THE ROLE OF NON-EXECUTIVE DIRECTORS IN

CORPORATE GOVERNANCE: AN EVALUATION

Biserka Siladi * La Trobe University

Professor Louise Kloot Swinburne University

*Corresponding Author
Biserka Siladi
School of Business
La Trobe University
Bundoora Victoria 3086
Australia

Phone: + 61 3 9479 1599

Fax: + 61 3 9479 5971
Email: [email protected]

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ABSTRACT

The role and responsibility of the board and directors has emerged as an important
issue in examining the cause of high profile collapses such as Enron, WorldCom,
Parmalat, One.Tel and HIH. This has created much debate on what the role of the
directors is in ‘directing’, ‘monitoring’ or ‘advising’ a company.

Corporate governance research has concentrated on empirical studies which attempt

to link financial performance to the degree of corporate governance compliance.
Researchers have attempted to measure board performance and effectiveness by using
indicators such as share values and shareholder returns. These studies have produced
inconclusive results.

A qualitative approach has been adopted in this study. Interviews were carried out to
obtain in-depth information from a small sample of non-executive directors. The
directors’ views on their roles and on some of the governance issues were examined,
specifically in relation to the executive and non-executive director debate.

A number of interesting viewpoints, not always in agreement with current

conventional wisdom, or the current academic literature emerged. One of the major
themes that emerged is that directors are traditionally considered to be responsible for
maximising shareholder wealth. However, directors are now expected to broaden
their responsibilities to include other stakeholders and to consider social and
environmental issues in making their decisions. The findings indicate that it is now
more demanding to be a director due to increased workloads arising from the
regulatory and legal requirements. Furthermore, directors’ personal experiences did
not necessarily concur with governance principles and guidelines. For example, the
widely recommended method of achieving ‘best practice’ by having a majority of
non-executive directors on a board is considered too simplistic.

Further studies are required on the behavioural and personality traits, technical skills
of the directors, board structure, composition and type of organization which make the
best contribution to achieving boardroom effectiveness.

Key words: corporate governance, boards, directors’ roles, non-executive directors,

JEL classification: M49

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INTRODUCTION

Corporate governance has emerged as a national and international issue (Cadbury

2002, Kiel and Nicholson 2003b) that has resulted in increasing attention being paid

to issues such as the effectiveness of reporting disclosure, roles of the board, internal

controls, audit committees and the independence of directors and auditors. A number

of high profile corporate collapses in Australia (for example: Ansett, Harris Scarfe,

HIH) and overseas (for example; Enron, WorldCom, and Parmalat) have led to much

discussion on accountability, regulations and professional codes (see for example;

Tomasic 2001; Carver and Oliver 2002; Cadbury 2002; Vinten 2002; Taylor 2003).

The current debate on corporate governance issues has raised more public awareness

and suggested that the investment community needs to be more critical of the way

companies are managed (Horwath 2002). As a result of this surge in awareness by

investors and shareholders, directors are being held increasingly responsible for

company performance (and any public controversy); as well as being held personally

accountable for their company’s legal compliance and social responsibility.

‘Corporate governance’ tends to be looked as a new term that has crept into our

business vocabulary especially in the last 10 years. However if we are to equate

accountability with corporate governance (Cadbury 1992) then in reality this is not a

new issue; it has evolved with the growth of the capitalist system and the development

of world economies (Vinten 2003). We still have the same issues to consider. What is

accountability? Who is accountable to whom? What role do directors play? What role

do shareholders and other stakeholders such as creditors and employee have? How do

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we promote corporate accountability? What board structures work the best? What is

the best mix of executive and non-executive directors?

