Boards: When Best Practice Isn't Enough

Abstract:     

Why is it that despite all the corporate governance reforms undertaken over the past two decades, many boards failed the test of the financial crisis so badly?

Recently, the European Commission, US Congress, and others found serious deficiencies in the way boards, particularly at financial institutions, guided strategy, oversaw risk management, structured executive pay, managed succession planning, and carried out other essential tasks. But it’s a sure bet that most of these boards would argue - and demonstrate - that they had best practice structures and processes in place.

The answer is that such best practice isn’t good enough, even if your board is stacked with highly qualified members. Without the right human dynamics, the board’s contribution to the company’s fortunes is likely to fall short of what it could and should be, no matter how good its processes are.

Identifying the contours of a fluid interpersonal exchange isn’t easy. But executive and non-executive directors can apply three tests to assess the human dynamics of their own boards: 1. Do our directors think and act like owners? 2. Does our CEO have a collaborative mindset? 3. Does our board guard its authority and independence?

Note: This article has been adapted from “Elevating Board Performance: The Significance of Director Mindset, Operating Context, and Other Behavioral and Functional Considerations," available at http://ssrn.com/abstract=1832234.

Number of Pages in PDF File: 7

Keywords: Board of directors, mindset, human dynamics, authority and independence

JEL Classification: G34, M14