The Emergence of Board Dynamics in Governance Flashcards
Chapter 1
Why is there a growing interest in board dynamics in governance in recent years? (6)
There are a variety of drivers, including:
(1) the many high-profile organisational scandals in companies that seemed to tick all the technical board-compliance boxes but failed nonetheless;
(2) the amplified focus on a variety of human factors, such as human capital, talent management, organisational culture, employee engagement, diversity, resilience and well-being;
(3) the shifts in approaches to organisational leadership;
(4) the increased focus on organisational ethics;
(5) the tentative inclusion in global corporate governance codes of principles that acknowledge behavioural factors; and
(6) the shift away from a simple focus on structural factors in board research
ORGANISATIONAL FAILURES
The biggest reason for increasing attention on governance, and the ensuing questioning of traditional practices, are the many organisational failures that have occurred.
What were the 3 major US scandals in the early 2000s and what did they result in?
Name 3 things this introduced.
- Enron (2001) = CEOs held back large debts from the balance sheets
- WorldCom (2002) = CEO inflated revenue with fake accounting entries and went to jail for 25 years
- Tyco (2002) = CEO and CFO stole $150 million disguised as executive bonuses/benefits
Result = US Congress passed the Sarbanes-Oxley Act
(1) top management to certify individually the accuracy of financial information
(2) greater penalties for fraudulent financial activity
(3) greater board director oversight and increased auditor independence
INTEREST IN HUMAN FACTORS
In addition to Gross National Product, what else is now commonly measured around the world?
This national- and political-level shift beyond the economic and financial also represents what?
Name 6 examples of such concepts that are gaining increasing attention and are now bubbling up to the board.
In summary, there are a variety of human factors that are gaining wider recognition in the workplace and governance has perhaps been slow to appreciate their importance. Boardroom thinking will need a shift in perspective that includes what?
Gross National Happiness
(countries and regions around the world have employed the concept and used a GHN index with their populations)
the growing broader acknowledgement of the human elements at play in societies’ core institutions
(1) human capital, (2) talent management, (3) culture, (4) diversity, (5) resilience, (6) well-being
That includes a detailed consideration of the directorship as a human resource in order to maximise individual and collective governance potential
INTEREST IN HUMAN FACTORS - HUMAN CAPITAL
What is human capital?
What did the Accounting for People Task Force find in their report?
The Maturity Institute talks about investors becoming interested in what?
the sum of knowledge, skills and experience and other relevant workforce attributes that reside in an organisation’s workforce and drive productivity, performance and the achievement of strategic goals
Was a clear need for better human-capital management reporting, to support more effective people policies and practices, in order to benefit organisations and their stakeholders
interested in understanding and measuring ‘Human Governance’ = the human capital in the boardroom (skillset and mindset) is most often the starting focus for investors to assess investment risk and reward
INTEREST IN HUMAN FACTORS - TALENT MANAGEMENT
What is talent management?
These considerations around board and organisational talent are even more important in light of recent attention on what?
Why should talent management be one of the pre-eminent considerations of leadership?
Name an example.
The systemic attraction, identification, development, engagement, retention and deployment of those individuals with high potential who are of particular value to the organisation
Attention on diversity, from both an ethical and performance perspective
Due to link between people and risk
E.g., most cybersecurity threats emanate from internal staff through negligence, accidental disclosure, lost or stolen devices etc.
INTEREST IN HUMAN FACTORS - CULTURE
What is corporate culture?
What constitutes a boardroom culture?
What is meant by ‘tone from the top’?
There is an increasing recognition that the leadership, and most significantly the board, is ultimately accountable for what?
The way we do things around here = artefacts, what people say, and what they do as an expression of their underlying core beliefs and values
includes leadership styles, practices. and processes
The extent to which boardroom culture will influence corporate culture
For the culture that has been created and perpetuated
INTEREST IN HUMAN FACTORS - OTHER HUMAN FACTORS
Stress-related illnesses are now the biggest cause of sickness and absence in the workplace.
What is personal resilience?
How is stress a diversity issue?
To work at their best, directors need to be mindful of what?
= the ability to bounce back and positively withstand strain over periods of time
minorities suffer more symptoms and consequences of stress than their majority counterparts
mindful of both their mental and physical health and capability
SHIFTS IN APPROACHES TO LEADERSHIP
There is a shifting mindset in leadership theory and practice away from what? To what?
What are the 2 types of leaders according to Jim Collins?
Name an example for each.
What is captured in the principle of authentic leadership?
What does this require the Board to do?
Away from traditional authority-based, command-and-control hierarchical methods to more authentic, democratic, relational and systems-based leadership
(1) Level 4 leader = the heroic type who leaps from one failing organisation to another = CEOs are externally appointed through aggressive self-promotion e.g., Tesco’s CEO
(2) Level 5 leader = the aspirational type who guides organisations from being good to sustainably great = CEOs who rise internally e.g. John Lewis’ CEO
a humble approach = ability of leaders to build multiple positive stakeholder relationships over time and appreciate and consolidate the strengths of those around them
Give up their egos and to become part of a high-performing team = know how and when to step forward and how and when to leave space for the contribution of others to maximise the board’s collective performance
FOCUS ON ETHICS
What did Bob Tricker recognise regarding ethics?
Professor Roger Steare argues that governance failures have occurred not because of _____________, but because of _____________?