DEFINITION

How can we define ‘Corporate Governance’? A number of definitions have been put

forward. Sir Arthur Cadbury in his report (Cadbury 1992, p.15) adopted a broad

definition that ‘Corporate governance is the system by which companies are directed

and controlled’. This involves the establishment of structures and processes through

which management is accountable to shareholders with the objective of enhancing

shareholder value. Similarly, the ASX Corporate Governance Council (2003, p.3)

guidelines on ‘Principles of Good Corporate Governance and Best Practice

Recommendations’, defines corporate governance as ‘the system by which companies

are directed and managed. It influences how the objectives of the company are set

and achieved, how risk is monitored and assessed, and how performance is

optimized’. Pat Barret (cited in Horwath 2002, p.5), Auditor General of Australia at

the time, suggested that “Corporate Governance is largely about organizational and

management performance. Simply put, corporate governance is about how an

organization is managed, its corporate and other structures, its culture, its policies

and the ways in which it deals with its various stakeholders. It is concerned with

structures and processes for decision-making and with the control and behavior that

support effective accountability for performance outcomes/results.

The OECD (2004, p.11) definition is that “Corporate governance involves a set of

relationships between a company’s management, its board, its shareholders and

other stakeholders. Corporate governance provides the structure through which the

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objectives of the company are set, and the means of attaining those objectives and

monitoring performance are determined. Good corporate governance should provide

proper incentives for the board and management to pursue objectives that are in the

interest of the company and its shareholders and should facilitate effective

monitoring.”

Adopting and synthesizing these broad definitions, corporate governance includes the

relationship between shareholders and corporations; between financial markets and

corporations; and between employees and corporations. Structures are therefore

needed in place to provide for corporate governance practices (Horwath 2002). The

ASX Principles (2003, p.3) state that “Good corporate governance structures

encourage companies to create value (through entrepreneurism, innovation,

development and exploration) and provide accountability and control systems

commensurate with the risks involved.”

There is no one structure or model that would suit all businesses. This is also

recognized by the OECD principles (2004 p.13) due to not only the complexity and

range of activities that businesses are involved in but also legal issues depending on

the country’s jurisdiction, as well as social and cultural issues. The common threads

in corporate governance frameworks are shareholder rights, disclosure and

transparency, executive (management) and board accountability (Healy 2003 p.134).

GOVERNANCE RESEARCH

Studies on the impact of corporate governance in organizations in academic literature

have concentrated mainly on the use of quantitative data analysis. Corporate

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governance research has concentrated on empirical studies which attempt to link

financial performance to the degree of corporate governance compliance; and

attributes such as the ratio of executive/non-executive directors; board composition

and size; and leadership structures. Board performance and effectiveness are often

measured using a variety of performance indicators; for example, share values and

shareholder returns. These studies have produced mixed results. For example, Muth

and Donaldson (1998) examined board independence and performance based on a

statistical analysis of listed companies; their results were inconclusive. Kiel and

Nicholson (2003a) concluded that there was a positive relationship between the

proportion of inside directors and the market-based measures of firm performance.

Dulewicz and Herbert (2004) determined from their research that board practices on

identified tasks were not clearly linked to company performance. Likewise there was

limited support for the argument that companies with independent boards are more

successful than others.

Despite the lack of research evidence, conventional wisdom is that financial

performance is improved with the application of improved corporate governance

procedures. A general belief exists that those companies with ‘good’ corporate

governance structures perform better than those without. Bosch (2002 p.271) states

‘good governance is desirable and important’ for two reasons. Firstly, ‘investor

protection has increased with the enormous surge in share ownership;’ and secondly

good governance can ‘increase the creation of wealth by improving the performance

of honestly managed and financially sound companies’ even though it is

acknowledged that conclusive proof is lacking.

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Studies (for example; McKinsey 2002) have shown that investors are willing to pay a

premium for ‘well-governed’ companies. The 2005 Horwath Report’s research

conclusions indicate that generally companies with good corporate governance

practices had better share price performance than those without. This was consistent

with previous Horwath Reports of 2003 and 2004. So why is corporate governance

important to an investor? According to Cornelius and Kogut (2003) a well-governed

company has trustworthy and honest managers. ‘Good corporate governances provide

shareholders and the public with reliable reports and financial information’ (Cornelius

and Kogut 2003, p. 372).

However as stated above, the connection between corporate governance and

performance is not conclusive. Nevertheless it does not necessarily mean that there is

no connection. It merely means that as yet that connection has not been identified.

Due to this lack of conclusive evidence it has been suggested that perhaps researchers

are studying the ‘wrong’ aspects of corporate governance or that the manner in which

these studies are being carried is incorrect or limiting (Leblanc 2001).

