution
of the chairman and whilst paying particular attention to the need for
deliberative practice (Kakabadse and Kakabadse, 2007), an interpretative inquiry approach was adopted in order to avoid the ‘pretensions’ of
Aligning the Board: The Chairman’s Secret
365
objectivity (Taylor, 2001). Throughout the inquiry attention was paid
to language, communication patterns, director interaction and context
in order to better appreciate how board members construct their social
world resulting from the nature of their reasoning for the actions they
undertake (Ryfe, 2006: 73).
Open-ended interviews with 23 board directors from the UK, the
United States, Australia, China and Russia were pursued. The sample
included chairmen, CEOs and NEDs. The purpose for adopting an
open-ended interview approach was to allow for freedom of expression
of life-stories, and self narratives (Shamir and Eilam, 2005) in order to
draw out ‘hidden patterns and hitherto unexplored meanings’ (Kearney,
2002: 12). Saturation of themes (Glaser and Strauss, 1967) was reached
by 21 interviews, broadly in line with Alexandersson’s (1994) and Sias
et al. (2004) findings.
All interviews were tape-recorded and transcribed thus collating
detailed narratives from each respondent. Many ways exist to analyse
participants’ narratives capturing their experiences (Taylor and Bogdan,
1984), ranging from examination of the narrative as a whole (Lieblich
et al., 1998), to identifying self-contained story formats (Boje, 1991),
to determining patterns of themes that recur in discourse (Reissman,
1993; Pentland, 1999). The third approach of thematic analysis pattern
recognition was adopted, since the focus of the study was to appreciate the meanings attached to expressions of deeply held beliefs and
emotions concerning board director contribution towards achieving
alignment across disparate agendas within the boardroom. Hence, the
themes were derived from recurring expressions of participants experiences and feelings (Taylor and Bogdan, 1989), ‘bringing together components or fragments of ideas or experiences, which often are meaningless
when viewed alone’ (Leininger, 1985: 60). Emergent themes and frameworks were amended in the light of subsequent transcriptions in order
to ensure for coherence of ideas which ‘rests with the analyst who has
rigorously studied how different ideas or components fit together in a
meaningful way when linked together’ (Leininger, 1985: 60).
Study results and discussion
Four themes emerged from thematic examination of how the chairman
‘shaped’ boardroom dialogue (or the lack of it), which in turn effected
the level of alignment between board directors. The four themes portray
the particular dynamics underpinning the inhibited board, the actionoriented board, the self-congratulating board and the learning board.
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Inhibited board: lack of effective dialogue
Aristotle, in 450 BC, argued that if communication is to change individual behaviour, it must be grounded in the desires and interests of
the receiver. Modern-day scholars agree highlighting that if a person
is to be motivated to change, the communication they receive needs to
‘touch’ their interests and values (Larkin and Larkin, 1994).
No, NEDs are not used effectively. I don’t think we are clear what we
are here to do. I think that the Chairman needs to clarify our roles
and enable us to contribute. I don’t know whether we are getting the
right information or not, but it goes beyond information. We are not
encouraged to ask questions. The moment one of us ask questions
the invisible shields goes up and you feel it. (Participant 3, NED).
The level of collective experience and knowledge NEDs share is
taken for granted. They are almost all household names, but I think
that they are not given space to contribute and that is due to the
Chairman’s style (Participant 4, MD)
Few would argue that it is chairman’s responsibility to focus boardroom
discussion to relevant matters and to appropriately direct the decisionmaking process. In order to effectively do so, managing time and allowing for debate on complex issues and encouraging challenge have been
recognised by a number of review bodies (Cadbury, 2002; Higgs, 2003),
practitioners (Bloch, 2005) and academics (Leblanc and Gillies, 2005)
as critical. Leblanc and Gillies (2005) conclude that the chairman is
pivotal to identifying the goals and objectives of the board through the
setting of the agenda. Roberts and Stiles (1999) agree and hold that the
chairman facilitates the active contribution of executive and non-executive directors. If conversation does not easily flow, boards are deprived
of individual directors experience and wisdom.
Within the theme of the inhibited board, a number of the study
respondents narrated that their skills and experience were considerably underutilised due to the inhibiting board culture nurtured by the
chairman. Uninvited conversation was reported as unwelcome:
But when you go to the actual Board meeting and watch things you
get an almost monotone presentation and sometimes it may have just
too many numbers in it. So you get lost in the detail. The non execs
feel inhibited and don’t quite know how to respond or what questions to ask … Nobody dares to challenge. (Participant 10, NED)
Aligning the Board: The Chairman’s Secret
367
Avoiding social costs from not expressing opinion (Miller and Nelson,
2002) often leads to a ‘spiral of silence’ (Noelle-Neumann, 1993: 1).
Certain researchers highlight that board members who hold private
concerns about the organisation and its practices tend to assume from
the lack of expressed concern by others that they are in the minority, thus making them less likely to state their concerns (Westphal and
Bednar, 2005). This collective psychology is what some have labelled as
a ‘pluralistic ignorance’ (Westphal and Bednar, 2005).
Self-congratulating board: sharing positive experience
Sharing positive experience and emotions has long been recognised as
‘motivating’, particularly in the pursuit of ‘achievement, recognition,
pursuing challenging work and taking responsibility which all contribute to personal, team and organisational advancement’ (Herzberg et al.,
1959: 63). Yet, over focusing on positive experience can lead to self-deception, an ‘emotional switching off’ especially when challenged with
perspectives that do not fit the individual’s glowing picture of the world
(Sousa, 2004: 65). Certainly drawing on emotions to shape thinking
and identify ways forward is an influential power lever, much dependent on the intentions of the individual ‘swaying the crowd’ (Bovens,
1999).
