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    Latest #corpgov research sounds great—until you read it

    Governance Performance Readings Research
    For some months now, I have been wrestling with the possibility that corporate governance might not be a structure or a process, but rather a mechanism that is activated by boards in some way. I've been beavering away on this, without seeing much other research activity in the same area—until today, when this release from Penn State arrived. The article referred to corporate governance and mechanisms in the same sentence. Wow! Could this article point to some research along the same lines as my attempts to get to the bottom of what actually happens in boardrooms? Here's the first three paragraphs:
    UNIVERSITY PARK, Pa. -- The most effective corporate governance occurs when a mix of complementary mechanisms that include CEO incentive alignment and both internal and external monitoring mechanisms are present, according to a new study from Penn State Smeal College of Business faculty member Vilmos Misangyi and his colleague from the Singapore Management University.

    Corporate governance refers to the collection of activities meant to help ensure that executives make the best decisions for shareholder profitability. While much past research has attempted to evaluate the effectiveness of each governance mechanism individually, Misangyi’s study of the S&P 1500 firms instead takes a holistic view of how these activities work in concert to achieve profitability.

    The two primary categories of governance mechanisms include incentive alignment and monitoring. Alignment mechanisms incentivize executives to act in the best interest of shareholders through, for example, CEO stock ownership and compensation contingent upon firm performance. Monitoring can occur from both internal and external sources, such as boards of directors and shareholders owning large blocks of equity, respectively.
    By the time I got this far—three paragraphs into a nine paragraph release—the wind was gone from my sails. My hopes were dashed. Misangyi and Acharya seem to suggest that effective corporate governance occurs when CEO incentive alignment and monitoring mechanisms are in place. They evaluated two variables (they call them mechanisms) in 1500 firms and described their research as holistic. Interesting. There is a growing body of research that suggests that board's involvement in the development of strategy and in the making of decisions is what matters. Misangyi and Acharya's release makes no mention of anything along these lines, nor is there any suggestion that the researchers directly observed any of the 1500 boards in their study. 

    I'm looking forward to reading the full research report when it is published, to see whether this is another study based on secondary data and hypothetico-deductive science, or whether Misangyi and Acharya have discovered a whole new paradigm.
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    The inside/independent director tension: are we there yet?

    Governance Leadership Performance Research
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    Harking back to your childhood, do you remember asking "Are we there yet?" while travelling with your parents? I do, and sense my parents' negotiation skills and patience were tested each time one of their four sons opened their mouth.

    Fast forward to 2014. I want to ask the question again, although in a different context: the debate over the value and contribution of inside and independent directors. The debate has been simmering away for years. On the current evidence, it shows no sign of abating or of being resolved. Two recently published articles highlight the problem. The case for independent directors made by Larry Putterman, and the suggestion that independent directors destroy shareholder value, have stimulated a fair bit of discussion. Which one is right? They both can't be, or can they? The tension is palpable.

    Many corporate governance researchers—and practising directors and other commentators—seem to have a love affair with counting things and with finding a single "truth" about the way to achieve a desired result. Boards are made up of people who make choices, and they change their mind based on the circumstances before them. Therefore, every board is, to some extent at least, unique. What I can't understand is why we continue to think that a specific structure or composition might make one iota of difference to performance. Surely studies of boardroom behaviours, interactions and activities are more likely to lead us to a credible answer to the conundrum?
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    Should we think about boards like we think about cake? 

    Governance Performance Research
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    I have shared the following story twice in the last 24 hours. It resonated with those that heard it, so much so that I thought a wider audience might also appreciate it.

    My wife provides a useful sounding board for my research work. However, she tells folk that she's no governance expert. I suspect she knows way more than she lets on. Here's why. While we were on vacation recently, we chatted about my doctoral research a couple of times. One time, out of the blue, she offered this analogy:
    Aren't boards a bit like cakes? A cake only becomes a cake after the ingredients are combined and the mixture is baked. A cake cannot be explained by describing each of the individual ingredients, or even the mixed dough. Why pull something apart to explain it, when it only makes sense when it is complete? 
    I thought this was a really profound analogy. It provides a timely reminder that we need to think about boards and the context within which they operate—the company—in a holistic way, if the goal is to explain how they influence performance outcomes. A close inspection of individual attributes of boards won't give us that.
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    On corporate governance: circa 2012 and 2014. What's changed?

    Governance Performance Phd Readings Research Strategy
    I got a little bit fed-up with writing today, so I decided to read back through Musings, to see how the corporate governance discussion has changed over the last couple of years. Sadly, many of the topics discussed two years ago are still being discussed. Sure, the prevalence of articles about boardroom performance seems to be waxing, and the number of quota-based gender proposals has waned somewhat. That a very similar set of topics is being discussed is a shame. It suggests we are making slow progress. The following muse, originally written in October 2012, illustrates the point fairly well.
    Have you noticed the rising tide of news stories about corporate governance in recent months? While some have highlighted the fraudulent behaviours of some boards and directors, most of the articles have focussed on efforts to improve the quality of governance around the world. 

