Board Dynamics and Effectiveness

Shareholders cannot appoint a dysfunctional Board and expect positive results or effective performance in times of challenge. Composition and leadership are critical in supporting a board’s ability to carry out its responsibilities effectively. However, selecting many equally competent (in one area like law) and equally aggressive directors to a Board may hinder effectiveness rather than boost their performance. Nomination committee has a difficult task getting the Board dynamics right to avoid too many dominating members as well as sleepy members in the Board. Therefore, composition is important for setting the right culture of the Board to get the dynamics for effective performance. It is also relevant to remember that what is called the “right” combination changes over time.

High profile or dominant members doesn’t necessarily mean effectiveness or good financial literacy. At the time of their meltdowns, for example, K-Mart had six current or recent Fortune 500 CEOs on its board, and Warnaco had several prominent financiers, a well-known retail analyst, and a top-tier CEO; all those excellent credentials made little difference. Even Enron’s Board included a former Stanford dean who was an accounting professor, the former CEO of an insurance company, the former CEO of an international bank, a hedge fund manager, a prominent Asian financier, and an economist who was the former head of the U.S. government’s Commodity Futures Trading Commission. Yet members of this board claimed to have been confused by Enron’s financial transactions.

In an article on HBR (hbr.org) titled ‘The Key to a Better Board: Team Dynamics’ researcher and writer -Solange Charas reports her findings on the research inquiry: What impact does board dynamics have on financial outcomes? She states that her research provides strong evidence supporting three findings:
#1 “Cultural intelligence” of individual directors, or their predisposition to working well in teams, is critical in generating high-quality team dynamics;
#2 The quality of Board-level team dynamics is highly correlated with firm profitability; and
#3 Boards that are able to function effectively as a team have an 800% greater impact on firm profitability than any one well-qualified board director — in other words, and consistent with Aristotle’s observation, the whole is greater than the sum of its parts.

In this article the writer points out that Boards can improve their performance by focusing on team dynamics. The key steps to take are:

* Determine your Board’s dynamic. If it’s healthy, great! If it’s weak, there’s work to be done to best position the board to meet its fiduciary responsibilities — that is, to have a positive bottom-line impact.

* Rethink your recruiting criteria. A prior research by the same writer showed that recruiting “strangers” to Boards tends to generate higher levels of governance quality. This research implies that Boards should screen directors for CQ to ensure that the director has the skill and motivation to work well with the existing Board.
(Cultural Intelligence (CQ) is “a person’s capability to function effectively in situations characterized by cultural diversity.)

* Get team coaching. If there are gaps in your team dynamics, team coaching really can help. Transforming a weak Board to a strong one is not investment-intensive, and the benefits are significant.

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About surenraj

“Views expressed are my own”
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