There are a tiny minority of leaders whose behaviour is clinically flawed, but most ethical misjudgement arises out of what?
In addition to the negative impact of poor ethics, there is a growing recognition that good ethics can be positive for a company as well as for its stakeholders.
that ethics is inherent to the work of boards and that trust in businesses would only be rebuilt through boards handling ethical risks
not because of a failure to understand financial risk or too little technical knowledge, but because of a lack of moral integrity and courage
out of a leadership context of wilful blindness and/or cultural reinforcement that amplifies minor natural human errors or decision-making biases (ethical misconduct arises out of the surrounding culture for which the company leadership is responsible)
HOW CORPORATE GOVERNANCE IS MATURING - THE EVOLUTION OF CODES
What are the 5 corporate governance codes that were published between 2009 and 2018?
How do the 2010 and 2018 codes differ, showcasing an increase in appreciation for the more human aspects of governance and the inclusion of psychological elements for boardroom evaluation? (2)
How has the FRC Guidance on Board Effectiveness evolved?
(1) 2009 review to recommend measures for improving the corporate governance of UK banks (found that there was no guidance on the main drivers of, and factors affecting, boardroom behaviours)
(2) 2010 UK Combined Code
(the world ‘culture’ used once)
[requirement to evaluate the ‘balance of skills, experience, independence, and knowledge on the board’.]
(3) 2011 FRC Guidance on Board Effectiveness
(4) 2018 UK Corporate Governance Code
(the word ‘culture’ used 7 times)
[Added to the list to evaluate includes diversity, how effectively members work together to achieve objectives (Principle L) and cognitive and personal strengths (Principle J)]
(5) 2018 FRC Guidance on Board Effectiveness
(provides more rigorous and practical advice on culture, behaviours, and dynamics)
HOW CORPORATE GOVERNANCE IS MATURING - SHIFT IN BOARD RESEARCH AWAY FROM STRUCTURAL FORMS
The historical literature on boards that has been undertaken has mainly looked at what?
However, there has been a growing recognition since the early 2000s, also as a response to the very public corporate failures from around that time, that more research attention needs to be paid to what?
Rather than assume that companies will survive because they have adopted the optimal governance structure, the research community (in addition to practitioners) is recognising what?
structural factors such as size, composition and leadership structure as the main correlates to tests against board and organisational performance
needs to be paid to the attitudes and behaviours of directors and the board as a whole
that there are additional human factors that are influencing how governance predicts performance
THE 11Cs MODEL OF CORPROATE GOVERNANCE
What is the x axis?
What is the y axis?
What are the 4 quadrants?
X axis = individual to board
Y axis = behavioural (-in practice) to technical (-on paper)
(1) Board structures = the dynamic interaction between technical and board level
(a vital starting point for approaching corporate governance)
(2) Board demographics = the dynamic interaction between technical and individual factors
(captures some of a director’s surface characteristics = professional capital and social capital)
(3) Board attributes = the dynamic interaction between behavioural and individual factors
(captures the more psychological and emotional competencies of a director’s personality = behavioural capital)
(4) Board dynamics = the dynamic interaction between behavioural- and group-level boardroom factors
(mostly responsible for shaping boardroom culture and performance,
but has been largely under-researched and under-acknowledged until now)
THE 11Cs MODEL OF CORPROATE GOVERNANCE
What is the broad question that each quadrant asks of a board? (4)
How do the 11Cs fit into the 4 quadrants?
(1) board structures = does the board and committees have appropriate CONFIGURATION and are they COMPLIANT?
(2) board demographics = do directors have CAPACITY, CAPABILITY and are they well CONNECTED?
(3) board attributes = do directors display COMPETENCE, COMMITMENT, and CHARACTER?
(4) board dynamics = does the board model a CULTURE of COHESION and CHALLENGE?
configuration and compliance (board structures), capacity, capability and connections (board demographics), competence, commitment and character (board attributes) and cohesion, challenge and culture (board dynamics)
THE 11Cs MODEL OF CORPROATE GOVERNANCE
What are the detailed components for each quadrant? (4,3,5,6)
Board structures = [1] basic set up (NED ratios, size, committees), [2] Chairman set-up (CEO split, former CEO, Exec), [3] Director set up (tenure, diversity, compensation), and [4] Board tasks (meeting frequency, review, induction/development)
Board demographics = [1] capacity (fit/proper, external commitments), [2] capability (independence, professional capital, financial/technical expertise, diversity), and [3] connections (professional, alumni, social)
Board attributes = [1] Role competence (chairman, CEO, NED, ED, SID, Cosec). [2] general (Emotional intelligence, style), [3] 21st century (resilience, agility, cultural IQ, digital IQ), [4] commitment (personality, mindset, motivation, derailers), and [5] character (ethics)
Board dynamics = [1] board cohesion/challenge, [2] decision-making, [3] stakeholder conversations, [4] leadership culture, [5] diversity, and [6] board environment
DEFINING BOARD DYNAMICS
How is board dynamics formally defined?
Less formally, board dynamics is about what?
Board dynamics offers what? Depicted by what?
= the interactions between board members individually and collectively and how these influence, and are influenced by, their wider stakeholder system
about how boards behave, and indeed about how they misbehave, rather than about what tasks they do = it is about how they discuss issues rather than what issues they discuss
Offers a group and behavioural perspective on governance rather than a more technical or individual perspective, which is depicted by the 11 Cs model of corporate governance