X’s strength is how he uses dialogue, his words are not empty nor
condescending, he uses dialogue not to veil intentions, but to disclose deeply held realties. He uses dialogue not to antagonise but
to establish relations and create new realities. I think that these are
mandatory skills for an effective Chairman. Even after… when motivations were low, he managed to preserve a trusting and positive ear
in the boardroom. He keeps reminding us of the good things that we
had done and how we did them (Participant 14, NED).
Participant 14 outlines the upside to drawing on positive experiences,
unlike the narrative offered by participant 3.
We have a very enthusiastic and hardworking Chairman that genuinely appreciates the sharing of our success stories, which is all well.
But when we needed to discuss some potentially sensitive issues, willingness to listen to peoples less positive feelings abated. For example,
in Russia, we were not only entering a new market but we were targeting their national champions, their strategic assets, their financial services, which could inflame nationalistic sentiments, and yet
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we were not discussing these issues. I have 20 years of Russian experience and no one asked me for my opinion, because I had some negative feelings about it all. Any negativities were not welcome and that
was due to the Chairman’s inability to handle anything less than
positive, but necessary to raise sentiments. (Participant 3, NED).
The incapacity to surface relevant but unwelcome sentiments can lead
to groupthink or related decision making bias.
We never talked about what we knew was going to happen. The
Chairman could not bring himself to face up to the CEO and that
one other director. We were all encouraged to put on a good face and
say positive things. Soon the skill became, ‘stop your real emotions
spilling out’. And you know what, the inevitable happened in the
way we all knew it would. It was a hell of an encounter. Although
painful, I felt a sense of relief. Pretending being positive drained me.
(Participant 2, NED).
Interestingly, most of the study participants who admitted to pretence
also stated that the longer that continued, the clearer their insights
concerning future effects, especially those of bankruptcy, take over or
collapse. Yet, despite these insights, many narrated a lack of action, a
conspiracy of silence, of becoming paralysed and unable to enter into
dialogue.
Action-oriented board: sharing of negative expertises
Raising the uncomfortable issue has been recognised as a critical skill
of dialogue (Kakabadse and Kakabadse, 2011). Cross-cultural dialogue
in particular is potentially loaded with unwelcome tension, leading to
miscommunication and misunderstanding, requiring empathy as the
antidote (Goleman, 1998). Being attuned to the subtleties of body language needs to be complemented by hearing ‘the message’ beneath the
words being spoken and it is these aspects that are promoted as core to
skilful negotiation (Goleman, 1998:101).
You can say that it is X’s experience, his nurturing style, his use of
words, his general demeanour, his determination, his actions. The
bottom line is that he instils trust in the others on this multicultural board which potentially can be minefield. I think that is what
makes him a very effective Chairman. It is that trust that plays a vital
role in having effective dialogue in the boardroom which allows
Aligning the Board: The Chairman’s Secret
369
for discussion of negative feelings and gives permission for sensitive
issues to emerge. That more than anything helps us engage in the
difficult conversations. (Participant 7, NED)
As I got older, I become more aware and sensitive to peoples emotional ways, so I try to connect with all board members on a human
level and build trust irrelevant from which corner of the world they
come from. They all have their own issues, but I allow them to openly
express themselves and share their frustration in a constructive way
and that way you build trust. … I think that sharing negative emotions builds trust faster than the sharing of positive experiences.
Common human problems bind people together. (Participant 23,
Chairman).
Study suggests that people better recall negative events than positive
ones (Minar et al., 2005; Brison, 1999; Dasborough, 2006) due to the
fact that negative emotions tend to be more immediate and pressing
(Frijda, 1986) and people are hardwired to respond to them (Taylor,
1991).
To surface and positively draw upon negative emotions can lead to
a ‘galvanisation of emotion and energy’, which can then be harvested
for action. However the question that commentators have raised is,
through being enthused by the catharsis of emotional release, can sense
of judgement be lost leaving the individuals concerned unable to discriminate between data and objectives (Griffiths, 2004: 247)?
Getting all this off our chest was great. We swung in to action only to
discover we should have stopped and thought a bit more. (Participant
22, Chairman)
Catharsis was narrated by the study participants as critical to fostering
constructive boardroom dialogue, but an additional step was identified
as required, that of being able to stand back, rationalise, allow for the
negative emotions to subside and only then enter into the decision taking/making processes.
Learning board: sharing of positive and negative experiences
Dialogue, as an open-ended conversation in which participants strive
to understand their experiences, language and ways of thinking and
through so doing build safe spaces for the expression of dissention and
difference for the creation of shared meaning, has been identified as
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critical for high level board performance (Kakabadse and Kakabadse,
2008).
