Many commentators—academics and practitioners—agree that corporate governance is complex and difficult to get right. In the context of maximising business performance, boards must satisfy many demanding (and competing) priorities including shareholder expectations; legal and compliance requirements; the management of risk; the determination of future direction; and, the hiring (and sometimes firing) of the chief executive. Directing is a busy job, and it is one that takes time and commitment to do well. The steady stream of boardroom 'fails' in recent years (HSBC and Christchurch City Council amongst many others) and indiscretions (FIFA) suggests many boards are not doing their job as well as they need to. Why is this?
Many aspects of boards and board practice have been studied in recent decades including structure, composition and boardroom behaviour in an effort to understand how boards work and how they might contribute to performance. Independent directors have been held up as being crucial to boards maintaining distance from the chief executive and to the effective oversight of performance. Gender (and other) diversity has been promoted heavily in many quarters. The forming of a strong team through high levels of engagement and desirable behaviours has also been explored. As yet, none of the research has exposed any conclusive results in terms of increased company performance and value creation.
The prevailing theory of board–management interaction (agency theory) that underpins much of the current understanding of how boards work (or should work) appears to be flawed. It assumes that management is opportunistic and cannot be trusted and, therefore, needs to be closely monitored. Yet none of the structural provisions based on the theory (independence, incentives, various structures) have been causative to increased performance, despite considerable effort over many years.
Rather than continue to dogmatically pursue a flawed model, we need to move on. The goal posts need to be shifted—from a focus on compliance, structure and composition to a focus on value creation. The notion of a strategic board suggests a focus on future performance and strategy; on high levels of engagement to understand the business and the market; on critical thinking and an independence of thought; and, on robust debates which explore a wide range of strategic options (diversity of thought being considered crucial to avoid consensus thinking).
Imagine what board meetings might be like if the focus changed. They'd probably last longer. Directors would read their papers before meetings, and they would be actively engaged. There may be heated discussions. Necessarily, directors would sit on fewer boards. But perhaps, if boards were bold enough to change their focus, they might become more effective. Perhaps. Here's hoping.
The original version of this muse, posted in December 2012, is available here.
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.