Corporate Governance and Boards: what good governance codes fail to tell you about board effectiveness Dr Silke Machold Reader in Governance and Ethics.

Corporate Governance and Boards: what good

governance codes fail to tell you about board

effectivenessDr Silke Machold

Reader in Governance and Ethics

The problem

Mace, 1971

Anglo-Irish Bank: “'a cosiness' around the boardroom table”; “no formal plan in place – reactions are instinctive when crisis strikes”, (Hague in Carswell, 2011)

RBS: “There were people in that boardroom during the ABN Amro takeover who must have thought 'this is madness', but no-one was prepared to stand up to Sir Fred. I know people who worked for him, and it was a case of 'yes Sir, no Sir, three bags full, Sir.” (Buik, 2009)

Boards and good governance codes

Board structure & composition• CEO/Chair duality• % non-executive directors• Sub-committees• Unitary/two-tiered board• Multiple directorships• Board diversity

Firm Performance

The ‘usual suspects’(Finkelstein & Mooney, 2003)

Company % Outsiders % directors with shares

Board size CEO duality

A 86 100 14 No

B 75 100 12 No

C 73 100 11 Yes

D 67 100 18 No

The problem with the ‘usual suspects’ Company % Outsiders % directors

with sharesBoard size CEO duality

Enron 86 100 14 No

WorldCom 75 100 12 No

Tyco 73 100 11 Yes

RBS 67 100 18 No

Meta-analyses show that there is no conclusive empirical evidence linking board structure to performance (Dalton et al., 1998).

“Great inferential leaps are made from … board composition to… board performance with no direct evidence on the processes and mechanisms which

presumably link the inputs to the outputs.” (Pettigrew, 1992:171)

What do boards do?

Firm Performance

Board structure & composition

What boards (should) do

Firm Performance

Board structure & composition

Board Task PerformanceMonitoring & control task

Service (resource provision,advice, networking…)Strategy involvement

0

20

40

60

80

100

120

140

160

180

Alpha Beta Gamma Delta Epsilon Zeta

M&C Strategy Service Other

The board as a team

Firm Performance

Board Task Performance

Board structure & composition

Board Processes & BehavioursUse of knowledge & skills

Pluralistic ignoranceEffort norms

Trust & cohesivenessSocial distancing

ConflictLeadership

Board leadership study (Machold et al., 2011)

• structure vs. process & behaviours• Leadership as multi-dimensional construct:

ensuring right knowledge & skills and use of these, initiatives to improve board work, and effective leadership

behaviours• Leadership in small firm boards

Results

H1: There is a positive relationship between board members knowledge and strategy involvement.

Supported β .20*β .31***β .21*Adj R2 .27F change 15.19***

H2: There is a positive relationship between board development and board strategy involvement.

Supported

H3: There is a positive relationship between chairperson leadership efficacy and board strategy involvement.

Supported

H4: In firms with CEO duality, positive relationship between leadership efficacy and board strategy involvement will be strengthened.

Supported β .15*Adj R2 .29

H5: The negative relationship between recent changes in board composition and board strategy involvement is positively moderated by leadership efficacy of board chairperson.

Supported β -.19*β .17Adj R2 .36

Implications for practice

• Board member selection – firm-relevant knowledge

• Board development initiatives – away days, training, board evaluations

• Effective leadership behaviours – establishment of process-

oriented board climate

Cognitive conflict

Task-oriented disagreement

Differences in viewpoints, opinions, ideas

Associated with positive team outcomes (Jehn, 1995; Pelled et al. 1999, Zona & Zattoni, 2007; Minichilli et al. 2009)

Affective conflict

Personality or relationship conflicts

Clash in emotions and feelings, search for blame

Associated with negative team outcomes (deDreu & Weingart, 2003; Runde & Flanaghan, 2008

Some initial results (Walker & Machold, 2011)H1: Personality trait diversity is positively related to CC.

Not supported – significantly negative

β=-.21*Adj.R2 =.34

H2: Personality trait diversity is positively related to AC.

Not supported (ns) β=.02

H3: Age and gender diversity are positively related to CC, but less significantly than personality trait diversity.

Partial support Age β=-.15Gender β=.24+

H4: Age and gender diversity are positively related to AC, but less significantly than personality trait diversity.

Not supported Age β=.00Gender β=.12

H5: Tenure diversity is positive related to CC. Supported β=.35***Adj.R2 =.30

H6: Tenure diversity is positive related to AC. Supported β=.68***Adj.R2 =.60

Other findings

• % non-executive directors has strong negative relationship to both cognitive and affective conflict (β=-.44*** and -.75*** respectively) – failure to challenge executive team

• Also significant negative relations between company size & turnover – large companies and growing companies have less conflict in boards

• Board size matters for affective conflict (β=.27**)

Implications for practice

• Diversity matters – but not quite as we thought!• having different tenure cycles may be double-

edged sword• Structural prescriptions of codes (non-execs)

unlikely to stimulate effective board processes and behaviours

Concluding remarks

• Don’t get pre-occupied with the usual suspects

• Develop effective board processes & behaviours, and focus on board task performance

• Collaborative research win-win scenario

Thank you

• This presentation is available online at http://www.wlv.ac.uk/uwbs80years