In the first evening of our away days, the Chairman reflected on his
long experience with the board. Then he asked the longest serving
board director to reflect on his experience. Then the second longest
serving and so on until all members had told their story. I was last, as I
had been on the board for only two months. Each story was reflective,
some were quite funny and few were a deep reappraisal of the bitter
experience with the former CEO. The upshot of telling stories was to
connect longer serving board members with new ones, and to discover
the deeply held sentiments that some members harboured. The result
was that by telling stories, we all gained a perspective about each other
and as a consequence showed understanding which reduced a lot of
barriers between us. X …. has an easy style of communicating and
sharing that prompted us all to open up. The evening paved the way
for a next day of deep discussion. I am a seasoned board member and
have been on many boards, but have never had such a profound, experience as here. I think that the success of this board is very much due
to X’s….(the Chairman’s) sensitive style. (Participant 10, NED)
Drawing on significant experiences allows for sense of continuity,
which the study participants narrated as important for positive board
room contribution, ‘there is no continuity without an appreciation of
the past. People will experience continuity when they can recognize the
past in their present actions and intentions for the future’ (Bouwen and
Overlaet, 2001: 34). To do so requires the sharing of personal experiences, where both negative and positive emotions are the driving force
behind social action (Barblet, 1998). This was particularly emphasised
by one study participant:
We went through the very traumatic experience of CEO replacement. There were some ugly scenes between the CEO and Chairman.
I think that Chairman handled it well. He delved deep in to our
experience and brought out our resentments. After that we went
from strength to strength. Trust is fundamental for building open
discussion in the boardroom, but that very much depends on the
Chairman’s skill, benevolence and integrity. Fairness, discretion,
integrity and openness are a precondition for effective boardroom
communication. (Participant 9, NED).
Scholars have argued that emotions reflect value judgments in that
emotions guide the individual to appraise and appropriately respond
Aligning the Board: The Chairman’s Secret
371
to social situations (Kemper, 1978; Averill, 1980; Fineman, 1993). In so
doing, the study participants emphasised that for learning on the board
to take place (which in turn leads to considered action) attending to
both positive and negative emotions is required.
Discussion
All of the study participants narrated that the sharing of experience in
the boardroom is critical to opening up conversation in order to reach
meaningful decisions. Inducing an open sharing of experience was
dependent on the chairman’s skill to surface the sentiments each board
member held about the board, its directors and the chairman. The data
reveals two intertwined but over-arching dimensions that are instrumental in the surfacing of sentiments, namely, the sharing of positive
experiences and the sharing of negative experiences. Juxtaposing these
two dimensions, the study surfaced four board identities which can as
much discourage learning and conversation as encourage learning and
positive dialogue (see Figure 13.1):
1. Inhibited board: Low sharing of negative experience and low sharing
of positive experience.
2. Self-congratulating board: Low sharing of negative experience and
high sharing of positive experience.
Action Oriented Board
Learning Board
Inhibited Board
Self-Congratulating Board
Low
Sharing Negative Experience
High
Boardroom Behaviour
Low
High
Sharing Positive Experience
Figure 13.1
Boardroom behaviour
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Nada K. Kakabadse et al.
3. Action-oriented board: High sharing of negative experience and low
sharing of positive experience.
4. Learning board: High sharing of negative experience and high sharing of positive experience.
The study results support previous findings that emotional information is as much a legitimate source of knowledge about reality as
information provided through systems and structures (Sousa, 2004).
Constructs related to social sharing through the surfacing of positive
emotions have been identified as inducing moral building, enhancing
of communication, offering of support, displaying a positive attitude,
providing encouragement and showing enthusiasm, which together foster a shared memory of a rewarding experience (Jehn and Shah, 1997).
Constructs related to the raising of negative emotions have been identified as unwelcome painful experiences, but if well handled foster caring,
empathy, support, compassion and constancy (Kahn and Isen, 1993).
Most of the study participants expressed themselves as more comfortable to be around other directors who projected a ‘happy disposition’,
but equally admitted that boards that share only positive emotions
can engender ‘political’ behaviour where directors focus on ends
rather than means. In effect, attention concentrates on what can be
achieved without exploration of the pitfalls to be faced and the need
for capability development to realise the stated aims of the board and
the organisation. In contrast, the study participants narrated that the
sharing of negative experiences engenders a cathartic release, which
acts as a precursor to action but then needs considered deliberation
to better guarantee a quality outcome. Such sensitive but penetrating
discussion requires that board members trust each other. A number
of the study participants narrated that trust is only realised by board
directors behaving authentically. Authentication is conceptualised as
being unpretentious, through being unmasked of thought, feelings and
beliefs (Khan, 1992). To be viewed as authentic, the study participants
considered it important for board directors to feel genuine about their
emotional welfare and the board environment which they inhabit.
Being authentic is recognised as ‘owning one’s personal experiences, be
they thoughts, emotions, needs, preferences, or beliefs, processes captured by the injunction to know oneself’ (Harter, 2002: 82).
I have a very deep philosophy about human participation and
I encourage people to be true to themselves in whatever they do,
because I think that’s where they find the space and energy that
Aligning the Board: The Chairman’s Secret
373
allows them to fulfil their greatest potential and to exercise their
gifts that are unique to each person. I think that every board member has special gifts that are often not exercised because people are
encouraged by social norms and inauthentic behaviour. (Participant
11, Chairman)
Participant 11 draws attention to the challenge of being authentic primarily because of the feeling of being unable to express negative emotions, which has its toll on the individual. As noted by one participant
‘having a permanent grin on your face comes with a price’ (Participant
8, NED). One study participant went further and linked the suppression
of negative emotions to ‘burn out’, with the only way of coping being
to ultimately exit the board.
