Corporate Governance and Boards: what good governance codes fail to tell you about board effectiveness Dr Silke Machold Reader in Governance and Ethics
Dec 14, 2015
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