By Dr. Peter Crow is a company director and board advisor
Leadership is an enduring topic of interest in most spheres of human endeavour; companies are no exception. To encourage others to achieve great things is the stuff of effective leaders.
Leadership can take many forms, of course. The era of the titan (Rockefeller, Carnegie, Morgan, and Ford, for example) saw leaders exert control over companies powerfully. The emergence of the management class in the inter-war years saw the emphasis change: management science and operational efficiency came to the fore. More recently, heroic leaders have included Iacocca, Welch, Walton, and Jobs, among others.
Since the turn of the 21st century and the entry of corporate governance into the business lexicon, a collective form of leadership has become more prominent: the board of directors.
What is more, expectations of the board’s role have shifted somewhat over the past 18 months, as commentators, critics and self-styled experts have used the onset of the coronavirus pandemic to promote new priorities for boards. Examples include board diversity, equity, and inclusion; climate change; stakeholder capitalism; environmental, social and governance (ESG) reporting; and more besides. Proponents argue that these priorities are necessary to redress perceived imbalances and achieve more sustainable societal outcomes.
Pressure on boards to adopt structural recommendations such as director independence and various forms of diversity remains high: the underlying assumption is that composition is an antecedent of board effectiveness and, consequently, company performance. Many boards and shareholders have been enthralled by these recommendations. But the extent to which the embrace of any externality or board configuration might be material to more effective governance, much less more sustainable company performance, is far from clear.
The board’s primary leadership role is to ensure the enduring and sustainable performance of the enterprise it governs, having considered information and made decisions. Directors need to be alert and actively engaged; understand the business of the business, the company’s strategy and the strategic implications thereof; watch for weak signals that may portend emerging or unexpected disruptions; and exercise control constructively – all of which is made easier if the directors work together as a team. Indeed, effective steerage and guidance – the essence of corporate governance – requires the board to operate as a collective and cohesive unit, not a diverse assembly of individuals.
This sounds straightforward. But many boards struggle to embrace such guidance.
Consider board diversity, a topic of great interest over the past decade. Agreement with the predication of a positive correlation between various diversity attributes (sex, gender, and ethnic identity, inter alia) and company performance is now widespread. More recently, diversity of thought has been added as an antecedent of better decisions. This more nuanced consideration is a welcome development. Thus, diversity appears to be conducive to elevated performance. But Wittgenstein’s aphorism provides a useful reminder that boards and nomination committees should tread carefully: “From its ‘seeming’ to me – or to everyone – to be so, it doesn’t follow that it ‘is’ so.”
Katherine Klein, a professor of management at the Wharton School, recently conducted a comprehensive review of board diversity literature, in search of a more complete understanding. Her findings paint a rather different picture from mainstream opinions:
“Rigorous, peer-reviewed studies suggest that companies do not perform better when they have women on the board. Nor do they perform worse. Depending on which meta-analysis you read, board gender diversity either has a very weak relationship with board performance or no relationship at all.”
While the moral case is strong, the business case for diversity is far from resolved, it seems. “The best and most effective boards are those that focus their attention on providing steerage and guidance, in pursuit of agreed goals. As with sailing and other team-based endeavours, decisions matter”
“The best and most effective boards are those that focus their attention on providing steerage and guidance, in pursuit of agreed goals. As with sailing and other team-based endeavours, decisions matter”
Beyond externalities and diversity
The best and most effective boards are those who focus their attention on providing steerage and guidance, in pursuit of agreed goals. As with sailing and other team-based endeavours, decisions matter. Heterodox perspectives, high-level sense-making, systems thinking, and consensus building are vitally important. Without these, boards run the risk of introspection, relying instead on heuristics and natural biases or, worse, ideological preferences.
If boards are to govern effectively and fulfil their duty to ensure high levels of performance are achieved and maintained over time, directors need a comprehensive understanding of both the business they are responsible for and the wider operating environment within which the company operates so they can respond well. For this, information needs to be elicited from multiple sources to minimise the potential for bias, blind spots, and groupthink.
Wisdom, maturity and proximity
The importance of directors working as a cohesive unit in the provision of steerage and guidance cannot be overstated. Maturity, wisdom and high levels of situational awareness are necessary to enable directors to draw on prior experiences and adjust their mindsets and contributions to suit the prevailing circumstances. For example, a creative mindset is beneficial during ideation: diverse perspectives and experiences are highly valuable when the objective is to identify options. In contrast, the analysis of options and selection of one requires a different mindset: a commitment amongst directors to test options against agreed corporate purpose and strategy, and not any divergent or individual preference.
Another important aspect of board work is the board’s relationship with management. The dominant recommendation has been to maintain distance in order to protect objectivity. And yet research indicates as few as one in six directors understands the business they are charged with governing, which implies distance may be a problem. Effectiveness in personal relationships is contingent on proximity, to build the trust and respect needed to underpin high-quality interactions. So why not among directors and managers, too?
Ultimately, the board’s role is relatively straightforward: it is to provide steerage and guidance to ensure agreed corporate objectives are achieved, and to do so within prescribed statutes, given prevailing externalities. Board composition recommendations have been prescribed as analgesics for the malaise that impairs the effectiveness of many boards. But the preceding discussion illustrates that behavioural attributes may be more important if high levels of effectiveness are to be achieved. And that points to maturity, wisdom, and proximity as being worthy of close attention.
About The Author:
Dr. Peter Crow is a company director and board advisor with deep expertise in corporate governance, strategy and the craft of board work, and an extensive international record helping boards realise organisational potential. He is a chartered director, and holds a doctorate in governance and strategy.