You can suppress your feelings only for so long and then comes
the time that you must do something about it. You must assess the
situation and air things in the boardroom or if you think that the
climate is not right for such discussion you must leave. There is no
point in making yourself ill. In retrospect, after many sleepless nights
and unsuccessful attempts to bring issues on the table, I resigned. It
was the sensible thing to do. (Participant 2, CEO)
Conclusion
The study participants emphasised the social benefits of raising and
deliberating the social experiences of the board such as the emotions
evoked through undergoing critical events, the changing of board members or facing a setback. Through making these experiences the object
of dialogue, encounters became legitimised which then allowed the
board members to trust their own co-construction of events. The study
emphasises the need for quality dialogue on the board where ‘truth’ is
not seen to hold in any particular point of view, but more the dialogue
between points of view.
Within this process, the study participants emphasised the need for
trust in order to permit deep-seated sentiments to emerge. One of the
essential elements to building trust is the perception that each actor
would raise sensitive concerns in a constructive way, given the space to
do so (Butler, 1991; Mayer et al., 1995). Other factors that lead individuals to trust each other include behavioural constancy, fairness in the
treatment of others, behavioural integrity, accurate capture of events,
openness and naturally expressing concern for people and situations
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Nada K. Kakabadse et al.
(Butler, 1999; Whitener et al, 1998). ‘The best device for creating trust is
to establish and support trustworthiness’ (Hardin, 1996: 29). Additionally
dependability and emotional security provide for a unique form of trust
which in turn allows for expressions of care and concern (Granovetter,
1985; Rempel et al., 1985).
The study highlights that trust between critical actors can be achieved
by facilitating communication dynamics that balance the forensic penetration of inquiry against the comfort of camaraderie amongst colleagues necessary for meaningful dialogue. Through so balancing,
the actors involved can better grasp the underpinnings of the broader
themes they face,
one can listen, ask direct questions, present one’s ideas, argue,
debate, and so forth. The defining characteristic of dialogic communication is that all of these speech acts are done in ways that hold
one’s own position but allow others the space to hold theirs, and
are profoundly open to hearing others’ positions without needing
to oppose or assimilate them. When communicating dialogically,
participants often have important agendas and purposes, but make
them inseparable from their relationship in the moment with others
who have equally strong but perhaps conflicting agendas and purposes. (Pearce and Pearce, 2004: 45)
Creating space for communication through dialogue is an evolving
delicate craft rather than a fixed technique which the study participants considered as only certain experienced chairmen have mastered.
The making of space requires discipline and time, and demands a willingness to reflect on individual and group communication habits and
power relationships. Equally important is the determination to experience different ways of relating to each other within a formal context
such as the boardroom. The study participants profoundly recognised
that dialogue promotes sharing of experiences, doubts, deep-seated
emotions as well as pleasurable encounters between board members
which in turn builds the trust to surface troubling sentiments. All this
is done by opening up conversation about alternative ways of speaking and knowing which encourages imagination and through so doing
averts a crisis mentality and provides important information for decision making.
The social sharing of emotions serves an opportunity for reappraisal
leading to new interpretations of events. In doing so, a further human
need is identified that of satisfying the need for affiliation, status and
Aligning the Board: The Chairman’s Secret
375
recognition (Fineman, 1993). This study has identified that where the
surfacing of emotions becomes a board norm, the directors engage less
in political behaviour.
Boards need quality conversation. There is always room for a challenge, some disagreement and critical interjection. But if the boardroom ends up being a battle ground then it does nobody any good.
The sharing of sentiments can be catalytic for a board. However,
there is a fine balance to strike between being on somebody’s side,
exchanging emotional support and being that critical friend. The
end result is trust, rapport and not being driven by likes and dislikes.
(Participant 17, Chairman)
An effective board member needs to know how and when to challenge. Criticism, even when constructive, can be difficult for executive members to take. However when that balance is reached, those
negative politics between us disappear and the positive politics of
addressing each proposal on its merits and arguing on behalf of the
position one has adopted, takes over. (Participant 19, Chairman)
The study results emphasise that the social sharing of emotions helps
form strong personal ties, which run much deeper than just interpersonal affects, namely the idiosyncrasy of likes and dislikes (Granovetter,
1973; Casciaro and Lobo, 2005).
The study reported in this chapter highlights that if the board is to
prepare itself to face stretching challenges, it is critical to find ways to
surface those sentiments that have inhibited board members from not
facing up to the issues that have lingered from the past. Whilst cognisant of the sensitivity of relationships, directors can make these sentiments the object of dialogue and in so doing legitimise the exploration
of negativities through each individual’s co-construction of events.
The findings indicate that the greatest challenge to dialogue is to surface inhibiting tensions. From such a perspective, it would be easy to
conclude that it is solely the chairman’s responsibility to nurture an
interactive board culture. The study findings however emphasise that
each individual board member needs to separately and additionally consider how to find ways to raise positive and negative sentiments in order
to help the board develop the skill and courage to speak openly and in a
way that others find supportive. Yet despite this proviso, the study results
highlight that unless the chairman creates a climate for surfacing past
resentments for the benefit of the board, little progress will realistically
be made in confronting continuous and damaging tensions. Perhaps
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the most worrying concern is the blatant conspiracy of silence that can
plague a board and the need to work through the spread of emotions that
bedevil open discussion. This well-kept secret is only prised open by an
act of courage, more often than not, initiated by the chairman.