A criticism of the extant research is also that ‘ trying to distill a relationship between

governance and performance - from outside a boardroom - is analogous to trying to

find out what makes a sports team effective by sitting in a cafeteria reading the sports

pages, without entering the arenas or locker-rooms or interviewing the game’s great

teams and players. A board, in its simplest terms, is a decision-making body. How,

when and why boards act, or fail to act, is best determined by observing boards in

action, in real time, and by engaging in in-depth interviews and intense dialogue with

directors themselves…’ (Leblanc 2004, p.437). Leblanc’s critique implies that studies

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which focus on boards and board processes can be useful in determining the

relationship between governance and performance.

Leblanc (2004, p.438) also identifies three areas which need to be addressed by

researchers to determine ‘with greater particularity the nature of board effectiveness

and the relationship between this construct and corporate financial performance’.

These areas are: firstly the independence of judgment, competencies and behaviors of

the chairman of the board; secondly, the behavioral posture of the Chief Executive

Officer; and thirdly, the effectiveness of individual directors in the decision making

process.

Similar areas have been identified by other researchers. For example, Zahra and

Pearce (1989) suggested that further research needed to be done on how board

processes operated. Stiles and Taylor (2002) also pointed out that there were few

studies which examined the behaviour of directors and how they made their decisions.

However it is also recognized that one of the difficulties in carrying out such research

is the fact that boards operate within the confines of confidentiality. Understandably

these discussions and deliberations take place behind closed doors. ‘There are good

reasons for this, not the least being the danger of giving away competitive advantage

or disclosing premature or misleading information that could affect the decisions of

investors’ (Leblanc 2001, p.8).

RESEARCH OBJECTIVES AND METHODS

Board processes remain critical and largely rely on the behavior of individual

directors. Thus the objectives of this study are to examine directors’ views on the

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impact of the current focus on corporate governance including their views on the

executive and non-executive debate.

This is of particular interest, due to a number of recommendations and Codes of Best

Practice (for example; ASX Corporate Governance Guidelines 2003, Cadbury 2002,

Sarbanes-Oxley Act 2002). These governance practice guidelines will supposedly, if

they are followed, lead to ‘better’ performance. Given that we have these corporate

governance guidelines, what do directors themselves think of them? How do they

perceive their role in all of this? Does a non-executive director on a board really

make a difference? Conventional wisdom has led to such recommendations as: a

majority of non-executive directors is necessary; a lead independent director is useful;

the chair and CEO should be separated; and separate committees for nominating

directors, remuneration and audit functions.

Whilst actual observations of decision making and board processes would provide

some answers to governance related questions, they are often infeasible for

researchers given the difficulties of accessing the actual workings in the boardroom

and the confidentiality of discussions. For this research, interviews with directors on

their boardroom experiences, but undertaken outside the boardroom, are used to

provide directors’ perspectives on governance issues.

Board performance and effectiveness are often measured using a variety of

performance indicators such as share values and shareholder returns. This study,

whilst recognizing the importance of quantitative data, concentrates on qualitative

research methods. The focus is to obtain information on how directors perceive their

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roles based on their own personal experiences. Non-executive directors are

interviewed on their views regarding the impact of corporate governance on their

boardroom experiences. The purpose of this exploratory study is to review and

examine interviewees’ viewpoints.

This study also attempts to address the ‘relevance gap’ between academic research

and what the practitioners in the field are actually experiencing. As this is an

exploratory study, the objectives to do not lend themselves to traditional hypothesis

testing

RESEARCH RESULTS

The interviews were designed to obtain in-depth information from a small sample of

non-executive directors. The sample consisted of 11 participants, where each

participant had to be a current non-executive director in any type or size organization.

The sample does not claim statistically to represent the views of Australian directors.

However there is representation from not-for-profit organizations, including

government bodies, co-operatives, educational, health and superannuation

organizations; and for-profit organizations including private and public companies,

listed and unlisted. The sample was gender balanced. The demographic summary of

the interviewees is presented below.

