Elevating Board Performance: The Significance of Director Mindset, Operating Context, and Other Behavioral and Functional Considerations
Simon C. Y. Wong
Northwestern University School of Law; London School of Economics
Northwestern Law & Econ Research Paper No. 11-12
The global financial crisis has prompted debate once again on how to improve the effectiveness of the board of directors at listed companies. Despite considerable reforms over the past two decades, boards – particularly at financial institutions – have been criticized recently for failing to properly guide strategy, oversee risk management, structure executive pay, manage succession planning, and carry out other essential tasks.
This article argues that the lack of attention to behavioral and functional considerations – such as director mindset, board operating context, and evolving human dynamics – has hampered the board’s effectiveness.
To reach their potential, the article recommends that – alongside establishing core building blocks such as appropriate board size, well-functioning committees, proficient company secretarial support, and professionally-administered board evaluation – boards and their members focus on the following:
1. Think like an owner – as boards represent the interests of owners, directors should adopt an ownership mindset. However, non-executive directors, while generally hard-working and earnest, often have a limited conception of their roles. An ownership mindset can be instilled by, among other things, recruiting directors who exhibit energy, a proactive attitude, and an independent mind, involving them meaningfully in substantive board work, strengthening their emotional bonds to the company, and employing long-term financial tools.
2. Know their companies – for a board to add value, individual directors must possess a strong understanding of the company and its industry. However, getting outside directors to be functional is challenging in practice. Boards can build in-depth knowledge and expertise by, among other things, emphasizing interactive, experiential modes of information acquisition, inviting "dissenting" opinions from the outside, and ensuring that a meaningful proportion of non-executive directors possess sector expertise.
3. Be prepared to “roll up their sleeves” – there is broad acceptance that listed company boards should operate on the basis of “noses in, fingers out.” However, to properly discharge their stewardship responsibilities, boards must engage intensively in such critical areas as strategy development and risk management. On matters where management faces severe conflicts of interest, such as CEO succession planning and executive remuneration, boards must "roll up their sleeves" and drive the work.
4. Take charge of their priorities – the board’s responsibilities have broadened over the years, including following the global financial crisis. As most boards still meet only 8-10 times a year, they need to prioritize their activities and manage their time efficiently. Because the board and management may not always hold the same view on priority issues, boards should decide their top priorities rather than rely solely on management to determine the board's agenda. Operationally, boards should limit the time spent on routine and "backward-looking" matters and ensure they are not rushed on important decisions.
5. Hire a collaborative CEO – boards are highly reliant on management to provide them with information on the company and must therefore ensure a collaborative CEO is in place. This can be accomplished by looking for collaborative traits when selecting a new CEO, incorporating collaboration with the board into the CEO’s job description, and providing regular feedback. In turn, boards can enhance management's willingness to cooperate by demonstrating an ability to add value and not micro-managing the executive team.
6. Protect their authority and independence – to be effective, the board must possess adequate authority and independence from management. However, board authority ebbs and flows and independence of mind is likely to erode over time. Boards can protect their standing and objectivity by separating the roles of chairman and CEO, keeping on top of succession planning and leadership development, paying attention to the relative status of people in the boardroom, and putting in place term limits for directors and the CEO.
Note: Condensed versions of this article have been published in the McKinsey Quarterly (available at http://ssrn.com/abstract=1872324) and Butterworths Journal of International Banking and Financial Law (available at http://ssrn.com/abstract=1886004).
Number of Pages in PDF File: 33
Keywords: Board of directors, mindset and behavior, board culture, independence and authority
JEL Classification: G34, M14working papers series
Date posted: May 13, 2011 ; Last revised: July 15, 2011
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
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