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Index
Abeline paradox, 220
absenteeism, 58, 65
academic institutions, 25–6
Acciona, 120, 125
accountability, 106, 205, 217–18, 312
advisory role, 178, 190–1
age, 122
of board members, 99–100
of chairman, 342–56
agency problem, 11, 16, 316, 362–3
agency theory, 47, 48, 77, 361–2, 363
alignment, 360–76
Anglo-American corporate
governance model, 28, 44, 48–9,
53, 63–4, 110, 195, 311, 321, 332
Anglo-American Platinum, 120, 125
Anglo-American relations, 16
annual reports, 87–8
Apple, 20, 23, 26, 52
appraisals, of directors, 230–4
Arab Spring, 18, 22
arms exports, 17
Asia, executive pay in, 108
audit committees, 176, 192
austerity programmes, 30
Australia, 112
banking sector, 14, 17–18
Bank of New York, 14
Bank of Scotland, 14
Barclays, 26
Belgian Corporate Governance Code,
212, 272
Bilderberg group, 95
Bill of Rights, 44
black box, 204
Black Tuesday, 13
Blackwater, 17
board committees, 112, 191–3, 222–3,
246, 257
board dialogue, 3, 224–5, 366–76
board dynamics, 228–9, 260–2, 264,
292, 363–4, 366–76
board effectiveness assessment tool,
4, 116–21, 153–82
board information, 241–6
board meetings, 216
agenda setting for, 238
effective, 237–40, 263
engagement outside of, 239–40
flaws in, 239
minutes of, 242–3
time management for, 237–9, 280–1
board members
age of, 99–100, 122
assessment of, 230–4, 262–3
communication among, 297,
302–3, 304, 307, 366–76
compensation of, 201–3
demographics of, 298, 300–1
distance between Chairman and, 6
diversity of, 97–102, 122–3
education process for, 247–9
ethnicity of, 100–2
gender of, 97–9, 122–3, 196–7, 251
induction of, 247–9
professionalism of, 228–37, 262–3
relationships between, 254, 363–4
re-nomination of, 258–60
roles and responsibilities of, 5
turnover, 109
typologies of, 235–7
boards of directors
advisory/support role of, 178,
190–1
alignment of, 360–76
CEO and, 167–9, 188, 198, 312–13,
328–30
challenges facing, 3
as collegial bodies, 188–93, 206,
226–7, 260–1
composition of, 193–8, 207–8,
249–60, 264, 292
corporate performance and, 153
cultural dynamics, 4, 110–12, 119,
124
381
382
Index
boards of directors – continued
decision-making role of, 162, 163,
189, 211–65
diversity, 27–30, 97–114, 116, 118,
122–3, 196–7, 208, 218–19, 251,
257
effectiveness of, 111–12, 116–21,
137–51, 153–82, 312, 363–4
empowerment of, 159
evaluation of, 111–12, 144–9,
153–82
independence of, 106–7, 190,
193–6, 207, 218–19, 250–1,
318–20, 328–30
information for, 241–6, 263–4
inside-out perspective on, 2
internationalisation of, 102–3
leadership, 5, 104–9, 118, 123–4,
268–9, 342–3
leadership role of, 164–70, 180
management and, 161, 166–7,
198–200, 313
monitoring role of, 174–8, 180, 181,
190–1, 207, 250, 312, 313, 362
optimal size of, 249–50
outside advisors for, 245–6
outside-in perspective on, 2
oversight function of, 312–13
performance of, 4, 163–4
recruitment, 103–4, 123, 252–8,
285
redesigning, 11–33
reinvention of, 4, 95–126
roles of, 11, 163–78, 190–1, 200–3
selection process for, 251–2
strategic role of, 170–4, 180–1,
190–1, 344
structure of, 22–7, 103–14, 197,
200–1, 207, 271–2
supervisory function, 193
task performance, 162–78
tensions and tradeoffs in, 4–5
trade-offs by, 187–209
Board Support Survey, 246
board vacancy profile, 254–8
bonuses, 53, 108
bounded rationality, 215
Branson, Richard, 116
Brazil, 101
BRIC countries, 101, 114
British Broadcasting Corporation
(BBC), 25, 109
British East India Company, 12–13,
16, 29, 30
business context, 159–60
Cadbury Code, 26
capital, 26, 28
capitalism, 17, 27–8
Central Intelligence Agency (CIA),
3, 68
CEO, see chief executive officer (CEO)
chairman of the board, 268–88
age of, 6, 342–56
assessment of, 234, 285
attributes of effective, 348–9
board alignment and, 360–76
CEO and, 5, 104, 106, 268–72, 288,
292–3, 296
ceremonial, 286–7
challenges facing, 272–6
corporate performance and, 343–4
as decision facilitator, 281–4
decision-making and, 227–8,
274–84, 288
decision-making style of, 276–80
demographics of, 298
development of, 284–5
dual CEO role for, 311–35
effectiveness of, 297, 302, 306
future of, 284–7
high-performing, 342–56
independence of, 106–7
influence of, 363–4
interaction between board
members and, 6
isolation of, 6
leadership attributes of, 292–308
nomenclature, 271
role of, 5, 272–6, 292–7, 301, 303–6,
342–9, 360–76
selection criteria for, 287
surveys on, 297–308
time investment by, 287
as time manager, 280–1
tips and tricks for non-executive,
286
Cheney, Dick, 17
Index
Chevron, 17
chief executive officer (CEO)
background of, 103–4, 108–9
board and, 167–9, 188, 198, 328–30