Table I Demographic Information

Description Number
A. Gender Male 6

Female 5

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 B. Organization type Not-for-profit (NFP) 5

Profit & NFP 6

C. Experience as chair NFP or Profit 5

D. Experience as non-executive Less/equal to 10 years 4

director Greater than 10 years 7

The interview data resulted in a number of issues being developed. These issues

included: role of the board, directors and chair; executive and non-executive directors;

balanced boards; nomination of directors; board dynamics; and company

performance. The detailed analysis of each issue with the participants’ responses

(given in italics) is provided below.

Role of the board, directors and chair

The respondents identified that the role of the board includes: setting strategic plans;

monitoring and ratifying business plans; monitoring the performance of the

organization; and selecting/dismissing the CEO. They noted that focus needed to be

on high level issues such as market performance, risk management, profitability and

organizational outcomes or performance. The emphasis is on a ‘reviewer’ type role,

to ‘play the devil’s advocate’ in questioning the CEO (and other executives); and ‘to

throw up other options’. However this does not include getting involved with the

day-to-day operations. These comments were consistent with the general duties of

directors as discussed in the literature.

The board has a collective responsibility for the organization (Harper 2005). The

directors are usually seen as ‘stewards’ of the company, mainly responsible to the

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shareholders. After all it is the shareholders who effectively elect the directors to

manage the business on their behalf. The ‘traditional view’ is that the responsibility

of the board is to maintain the share value for the owners. This is changing somewhat

with other stakeholders such as creditors, employees and the community demanding

more of companies. That is, it is no longer acceptable to just be concerned about

shareholder wealth.

The literature indicates that ultimately it is the board’s responsibility ‘to ensure the

company’s continuing prosperity’ (Harper 2005, p.7). Whilst improving and

increasing shareholder value is seen as an important function for the board, arguments

have also been put forward that a longer time period should be taken. According to

Healey (2003) and Cadbury (2002) decisions are often made so that the shareholder

value in the short term is favourable, without taking into consideration the long term

implications of certain decisions. This short-termism has resulted from the emphasis

on the fixation of current share prices, and current profits. This impact on the

decisions that CEOs (and directors) make to achieve positive results during their

tenure (which is often short term i.e. less than 5 years). However as companies exist

in perpetuity, a longer term perspective is necessary which should take into account

environmental and social impacts

The participants agreed that the board needs to take and accept the ultimate

responsibility for the performance of the organization; therefore the directors need to

be ‘informed, knowledgeable and satisfied with the system’. Individual directors also

need to ensure that they understand their responsibilities and actively participate in the

board discussions by making a contribution based on their particular skills and

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experience. Directors were not expected to be familiar with the day to day operations.

It was necessary to look at issues ‘from a strategic and a monitoring and an over

viewing process, and they’re the skills you need, rather than knowing the ins and outs

of every activity and operation that a company does’. So ‘an enquiring and diligent

mind’ was needed. Directors were considered responsible for the company’s

performance; therefore it was essential that active participation of all members

occurred in meetings. However one of the respondents pointed out this did not always

happen, as it depended on the director’s particular skill base. This meant that there

would be occasions when a particular director may have limited input at a meeting.

An interesting point raised by one of the respondents was that a director (or the board)

may be required to ‘step’ into an executive role if the executives have been incapable

of carrying out their duties. This was given as an example where decisions needed to

be made at short notice and there was no other option because ‘the executive dropped

the ball’. However, this was not a desirable situation for a director, apart from having

no other option at short notice, and it is not really remunerated.

Another respondent emphasised that a distinction needs to be made between small and

large companies. In a larger company the management team tends to be well skilled.

However in a small company, the level of expertise in all areas may not be there.

Management experience may also be lacking in start-up businesses such as venture

capital and private equity boards where directors become part of the decision-making

team (Carter and Lorsch 2004). Such companies will therefore seek expertise from

their directors i.e. directors with those particular skills that the company’s own

management may be lacking are targeted. Companies seek ‘a director that will cover

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an area of weakness . . . For example; it’s common to seek a lawyer or a tax expert

on their board because they simply can’t afford to have it within the company. . .

sometimes directors can provide a level of expertise quite cheaply (in comparison to

employing a consultant from one of the accounting/legal firms). This seems to blur

the distinction between executive and non-executive directors. Non executive

directors are by definition not part of management but in small companies they may

act as if they are.