    Much of the current discussion is focussed on regulation and diversity. Some regulators, including those in Singapore, believe that good regulatory frameworks are key to investor confidence. Many others, including Hong Kong's Exchange HKEx and noted academic Dr Richard Leblanc, are promoting diversity as a means of improving the quality of governance. I applaud these moves, but question whether regulation and diversity are the variables that will reliably deliver the main goal of good governance: better company performance. Regulation, for example, is a compliance tool not a growth tool. While they provide important safeguards for shareholders and stakeholders, they don't help companies to grow.

    My conclusion, having reading hundreds of research reports and peer-reviewed articles, is that behavioural factors, social context and an active involvement in strategic decision-making are far more important than regulatory, structural or composition factors. As such, this is where our efforts to improve governance performance should lie. Ultimately though, the bottom line remains the same. Shareholders—whether professional investors or small business owners—need to know that the board is fulfilling its mandate to maximise company performance. If regulation or diversity helps achieve that, then well and good. If not, then let's move our attention to other factors—quickly—for the good of our economy and society.
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    The case for diversity in boardrooms

    Governance Performance Phd Research
    Over the past few years, I have read many articles propounding the benefits of diversity in the corporate boardroom. Much research has been conducted by well-regarded scholars and consultancy firms, and some great results have been achieved. Many correlations between a diversity variable (gender, race, religion, socio-economic, other) and some aspect of board or company performance have been identified. However, most of the articles also claim—either directly, or, more often, tacitly—that improved outcomes occur because the board is diverse.

    To say that company performance improves because there is a woman on the board (for example) is akin to claiming that red cars go faster because they are red. Such claims stretch things a bit far. They are also patronising to women. There is a world of difference between a correlation and causality. The debate needs to move from talking about the correlation between diversity and performance (most but not all research supports this linkage), to investigating why and how diversity is helpful to improved performance.

    One of the most coherent arguments for diversity that I have read in a long time was made by Andrew Leigh, Australian Federal MP, recently. A copy of his speech, delivered at a Progressive Policy Institute meeting in Washington, D.C., is available here. Leigh says that diversity opens hearts and minds to possibilities—a wide breadth of experience and thought is what is important, if high quality outcomes are the goal. In essence, Leigh's thesis is that better outcomes occur when diverse experiences and thought are brought to bear, not because some flavour of diversity is present. I agree. The challenge now is to apply Leigh's argument to board research, to discover what underlying mechanisms are necessary to effective governance and improved business performance.
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    And so the journey of discovery continues...

    Governance Phd Research
    My doctoral journey, to discover how boards influence company performance outcomes, has turned into a pilgrimage of a kind. I have been journeying, full-time, for three years so far (if you include the six months spent doing pre-requisite work). Some days have been diamonds, some have been stone. The journey has become all-consuming, however the end seems to be in sight! The data collection is done, the analysis is well advanced, and the writing of the thesis document is underway. At this stage, I'm hopeful of reaching a major milestone in December: the submission of the thesis for examination. Here's a snapshot of how I have been allocating my time in recent weeks:
    • About one-quarter of my time has been spent analysing data (over 6GB of sound recording files, 650MB of board papers and 1000 pages of related documentation), to try to make sense of what's really going on beneath the surface, because there is more to it than what can be seen.
    • Another quarter of my time is spent writing. The thesis document is starting to take shape. A couple of chapters are now completed to a "solid draft" stage, and the rest are starting to take shape. I have also written three conference papers and reviewed several others this year.
    • Another quarter is spent in board meetings (I have one directorship at present) or facilitating the Institute of Directors' professional development courses.
    • The remainder of my time is spent thinking. Well, that's what I call it anyway—reading articles and journals, debating the merits of various concepts and pondering ideas. Most of the pondering happens when I am out on my bike, so it's not all bad!

    Looking ahead, the main priority is to draw everything together. Writing will start to dominate, particularly as the analysis effort winds down. In fact, apart from preparing two presentations—for my talks at the British Academy of Management (Belfast, Northern Ireland, 9–11 Sep) and at the European Conference on Management, Leadership and Governance (Zagreb, Croatia, 13–14 Nov)—the focus is writing.

    And so the journey continues. There is plenty to keep me busy over the next few months, but at least the journey is more downhill than up now! Thank you to the many folk who have offered encouragement and support along the way, I appreciate it. If you have any questions, comments or suggestions, either about the research or the way I'm tackling things, please get in touch.