Chairman and, 5, 104, 106, 268–72,
288, 292–3, 296
in Chinese state-owned enterprises,
3–4, 75–91
dissenting opinions and, 222
dual chairman role for, 311–35
influence on decision-making, 227
leadership of, 325–8
monitoring of, 312
pay levels for, 45–69, 75, 107,
320–1, 330–2, 344
power of, 312–13, 344
role of, 5, 107, 292–3, 296–7, 301,
303–4, 305–6
talent of, 324–5
turnover, 109
China, 15, 23, 101
Confucius, 29
corporate governance in, 75–91
executive remuneration in, 3–4,
75–91
China Gas Company, 14
China Mobile, 29
China Security Regulatory
Commission (CSRC), 87, 89
Cigna Insurance, 14
Citibank, 14
cities, 26–7
Code of Corporate Governance, 95,
296
cognitive diversity, 218
collective decision-making, 189,
211–16
chairman’s role in, 274–84
consensus and, 226–8
dissent and, 219–26
effective, 218–19
group think and, 217–18
independence of, 218–19
collective wisdom, 270
collectivist cultures, 29
collegial bodies, 188–93, 206, 226–7,
253, 260–1
colonialism, 16
commodities, 28
383
Communications Assistance for Law
Enforcement Act, 23
communications technology, 28
communism, 17
Communist Party of China (CPC),
30, 88
communitarian thinking, 110
compensation packages, 108
see also executive remuneration
competencies, 255–7
competition, 17
concessionist thinking, 110, 124
confidentiality, 204
conflict management, 225–6
conflicts of interest, 106, 108
conformity, 217
Confucius, 29
Congo, 18
consensus, 4–5, 206, 217, 221, 226–8,
352–3
constructive criticism, 219–23
consumer goods, 26
Consumer Protection Act, 95
continuing education, for directors,
247–9
corporate collapse, symptoms
of, 95
corporate context, 159–60
corporate culture, 22–7
corporate Gini index (CGI), 3, 55–7,
62–8
corporate governance, 311–12
Anglo-American model of, 28, 44,
48–9, 53, 63–4, 110, 195, 311,
321, 332
‘best fit’ structure for, 157–62
China, 75–91
codes, 4, 137–44, 212, 249–52,
294, 296
corporate context factors affecting,
159–60
executive remuneration and,
52–5, 75
external contingency factors
affecting, 158–9
externally monitored, 138–40
history of, 319
holistic framework for, 153–82
internal assessment of, 144–9
384
Index
corporate governance – continued
internal contingency factors
affecting, 160–2
Latin model of, 63
Madisonian model of, 318–19
national frameworks for, 140–1
practices, 95
regulations, 95, 187, 314
U.S., 318–35
value drivers, 142–3
corporate performance
board practice and, 153
chairman and, 343–4
corporate Gini index and, 62–8
executive pay and, 51–69, 320–1
income inequality and, 57–69
remuneration based on, 202–3
corporate scandals, 25, 26, 52, 104,
112, 314, 316, 342–3
corporate social responsibility (CSR),
16, 110, 126, 165
corporations
characteristics of, 13
cyclical change, 14–16
dominance of, 28
emerging market, 101
expectations for, 110
externalities affecting, 14–15
future role of, 31–3
geo-politics and, 16–19
headquarters of, 29
interests of, 24
overview of, 12–13
power of, 18, 95
purpose of, 19–21
remuneration in, 3
role of, 3
theories of, 24–5
wealth controlled by, 22
corruption, 17
critical stakeholders, 205
cronyism, 17
crystallized intelligence, 354
CSR, see corporate social
responsibility (CSR)
cultural dynamics, 4, 110–12, 119,
124
culture, corporate, 22–7
cyclical change, 14–16
decision-making
board meetings and, 216
chairman and, 227–8
chairman’s role in, 227–8, 274–84
collective, 189, 211–16, 217–28
collegial, 188–93, 206, 226–7, 253,
260–1
consensus and, 226–8
default, 278
effective, 211–65
expertise, 234–5
eye-to-eye, 278
facilitation of, by chairman, 281–4
influence of group members on,
217–18, 261
information for, 241–6
non-board members and, 227
older individuals and, 353–5
postponement of, 227
process, 216
professional behaviour and, 228–37
role, of board, 162, 163
self-sufficient, 277–8
steps for constructive, 224
suggestions for, 215
traditional, 278
de-humanisation, 31
democracy, 15
Deng, Xioping, 79
Denmark, 97, 99
developing countries, capital inflows,
15–16
development cycle, 28
dialogue, 3, 224–5, 366–76
digital music industry, 23
director information, 240–9, 263–4
director typologies, 235–7
disclosure, 205, 208–9
dissent, 219–26, 261–2
diversity, 4, 27–30, 97–114, 116, 118,
122–3, 196–7, 208, 218–19, 251,
257
Dodd-Frank Act, 17, 95
Dow Jones Sustainability Index, 20,
110
dual board structure, 106–7, 109, 124,
292–3, 311–35
Dupont, 14, 24
Index
Durantez, Miriam Gonzales, 125
Dutch Enterprise Chamber, 242
DynCorp, 17
earnings per share (EPS), 64
East Asia, 28
East India Company, 12–13, 16, 29, 30
eco-corporations, 20–1
ecoDa, 246
economics-based theories, of
executive pay, 48, 50
economic value added (EVA), 51–2