According to Harper (2005, p.155) the role of the Chair includes: providing leadership

to the board; taking responsibility for the board’s structure; providing adequate

information to the board; planning and conducting board meetings; prioritising and

focusing key tasks; board/director evaluation; overseeing the induction and

development of directors; and supporting the CEO.

Respondents noted that the way in which the meeting is conducted by the Chair has an

impact on how the decisions are made. Some noted that the conduct of the meetings

varies according to the specific circumstances. Sometimes this required a more

authoritarian approach in conducting the meeting. For example, in a situation where a

particular member may be dominating a meeting because of a particular issue that

they want to pursue, the role of the Chair is to ensure all views are heard and

considered. Thus the skill of the Chair was important to ensure: ‘a smooth approach

to the agenda, that all members participate, and that there is a good communication

channel between himself/herself and the CEO’.

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A board should acquire ‘a collective personality’ (Harper 2005, p.146). However

within a group of people, invariably personal agendas and personality conflicts can

exist to ‘deflect the board from its proper function’ (Harper 2005, p.146). The

respondents agreed that the board needs to be able to function as a group and that it is

important for the chair to be able to steer the discussions to ensure that a decision is

made. The skill of the Chair is to have an understanding of the personalities and their

behaviour and ‘be able to assess how other people are thinking’. This also involves

being able to reach a decision based on some sort of consensus given that many

different (and opposing) views may be expressed during a meeting. Being able to

resolve these conflicts involves a degree of collaboration and compromise. The Chair

needs to be the facilitator and encourage discussion and discourage the pursuit of

personal goals.

All the respondents agreed that the role of the Chair is very important as it is the link

between management and the board. That role includes providing leadership to the

board, being able to conduct effective meetings, board evaluation and supporting the

CEO. It was also noted that an authoritarian Chair can destabilise the board (and

management).

Executive and non-executive directors

The majority of the respondents agreed that it was necessary to have a majority of

non-executive directors on the board. This was now ‘established wisdom’ in

Australia. One respondent, whilst not formally disagreeing, felt that ‘the jury could

probably still remain out on that’. Two of the respondents disagreed with the

viewpoint that a majority of non-executive was preferable. It was ‘nonsense about the

15
importance of non-executive directors’ and; that it would not necessarily ‘protect us

from corporate crime by insisting on a certain proportion of non-executives’. This

view was also presented by another respondent. ‘I don’t think it’s a big deal, I think

those who try to make an issue whether you have or don’t have executive directors,

making an issue for the sake of writing an article when it doesn’t really matter much’.

The quality of the individual was considered more important than whether they were

an executive or non-executive director. For example, the director’s skill, experience,

and being part of an integrated team were important qualities.

Other respondents offered a range of advantages in having non-executive directors.

Non-executive directors are independent of the organization, they have an

independent viewpoint and are able to ask questions and probe further about an issue.

They are also able to bring in experience from ‘outside’ the organization. It was also

acknowledged that difficulties can arise because of the lack of detailed knowledge

about the business. Hence ‘the problem with independent directors is just that we’re

independent’. However whilst it is not necessary to have all the knowledge and

background, ‘you want your fellow directors (to have) a willingness and a capacity

for them to quickly try to get on top of the core business to a level, where you can

develop a strategic approach’. Therefore if the non-executive directors have some

difficulties in understanding all the complexities of the business it is ‘important for

them to ask questions’. Furthermore, by having a reasonable amount of knowledge

and understanding about an organization, if the CEO raises certain issues they can be

considered on reasonable grounds.

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Respondents also acknowledged some other disadvantages associated with non-

executive directors including: the lack of knowledge; the difficulties experienced in

strategic planning (due to not being sufficiently knowledgeable about the

organization, the industry, etc); not getting involved in ‘important’ decisions due to

this lack of knowledge; too much time spent on compliance rather than leadership;

micromanaging the business thereby leading to much frustration from management

‘that the board is more concerned about minding the shop than growing the shop’.

These views were consistent with the discussion in the literature review.

