Do Board Processes Influence Director and Board Performance? Statutory and performance implications

• Author: C. Ingley,N. Van Der Walt
• DOI: http://doi.org/10.1111/j.1467-8683.2005.00456.x
• Published date: 01 September 2005
• Date: 01 September 2005

632

CORPORATE GOVERNANCE

© Blackwell Publishing Ltd 2005. 9600 Garsington Road, Oxford,

OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

Volume 13 Number 5 September 2005

Blackwell Publishing Ltd.Oxford, UK

CORGCorporate Governance: An International

Review0964-8410Blackwell Publishing Ltd. 2005

September 2005135632653

DO BOARD PROCESSES

INFLUENCE DIRECTOR AND BOARD PERFORMANCE?C.

INGLEY AND N. VAN DER WALT

*This paper was presented at

the 7th International Confer-

ence on Corporate Governance

and Board Leadership, 11–13

October 2004, at the Centre for

Board Effectiveness, Henley

Management College.

**Address for correspondence:

Albany Campus, Massey Uni-

versity, Private Bag 102 904,

North Shore City, Auckland,

New Zealand. E-mail:

C.B.Ingley@massey.ac.nz

Do Board Processes Inf‌luence Director

and Board Performance? Statutory and

performance implications*

C. Ingley** and N. van der Walt

Based on British legislation, the duties of directors are stated in the New Zealand Companies

Act 1993. However, “good” governance is not def‌ined within the Act. Considering the relative

importance attached by boards to a variety of governance tasks, this paper evaluates directors’

perceptions of the current contribution of fellow board members to different aspects of

governance practice. This evaluation is discussed in relation to the inf‌luence of board tasks

and functions on actions that may be regarded as being in the interests of the company as

def‌ined by the Act. The evaluation illustrates the strategic orientation of the board,

highlighting the extent to which individual directors and the board as a whole can actually

inf‌luence key outcomes and, thereby, their governance contribution. The paper reports

responses to f‌indings based on a study involving 3000 directors and presents suggestions for

enhancing board processes as well as possible changes in expectations that could be

encapsulated in legislation.

Keywords: Compliance, directors, Companies Act, board performance, decisions, agenda,

strategy, risk, governance

Introduction

ublic reaction to high-prof‌ile corporate

scandals in the 1980s resulted in various

inquiries and commissions in many countries

during the 1990s concerning the standard of

governance applying in the corporate sector of

their economies. Led by the US and the UK,

the response in capitalist countries worldwide

has been to legislate for tougher regulation of

corporations with regard to governance stan-

dards, to generate new sets of guidelines for

reporting and compliance requirements, and

to formulate codes of conduct for board

practice.

Emerging from this reaction and response

the corporate governance movement – as it

has become known – was driven by two dis-

tinct purposes. The f‌irst was to ensure tighter

P

accountability of board members and indivi-

dual directors to their corporations’ owners

for their actions. The second purpose was to

counter a perception of growing corruption in

many companies (private and public) and

countries, and so reinforce the move to estab-

lish the rule of law and facilitate the liberal

democratic process (Garratt, 2003).

The debate and ensuing reforms served,

however, to place the emphasis on compliance

issues. The focus of this comment and debate

was on pathology – a preoccupation with the

causes of failure and how to protect against

its reoccurrence, and legalism – legislating

against recurrences of such failures and ensur-

ing conformance to compliance requirements.

While reform was clearly indicated, the re-

sponse was essentially a punitive one (Ingley

and van der Walt, 2001; van der Walt

et al

.,

DO BOARD PROCESSES INFLUENCE DIRECTOR AND BOARD PERFORMANCE?

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© Blackwell Publishing Ltd 2005

Volume 13 Number 5 September 2005

2002). Carlsson (2001) and Healy (2003) note

that the corporate governance movement has

been more concerned with monitoring and ac-

countability for past performance which has

been the predominant focus, while the other

key aspect of corporate governance, the en-

hancement of business prosperity and creation

of shareholder wealth, has received much less

attention.