Edison, Thomas, 26
education, 25–6, 31, 108, 123, 247–9
effective engagement, 6
Egypt, 18, 26
elites, 22, 103–14
emerging market corporations
(EMCs), 101
Emirates Airlines, 30
emotional intelligence, 294
employee performance measures,
58, 65
employee stock options (ESOs), 52
employment, 19, 31
Enron, 25
Entwistle, George, 109
environmental degradation, 19, 27
environmental disasters, 18–19
Environmental Performance Index
(EPI), 19
ethnicity, 100–2
Europe, 126
executive pay in, 108
sovereign debt crisis, 15, 96
European Central Bank (ECB), 15
European Data Retention Directive,
23
Eurozone, 18
executive directors, 45, 82, 190–1,
197, 198–200, 207, 240
executive performance
monitoring, 168–9
remuneration and, 51–69, 170
executive remuneration, 3, 19, 26,
320–1, 344
board leadership and, 96
board’s role in setting, 170
for CEO, 320–1, 330–2, 344
385
in China, 3–4, 75–91
corporate Gini index (CGI) of, 55–7
corporate performance and, 51–69,
170
disclosure of, 87–8
evolution of, 60
governance and, 52–5, 75
income inequality and, 44–5
mainstream perspective on, 52–5
perceptions of, 82–4
performance and, 170, 320–1
process of setting, 84–7
regulatory action on, 54–5
rise in, 44–7, 75, 107
standards for, 90–1
structure of, 78–9
theories of, 47–51, 77–8
trends in, 108
in U.S., 45–7, 108
expert power, 274
external contingency factors, 158–9
external norms, 230–4
Facebook, 14
female board members, 97–9,
122–3, 251
financial regulations, 17
financial sector, 17–18
food industry, 22–3
Ford, Henry, 26
foreign direct investment, 30
France, 15
frugal engineering, 115
FTSE4Good index, 20, 110
future trends, 30–1
Gazprom, 29–30
gender balance, 97–9, 122–3, 196–7,
251
General Electric, 14, 24
geo-politics, 16–19, 29
Germany, 24
Ghohosn, Carlos, 115
Gini index, 55–7
Global Competitiveness Report, 112
global financial crisis (GFC), 13–15,
17, 75–6, 95, 113, 194, 204, 314,
344
global governance, 21–2
386
Index
globalisation, 18, 28, 44, 96
good governance, 194–5
Google, 23
governance
corporate. see corporate governance
country, 24
effective, 229–30
executive remuneration and, 52–5,
75
global, 21–2
good, 194–5
inside-out perspective on, 2
internal, 177
outside-in perspective on, 2
publications on, 1
governance codes, 4, 137–44, 212,
249–52, 294, 296
Great Eastern Life Assurance, 14
Greece, 15, 18, 26
green agenda, 18
group decision-making, see collective
decision-making
group dynamics, 213
group norms, 221
group think, 217–18, 261
GUBERNA, 151n1, 202, 229, 285
Halliburton, 17
Harrods, 14
headquarters, 29
herding, 218, 261
Honduras, 17
Hong Kong and Eu Yan Sang, 14
hostile takeovers, 344
human rights abuses, 17
Iacocca, Lee, 344
IBM, 14, 24
income inequality, 44–5
corporate performance and, 57–69
measurement of corporate, 55–7
income scale, 56
independence, 106–7, 190, 193–6,
207, 218–19, 250–1, 318–20,
328–30
India, 15, 101, 114–16
indigenous populations, 29
Indonesia, 15
induction process, 247–9
information, board, 241–6, 263–4
innovation, 4, 23, 26, 31
capital and, 28
jugaad, 113–16, 119–20, 124–5
patterns, 24
sustainable, 4, 113–16, 119–20,
124–5
value creation through, 25
insiders, 251
Institute of Charted Secretaries and
Administrators (ICSA), 246
intellectual property, 23
Interactive Corp, 52
internal contigency factors, 160–2
internal governance, 177
internal norms, 230–4
internationalisation, 102–3, 122
International Labour Organisation
(ILO), 19, 55
International Monetary Fund (IMF),
21
Iraq, 18
Ireland, 15, 26
Italy, 15
Japan, 15, 46
Johansson, Leif, 46
Johnson Controls, 123
JP Morgan, 14
jugaad innovation, 113–16, 119–20,
124–5
Juncker, Jean-Cleade, 107
key performance indicators, 176
Kodak, 24
Komatsu, 124
Kongo Gumi, 12
Latin corporate governance model, 63
leadership, 4, 5, 104–9, 118, 123–4,
164–70, 180, 268–9, 271, 292–
308, 325–8, 342–3
Lehman Brothers, 14
Leveson Inquiry, 23
Libya, 18, 26
life expectancy, 27
limited liability, 30
Limited Liability Act, 13
Lloyds TSB, 14
Index
lobbying, 17
Lockheed Martin, 17
London riots, 22
Magna Carta, 44
Malaysia, 15, 23
Malian Empire, 22
management model, 161
Mansa Masu I, 22
media, 23
mentoring, 4
mercantilism, 12
Merck, 14
Mercury, 52
Microsoft, 14
migration, 31
mobile communications, 23
monitoring, 4, 174–8, 180, 181,
190–1, 207, 250, 312, 313, 362
multiple directorships, 123, 125
Murdoch, Rupert, 109
myelin, 354
national debt, 15, 16
National Foreign Trade Council
(NFTC), 17
natural resources, 19
neo-liberalism, 15
Nestle, 14
networks, 17, 26, 27, 32–3, 101, 103–14
Newscorp, 25, 26
News of the World scandal, 23
New Zealand, 112
NIFO (Nose In Fingers Out) method,
240
Nigeria, 17
