Evaluating the effectiveness of corporate boards

• DOI: https://doi.org/10.1108/CG-08-2018-0275
• Pages: 372-387
• Published date: 15 November 2018
• Date: 15 November 2018
• Author: Donald Nordberg,Rebecca Booth
• Subject Matter: Corporate governance,Strategy

Evaluating the effectiveness of corporate

boards

Donald Nordberg and Rebecca Booth

Abstract

Purpose –This paper aims to examine how board evaluations have emerged as an important tool in

public policyand corporate practice for enhancingboard effectiveness.

Design/methodology/approach –The authors review theextensive literature on effectiveness and the

emerging literatureon board evaluation to identifyways to assess the current policy directionfor external

evaluationof corporate boards.

Findings –The paper develops an integratedframework of effectiveness that can be used as a tool for

board evaluation,in particular for externally facilitatedexercises.

Research limitations/implications –Through its integration of prior conceptual work this paper

advances our theoretical understanding of this emerging part of policy and practice, with to-date lack

much empiricalbasis.

Practical implications –The framework that is developed shows ways to focus how the practice is

conductedby boards and external evaluators alike.

Social implications –It can also help policy formationby pointing out the limitations as well as benefits

of variouspolicy options.

Originality/value –In pointing to ways to develop study of the field through empirical research, it

provides direction for future academic research. It also identifies a need for and direction toward the

professionalizationof practice.

Keywords Codes, Board of directors, Boardroom effectiveness, Corporate governance,

Boardroom performance

Paper type Research paper

1. “Where was the board?”

After each of the many corporate collapses over the past quarter of a century,

policymakers, practitioners and scholars alike have asked the question: Where was the

board? That question begs others: What does it take to make a board effective?

Indeed, what does it mean to say a board is effective? And how could we –

policymakers, practitioners, scholars, or even directors themselves –evaluate whether

it was effective?

The question of effectiveness has been the subject of much theorizing and empirical

investigation. Studies using various measures of firm performance as a proxy for board

effectiveness abound, though often with less than clear results. Can a board may be

deemed effective when a firm outperforms its sector, if we cannot tell what in anything the

board contributed? It makes senseto consider a board effective if it staves off disaster, say,

by organizing an orderly retreatfrom a failing industry, or by preventing a faulty decision by

a hubristic CEO. Such good results can go undetected by outsiders. Assessing

performance on tasks closer to the board’s direct span of action is difficult to do from afar.

Board effectiveness, therefore, seems to be a local phenomenon, contingent on

circumstances, involvingrelationships between directors in the execution of their roles.

Donald Nordberg is based

at Business School,

Bournemouth University,

Poole, UK. Rebecca Booth

is based at Independent,

London, UK.

Received 24 August 2018

Revised 8 October 2018

12 October 2018

Accepted 14 October 2018

An earlier version of this paper

was presented to the British

Academy of Management

conference at the University of

Warwick in 2017. The authors

thank participants for their

comments, which have led to

refinements to the argument

and the model.

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While scholars may therefore have difficulty in identifying the conditions that constitute

effectiveness, the practical and policy imperatives remain. Beginning in North America in

the 1990s (Cadbury, 1999, describes the Toronto Stock Exchange move; see also NACD,

2001) and with increasing force over time, policy initiatives around the world have pressed

the boards of companies to undertake regular, usually annual evaluations of their

performance. Since the financial crisis of 2007-2009, in the growing number of places that

followed the lead of the UK Corporate Governance Code (FRC,2010, 2018), policy has

demanded that boards use external facilitators, in expectation of achieving greater

objectivity[1]. It quickly became a model for new codes for listed companies in other

countries in many differentsettings (OECD, 2015).

The impetus for board evaluation has generated much advice from professional bodies

(Jones, 2011), consultancies (McKinsey & Co., 2011), well-intentioned directors and other

practitioners (Archer and Cameron, 2017;Pitcher, 2014), practitioner articles in academic

journals (Garratt, 1999;McIntyre and Murphy, 2008) and practice-oriented writing by

academics (Kakabadse et al.,2017;Leblanc, 2002). These writings generated frameworks

and checklists for practice, some combining ideas from employee performance appraisals

with insights about the peculiarities of boards (Spencer Stuart, 2017). Theoretical and

empirical understandingof board evaluation is, however, comparatively underdeveloped.

The push has met with considerablecompliance (Grant Thornton,2011, 2016) and also with

some push-back. Practitioner accounts suggest not only resistance and acquiescence but

also enthusiasm for a process traditionally associated with staff development and discipline

rather than those in the upperechelons.

In Section 2, we examine how practitioners discuss board effectiveness and how scholars

have conceptualize it, and then explore the emerging literature on board evaluation in

Section 3. Integrating the two, the paper develops a revised model of board effectiveness,

and develops of a research agenda with implications for practice and policy in Section 4. In

Section 5, we conclude with observations about factors that practitioners, boards and

facilitators might considerin designing evaluation exercises.

2. Board effectiveness

The work of boards involves complex interactions of individuals in which independence of

mind fosters both benefits and threats to effectiveness (Van den Berghe and Baelden,

2005). In theorizing board cognition and effectiveness, Forbesand Milliken (1999) write that

boards differ from conventional groups in that they are “large, elite, and episodic decision-

making groups that face complex tasks pertaining to strategic-issue processing”. But they

are large (typically a dozen or more); the presence of outside, or “non-executive” directors,

who serve the company only part-time may mean less than full commitment; and their elite

make-up holds the promise andthreat of strong individuality. Moreover, boards perform two

distinct and at times contradictory roles (Krause et al., 2013): service (providing advice),

and control (supervisingand disciplining).

Moreover, “outside” non-executives become insiders, and the “inside” executives to step

outside of their roles as managers. This role ambiguity creates the liminality in which

creativity can develop (Concannon and Nordberg, 2018), but only by suspending the

hierarchy. This is not to say that boardsare theoretically or empirically without hierarchy. But

since Cadbury (1992), policy in the UK and jurisdictions that followed its lead, has sought to

counteract it by separating the roles of chairman and CEO and enhancing director

independence, and thus –in theory –theireffectiveness[2].

Forbes and Milliken (1999) identify key processes of corporate boards: their effort norms;

how they use their knowledge and skills; and the more complex one of “cognitive conflict”.

The last is vital to challenging senior managers and the chief executive, even though it

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