Guest blog: Dr James Lockhart (College of Business, Massey University, New Zealand)
During the late 1990s and early 2000s the hot topic in corporate governance was independent directors. Independent directors, it was proposed at the time, were the very panacea for performance improvement. It didn't really matter what the problem was the solution was independent directors, preferably a majority of them—and fast!
Much effort went into defining an independent director and veritable lists emerged of the much needed characteristics and attributes, especially concerning ownership (the lack thereof); earnings from ownership (the lack thereof); or, employment or former employment (the lack thereof). Sadly, in all that enthusiasm the single most important attribute—independence of thought—was seldom mentioned.
Fast forward a decade: now its diversity’s turn. Diversity, it is now proposed, is the panacea for improvement. Just like independent directors in the past (where no systemic evidence emerged supporting the assumption that independent directors actually improve performance) business is besieged with the idea that diversity on boards will enhance performance. All of the board diversity research conducted to date has been from outside the boardroom. We know that because there have been only four longitudinal studies conducted within the boardroom—one in Norway by Morton Huse; one by a serving board member (no conflicts there); one by a British colleague (Silke Machold); and, one by Peter Crow.
So what is being measured? Just like the independent director research, the diversity research has reduced the boardroom to a simple input-output model. Diversity then refers to the measurable appearance of directors, such as, skin colour, ethnicity, sex, age, qualifications, professional backgrounds, and so on with a focus on sex, colour and age. But does diversity of appearance produce a diversity of opinion? Does diversity of appearance produce different strategic decisions that would not have been considered or not approved in the absence of such diversity on boards?
Given that we don't know how effective men are in the boardroom, it is implausible to argue that we know the effectiveness of women. That is not to suggest we don't need more women on boards—we do. But the focus of the discussion ought to be one of building better boards, boards that are focused on wealth creation, and boards that deliver the company’s aspirations.
As with the independent director argument that preceded it, repetition seems to matter—if something is repeated often enough it will eventually be believed. The discussion is being fuelled by the post-modern/neo-Marxist views currently dominating the B-school landscape, one that will acknowledge diversity everywhere other than amongst Caucasians. And with that, the point is lost. The focus of corporate governance should be on performance, in organisations where the thinking folder is overflowing, not what people look like.
About Dr James Lockhart:
James is a Senior Lecturer at Massey University’s Business School, and a credentialed and practising company director. He teaches and researches in strategic management and corporate governance, and is responsible for the delivery of the College’s business internship and professional practice (Management) courses. He currently holds two directorships; is on the Defence Employers Support Council; and, is a Chartered Member of the Institute of Directors in New Zealand.
What a thoughtful and concise expression of what is wrong with corporate governance theory -- it has no bearing to reality, only to what the proponents want. Roberto Romano at Yale started identifying "quack corporate governance" after Congress passed the Sarbanes-Oxley Act, but I fear that the world is moving to a place where there are fewer rational options for finding board members that actually care about the investors.
Thank you Robert. James and I have known each other for six or seven years now. He has consistently 'called out' weaknesses in the system, and we both have written many articles and addressed many audiences on this and related matters. I'd be delighted to explore matters further—send me an email if you'd like to take up this offer.
Henry D. Wolfe
Peter - I am posting the same comment here that I posted on LinkedIn. I think James has it exactly right. He has made the same argument that I have been making for years regarding both independence and diversity. Neither provide the right focus. What does provide the right selection criteria is competence in the context of the value creation drivers of the particular business that is being governed. Couple that with a couple of directors selected for general value creation skills and experience and you have a much better board. That said, the current governance model is ultimately the problem as it does not provide the right context for the selection criteria I have proposed. Nor does this model provide the right focus even if the selection criteria were shifted toward my suggestions. Ultimately, the entire model must shift toward one that approximates the private equity governance model before any real change in performance will be seen on a consistent basis. As I may have mentioned previously, I have just completed writing a book entitled "Governance Arbitrage" that addresses this very subject. I am now staring the long slog toward getting it published.
Thanks Henry, appreciate you taking the time to consider James' commentary and post your thoughts. We (you, me, James) are "together" on this matter. The normative model (as deployed) is part of the problem. This emerged in my doctoral research as well. In the last 2–3 years, I've had many conversations with incumbent directors and boards who privately admit something is badly wrong. The high and growing level of interest suggests that people like James, you and me are likely to be in demand for some time to come. My best to you.
A few years a ago I wrote an articled titled, Why Diversity on Board Can’t Happen. I somewhat addressed the issues this article has pointed out. My article focused more on the responsibility of the chairman.
It has been two weeks since I posted some observations on the current board diversity argument to Peter’s Blog, Peter cross-posted it to LinkedIn.
Leave a Reply.
Thoughts on corporate governance, strategy and boardcraft; our place in the world; and other topics that catch my attention.