The role of Chair and CEO was also raised. The ‘acceptable’ thinking in Australia is

that these roles should be separated, with the role of Chair being undertaken by a non-

executive director to avoid a conflict of interest. Donaldson and Davies (1991)

suggested that corporate performance would improve because of more independent

decision making. However some of the respondents pointed out that this was not

always the case. For example in the US, where the roles are combined, this combined

role does work. The corporate scandals of Enron and WorldCom involved firms

which did have a separation in roles; however this did not prevent their subsequent

failures. Academic research does not conclusively support the view that splitting the

role results in better performance (Sonnenfeld 2004).

Overall the interviewees’ remarks were consistent with the literature on the roles of

executive and non-executive directors. There is a general consensus that a majority of

non-executive directors is necessary for an effective board. However, a couple of the

respondents stated that whilst the regulators were advocating for a majority of non-

executive directors, they did not necessarily support this view. Comments were also

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made on the lack of conclusive research. That is, it was not clear if company

performance is improved by having a majority of non-executive directors. A

director’s skill and experience was considered more important.

The respondents acknowledged that an outsider can bring experience, knowledge and

networks to the organization. Thus a non-executive should be appointed according

to the skills required by the board i.e. to achieve ‘a balanced board’ (refer below for

further discussion). In some organizations a non-executive may also be appointed

because of the lack of experience and skills base available within the organization.

This is more likely in a smaller firm, where current employees’ skills are lacking or

simply the smaller firm cannot afford to employ all the specialists required.

Balanced boards

A ‘balanced’ board makes an effective board. A balanced board involves having a

mix of skills and personalities to build a team that will debate the issues and challenge

viewpoints to ensure decisions are made in the interest of the organization. Demb and

Neubauer (1992) suggest that a board needs to be able to be able to make critical and

independent judgements. Therefore it needs to have ‘a depth of understanding about

the company and the industry, a breadth of perspective that brings the larger context

into focus, involvement with and commitment to the objectives of the company’s

businesses, and a sense of detachment from any encumbering affiliation’ (1992,

p.101).

‘Diversity is crucial to any board’. This statement aptly sums the respondents’ views

on balanced boards. The necessary skills depended on the type of business or

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organization and its location. Desirable skills include industry experience, customer

knowledge, technologically savvy, marketing, legal and financial competency, being

politically connected (in the case of being reliant on grant monies); as well as a mix of

gender, age, ethnicity and personalities.

Comments were made that boards did not necessarily have that diversity as board

members were still predominantly middle-aged, Anglo-Saxon white males. The

Korn/Ferry International and Egan Study (2005) confirmed that the majority (90%) of

directors were male and that the average age of all non-executive directors was 59.

Gender and ethnicity diversity was an issue. Different perspectives can be obtained

by having members belonging to different demographics. For example, ‘if business

interests are in Asia or in Europe; (you) need to have people with the necessary

experience in being able to deal with these cultures as the way things are done in one

place doesn’t necessarily work in another’.

The respondents’ views were in agreement with the literature on the importance of

having a variety of skills, personalities and backgrounds on a board. However it was

also acknowledged that this was not always the case in practice especially with

respect to gender, ethnicity and age of board members.

Nomination of directors

The literature suggests that the nomination of directors needs to be done

professionally. However the manner by which directors are nominated does not

always follow an objective selection process. Whilst the respondents agreed that a

professional approach was needed, it was also recognized that it was not so easy to

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implement at times. There is a difficulty in finding the ‘right’ person for the role.

‘Board members are not easy to find in my experience’. This was more apparent in

not-for-profit organizations due to the voluntary nature of the role. Directors

volunteered their time and effort because of their personal interest in a particular

organization. In the case where members of an organization (for example, a

University Superannuation Fund) were eligible to be on the board, the nomination

process was again restrictive.

Directors are sourced from different means such as advertisements (often the case for

government boards); registers (e.g. CPA Directors Register or the AICD Register);

using head-hunters; as well as from existing director networks. Companies are

increasingly using head hunting firms. The advantage here is that they can identify

potential members from a wider base giving ‘you comfort that you’ve looked at the

field’. A criticism of these recruitment firms is that they ‘adopt the same practices

(as the companies themselves because they are made up of much the same type of

people); so it’s just transferring the same issue into a different forum and is not

really being open, and recruiting on a skills basis. So the company can now say

they’ve employed a head hunting firm, but nothing’s really changed’.