With the collapse of Enron in 2001 and the

enactment of Sarbanes-Oxley in 2002, corpo-

rate governance reform has gained momen-

tum as a worldwide issue, centred on

addressing perceived governance weakness

and failure, and aiming to restore conf‌idence

in the equities market system. This response,

however, raises the question as to whether, in

an environment of tougher regulation it is pos-

sible to legislate for good governance, given

that current legislation establishes minimum

basic requirements. Bostrom (2003) argues that

in the new environment (following the enact-

ment of the Sarbanes-Oxley Act 2002) simply

complying with the letter of the law and

revised listing requirements is not suff‌icient.

He argues that issues relating to governance

best practice are not just legal requirements

but ethical and cultural imperatives for the

off‌icers and employees of an organisation, and

advocates a number of corporate governance

changes in order to respond to the spirit of

these requirements and move to best practices,

with the board taking the lead.

With consideration of the relative impor-

tance attached by boards to a variety of

governance tasks that ref‌lect their legal

obligations and f‌iduciary responsibilities, this

paper evaluates directors’ perceptions of the

current contribution of fellow board members

to different aspects of governance practice.

Reporting responses to f‌indings based on a

study involving 3000 corporate directors, the

evaluation indicates the strategic orientation

of the board, highlighting the extent to which

individual directors and the board as a whole

can actually inf‌luence key outcomes and,

thereby, their governance contribution. The

paper also presents suggestions for enhancing

board processes as well as possible changes in

expectations that could be encapsulated in

legislation.

Commentary

Beginning in 1992 with the Cadbury Report,

which established the UK as the thought

leader in the development of best practice

for effective corporate governance, and the

National Association of Corporate Directors

(NACD) Blue Ribbon Commission in the US,

these reports have been inf‌luential in shaping

normative views of good corporate gover-

nance (Cadbury, 1992; Garratt, 2003; Kiel and

Nicholson, 2003). Some of the Cadbury ideas

that have become the standard across the

globe, especially in the 54 Commonwealth

countries, include separating the chair and

CEO roles, strengthening the role of the audit

committee through ensuring a membership

comprising only independent directors, insist-

ing that independent directors have access to

legal advice paid for by the company, and

clarifying the importance of ensuring the com-

petence of the chair and company secretary

(Garratt, 2003; Securities Commission New

Zealand, 2003, 2004). The Blue Ribbon report

delineated the board’s responsibilities as

including “selecting, monitoring, evaluating

and compensating, and, if necessary, replacing

the CEO and senior executives and ensuring

management succession” (Kiel and Nicholson,

2003, p. 304). The report also recommended

that the board have a substantial majority of

independent directors.

Following the Cadbury Report was the

Greenbury Committee’s Report (1995), an

unsuccessful attempt to tackle the then heated

controversy over executive directors’ pay and

conditions. This was in turn followed by the

Hampel Report (1998), which considered in

more detail outstanding issues from previous

reports. These three reports were revised and

published as the Combined Code of the Lon-

don Stock Exchange (1998) (Garratt, 2003; Kiel

and Nicholson, 2003; Securities Commission

New Zealand, 2003).

Moving from mere board conformance

toward a “board performance” approach, the

UK also published two highly controversial

reports and introduced an even more conten-

tious legislative proposal. First, the Turnbull

Report (1999) from the Institute of Chartered

Accountants argued that boards of listed com-

panies must report to their shareholders

annually on their risk-assessment and deci-

sion-making processes, or explain their failure

to do so. Indicating an element of ambiguity

in aspects of governance function, the Turn-

bull Report assumed that boards routinely

undertook rigorous risk assessment and deci-

sion-making around the boardroom table,

whereas many boards believed this to be an

executive responsibility and therefore an oper-

ational function (Garratt, 2003).

The second of these reports, the Myners’

Report (2000) for the Insurance Association,

raised an earlier concern over the mismanage-

ment of pension funds. Myners proposed that

trustees of pension funds be trained to compe-

tence so that they deliver the necessary stan-

dards of statutory care and thereby provide