Nokia, 23
nomination committee, 196, 251–2,
253
non-executive directors, 87, 140, 144,
159, 162, 166, 188–94, 197–203,
206–9, 215, 221, 222, 227, 229,
235, 240–5, 250, 263–4, 360, 366
norms, 230–4
Northern Rock, 14
Norway, 99
Occupy Wall Street (OWS), 44
old boys networks, 251
387
oligopoly, 17
one-tier board structure, 197, 207
organisation theory, 269
outside board advisors, 245–6
oversight function, 312–13
ownership power, 274
Oxford University Press, 14
Pepsi, 17
performance competence, 324–5
performance management, 176,
190–1
performance targets, 190
Petro China, 16
phronesis, 6, 351–3, 355–6
population growth, 28, 30, 113
population principle, 56
poverty, 19
power perspective approach, to
executive pay, 47, 48, 49, 77
practical wisdom, 351–2, 353, 355–6
prestige power, 274
private security, 17
professional directors, 240
professionalism, 208, 228–37, 262–3
profit maximisation, 26
public private partnerships (PPPs), 30
public sector expenditures, 30
Qatar, 18
quantitative easing, 15
questioning style, 226
recruitment process, 103–4, 123,
252–8, 285
red flags, 174–8
regulations, 111
on board nomination, 252
corporate governance, 95, 187, 314
on executive pay, 54–5
relational networks, 26, 27, 32–3,
103–14
remuneration, see executive
remuneration
Renault-Nissan, 115
re-nomination, 258–60
resource scarcity, 19, 27
Rice, Condoleezza, 17
ring-fencing, 17
388
Index
risk management, 176
role separation, 6, 104, 106, 268–9,
271–2, 292–3, 311–35
Rolls Royce, 14
Royal Mail, 14
Russia, 23, 29–30, 101
SABIC, 29
salami technique, 227
Samsung, 23
Sarbanes Oxley Act, 26, 344
Scandinavia, 99, 112, 126, 196
school social networks, 101
Schweppes, 14
sea levels, 30
Securities and Exchange Commission
(SEC), 252, 314, 344
self-regulatory principles, 158, 163
sense-breaking, 352
SEOs,see state-owned enterprises
(SEOs)
shareholder model, 161
shareholder return, 165
shareholders, 195–6
Shell, 17
Siemens AG, 124
Simon Property Group, 19
Singapore, 112
Smith, Adam, 13, 29
social inequality, 3
social networks, 101
social reasoning, 354
social reform, 28
social unrest, 22
socio-comparative theories, of
executive pay, 49, 50–1
socio-political perspective, on
executive pay, 48
soft skills, 233
South Africa, 5–6, 16, 24, 112, 295–6,
299–301
sovereign debt crisis, 15, 96
Spain, 15, 26
specialisation, 191–3, 257
stakeholders
critical, 205
interests of, 164–5, 180
start-ups, 160, 203
state-owned enterprises (SEOs), 29–30
executive remuneration in, 3–4,
75–91
stewardship theory, 269, 363
stock options, 52, 108, 344, 362
Stora Kopparberg, 13
strategy, 170–4, 180–1, 190–1, 344
structural power, 274
student plagiarism, 25
sub-prime mortgage crisis, 25, 95
succession leadership, 123–4
succession planning, 168
Sugar, Alan, 116
Suncor Energy, 24, 120, 126
supervisory function, 193
surveillance, 23
sustainability, 18, 20, 24
sustainability index, 20
sustainable innovation, 4, 113–16,
119–20, 124–5
Svanberg, Carl-Henric, 46
Sweden, 46, 99
Swiss Federal Institute (SFI), 22
Syria, 18, 21
Takamatsu Corporation, 12
talent, 324–5
talent management, 168
task performance, 162–78
Tata, 101
taxation, 20, 31
technological change, 14
technology, 23
communications, 28
future trends, 30–1
industries, 23
Thailand, 15
time management, 237–9, 280–1
tournament theory, 48, 49–50
trade-offs, 4–5, 187–209
in board composition, 193–8, 207–8
between direction and control, 207
to ensure collegial atmosphere,
188–93, 206
to ensure non-executive role
performance, 200–3
to reach consensus, 206
to reach professional board, 208
in relation between executives and
non-executives, 198–200
Index
for transparency, 204–5, 208–9
transfer principle, 55
transnational corporations, see
corporations
transparency, 20, 25, 54, 106, 177–8,
204–5, 208–9, 217–18, 288
trust, 26, 27, 328–30
turnover, 58, 65, 109
Unilever, 14
unitary leadership, 106, 250, 268–9,
271
United Kingdom, 15, 23
austerity programmes, 30
banking sector, 17–18
executive pay in, 45
London riots, 22
United States, 23, 126
chairman/CEO/president in, 6
corporate governance in, 318–35
executive pay in, 45–7, 108, 320–1
national debt, 16
quantitative easing policy, 15
389
universities, 25–6
vacancy profile, 254–8
value, 4
value creation, 25
Vestas Wind Systems, 120
Volcker Rule, 17
wages, 19, 60, 61–2
Walker Report, 247, 287
Walmart, 19, 25, 28
water scarcity, 19
wealth distribution, corporate, 57–69
wealthiest persons, 22
Wealth of Nations (Smith), 13
wisdom, 6
women, on boards of directors, 97–9,
122–3, 196–7, 251
World Bank, 21
World Economic Forum (WEF), 56
World Health Organisation (WHO), 21
World War I, 16
World War II, 16