The investment community, regulators and many others concerned about corporate governance have come to believe that better board structure makes for better corporate performance.
Yet the work of academic researchers confirms there is no causal relationship between board structure -- a majority of outside directors, the split of chairman and CEO and the size of the board -- and financial performance.
So what really matters? Over a five-year period, I observed the inner workings of some of this country's largest corporate boards (21 in total) and interviewed nearly 200 directors.
Being on the inside provided some real clues because boards of directors are among the most closed of institutions. Other than directors themselves, few have ever witnessed a board in action.
From that experience, I can tell you what matters to board effectiveness is not structure but membership and process: the competencies of the individual directors and their behaviour, and how boards work and reach the decisions they do. To the best of my knowledge, this has never been studied directly before.
More specifically, independence is greatly over-rated. Empirically, we know there is little evidence that board independence enhances board effectiveness. That is because directors tell me, and I have observed, that independence is a state of mind, based on ego and pay, and cannot be regulated.
What compromises independence is often invisible and includes social and personal relationships. The independence of a director inside a boardroom has nothing to do with that director's perceived independence outside.
Moreover, the act of regulating independence may lead to the appointment of less capable directors. In the search for independence to please regulators, boards may even appoint people with high publicly favourable profiles who are, in practice, ineffective directors. As a result, it is not unusual to find companies with such directors who fail. In a perverse way, regulations may do more harm than good.
Second, chairman and director effectiveness varies tremendously. Without a doubt, from the many board and committee meetings I have observed, board leadership has the single greatest impact on board process, and overall effectiveness, right down to running board meetings. Show me an effective board and I'll show you a strong chair ("conductor-chairs," I call them). Show me a dysfunctional board and there's a weak chair -- "caretaker-chairs " -- at the helm.
But -- and this is important -- the chairman's effectiveness has nothing to do with whether he or she is also the CEO. What matters more is who the person is -- the independence of mind, skills and behaviours of that person. In other words, it's not the separation of the positions but the selection. If it were as simple as separation, then the Canadian and British companies that split the roles would outperform the Americans ones that don't. That is not the case.
Third, the best boards I studied took director competencies very seriously. They used matrixes of specific competencies in their recruitment, making sure that the board had balanced capabilities aligned with the company and its environment. The worst boards recruited on the basis of external profile and personal likeability, bringing on whatever competencies the director had -- or didn't have. The best boards also link continued board tenure to performance, including the continued competence of directors.
Fourth, and perhaps most important, directors' behaviour and their impact on board process is vital but least understood. Directors must behave in a certain way to be effective. And you need the right combination of competencies and behavioural types of people sitting around the table.
It is at this intersection where boards are most able to exert their influence. But this doesn't happen by chance. It must be designed. So if you want a better board, take a hard look at the behaviours you have and need.
Fifth, director education and training is mostly abysmal. Why? Time and ego. Directors tell me their most valuable asset is time and many confide they don't want to have to admit they don't know by being dragged off to director ed programs. Audit committee members privately admit to not knowing the numbers. Executive compensation committee members admit to not understanding what they're reading.
Better-educated directors are better directors, which makes for a better board. Director education should be paid for by the company, not out of directors' pockets. It's a wise use of shareholder funds.
Richard Leblanc is a consultant, lawyer and professor who teaches corporate governance at York University's Schulich School of Business.
© The Globe and Mail
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