Director networks are sometimes more successful in recruiting a new director because

of an existing relationship. That is, that person is known to someone and personal

recommendations are still important in the smooth operation of the board (refer to

discussion above). Respondents varied in their views on the ‘old boys networks’ (and

‘old girls’ networks). Where directors drive the appointing process and are too close

personally then the process becomes a ‘closed circle and it becomes almost self-

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fulfilling in its own way’. A comment was made that it therefore led to situations that

directors were reluctant to challenge each other, but did challenge management. ‘As

long as boards do not take diversity and their nomination process seriously, then I

think that risk will remain, the risk of failure of the director’s role remains a very

serious risk for organizations whilst you have the good “old boys” sitting around the

table’. A positive comment on the other hand was that there is ‘nothing wrong with

the saying “old boys’ club” . . . because what you need most around the board table

is trust and confidence in your fellow director and we tend to get that from people we

know, and we’ve worked with’. In some cases directors may be chosen because of

their ‘name’ i.e. ‘we need people who are all well networked’.

In general, the respondents agreed that a wide range of skills (refer discussion above

‘balanced boards’) and backgrounds should be considered. ‘You should actually have

a sort of map of what you have already got on the board and then look to see what

you’re light on and then go out to all those different channels and find someone who’s

a good fit with that’.

In practice, it is not an easy task to nominate directors. Whilst consultants are used,

these are not always successful and hence personal networks are still an important

source. This has both positive and negative implications. On the positive side, the

person is known, but on the other hand achieving a ‘balanced board’ through diversity

of perhaps personalities and backgrounds may not be achieved.

Board dynamics

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The role of the Chair is important in board dynamics. (Refer also to the discussion

above on the directors’ roles above). Individual personalities may be overbearing

with a particular issue that they may wish to pursue, that is they have a ‘bee in their

bonnet’ about something. The chair needs to be able to diffuse this, and ensure that

the discussions stay ‘on track’ and that everyone is given an opportunity to make a

comment.

Participants stressed that the dynamics by which boards operate can be clearly linked

to the board selection process. An organization needs ‘ a mix and it’s very, very hard

to make sure you’ve actually got the matrix of skills and experience, as well as

personalities, somebody to reflect the markets you want, where you currently trade

or want to trade’. Obtaining this balance is not always easy especially in

organizations where members are eligible to serve as directors. The ‘old practice has

been that boards like to take on people that they feel comfortable with, that are to a

similar style to them’. However whilst we ‘don’t want a bunch of clones, we do need

a group that can work together’. So while there may be different views, the board

needs to be able to discuss these and get a resolution. In addition to a diversity of

skills, a balance of personality types is important. Directors need to be ‘questioning’

people, as well as a mix of introverts and extroverts.

Board size also has an impact on the dynamics of the board. The behavioural

characteristics of a group do change with the changes in numbers as well as the

personalities involved (Demb and Neubauer 1992; Van den Berghe and Levrau 2004).

It is considered difficult to prescribe the size of the board. Most respondents initially

responded with ‘depends on the organization’. However when asked for a ‘number’

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then the response was along the lines of ‘large numbers makes the discussion

unyielding’; ‘seems to work better when a few people are away’; and ‘if it’s too big

you get too many silent people’, ‘so they feel obliged to say something for the sake of

saying something’.

Comments as to the actual number of directors ranged mostly from 6 to 10. It’s

‘easier to engage a smaller group of 8-10 people than it is if you had 24 people’.

‘The smaller the board the more content I am, because the smaller the group the

more effective it is. If it’s too big people cannot participate and it’s just distracting’.

One respondent did not consider a large number of directors to be an impediment;

rather it ‘reflects the diversity of the business’. Furthermore ‘if you have a lot of

board members, you get all your papers out early . . . ask questions . . . (then the)

board meetings themselves become a rubber stamping exercise because the papers

have been read, the issues have been addressed outside the board meeting’. This

comment does raise further questions as to the board processes and what can be

settled outside the board meeting and what should be brought to the board’s attention.

The general consensus was that a smaller number of members yielded a better forum

for discussion. A large group could be an impediment to discussion by the time

everyone had their say. Or alternatively, members may simply make comments for

the sake of saying something thereby ‘wasting’ time on irrelevant points. Thus the

group dynamics were affected by the size of the board.

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Boards need to be cohesive but cohesion may result in ‘group think’. There is a

tension between cohesion, and questioning and challenging decisions. The research

by Leblanc and Gillies (2005) indicates that dynamics may be a more powerful

influence on board decisions than is currently recognized in the debate on corporate

governance. This means that there is a need for interpersonal skills such as being able

to work in a group and respecting each other views.

Company performance

A number of studies have been carried out attempting to link company performance

with such variables as board independence (for example, Kiel and Nicholson 2003a;

Bhagat and Black 2002; Lawrence and Stapledon 1999). Most studies reviewed deal

with for-profit organizations and use the usual performance indicators such as share

value, profit margins and return on investment. The regulatory changes (such as the

ASX Corporate Governance Council 2003, ‘Principles of Good Corporate

Governance and Best Practice Recommendations’) covering for example, composition

of boards, the use of committees, and increased disclosures were introduced to

improve (in theory) governance and thereby improve company performance. These

principles focus on the boards of directors. It is the directors’ responsibility to run the

company however, ‘companies don’t succeed or fail simply because of the directors’.

One of the respondents provided the following paragraph:

‘. . . If a company does really well it will never be exclusively due to a

manager or exclusively due to a board, because the two work in parallel or at

least in sync . . . If the management are capable, the board can guide or

modify management or change management but the board will never drive

high quality performance itself . . . But the board could stuff up, the board

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 could refuse to give approval. . . to provide the resources that are needed for

management do this great job they’re wanting to do. Then the board can be a

distinct drag on performance, just as management can be a drag, so the two

have got to recognize their partnership and a contribution from each makes

for operation performance’.

Thus a company’s performance is due to a number of factors. This was seen as

depending on strategies implemented, having the right systems (and people) in place,

the business structure, as well as external factors such as actions of suppliers,

competitors and government. A clear policy was also seen as important and thus the

decisions made will ‘fashion the direction that the organization follows’. A board

needs to grasp opportunities: ‘Visionary directors identify market opportunities, or

weaknesses or issues or change requirements and do so with good timing’.

The impact of directors’ decisions on company performance can be ‘devastating and

significant’. These decisions are dependent on what information is brought to the

board and how that information is presented. Inconsistent and incomplete information

leads to ‘unproductive meetings where you spend your time actually arguing about

the trees rather than the wood’. Directors should also be prepared to ask the

challenging questions and request any additional information considered necessary.

The relationship between the board and management also had an impact, since

directors are relying on the information presented to them. So probing questions

needed to be asked to ‘test the quality of your management as well’.

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The directors interviewed for this study all agreed that there is no one factor linking

corporate governance to company performance. This is supported by a large volume

of literature. In addition to examining variables such as board structures and

processes, economic influences and other external factors will also have an impact.

DISCUSSION

This research was motivated by board level management and direction of companies

attracting much attention in business circles. This has been brought about in part by

the failure of a number of well known companies, the remuneration debate especially

in regards to outgoing executives in times of poor company performance, the growing

concerns about accountability and transparency, and investors’ concern over their

investment returns (especially with the increase of institutional investors representing

large holdings of client’s superannuation funds).

Corporate governance guidelines tend to concentrate on such issues as board

structures and composition, the number of non-executive directors, the use of

committees, especially audit and risk management, nomination and remuneration, and

the number of meetings attended by directors. These are used to reach a conclusion

that if these guidelines have been followed, then good governance has also been

achieved. However, there is now some questioning in relation to how these guidelines

and regulations actually aid the corporate governance issue. Extensive research

studies have been carried out examining the relationships of various variables to

company performance. Researchers have attempted to find some sort of link via

statistical analysis such as regression analysis, Tobin’s Q and other formulae between,

for example, the number of independent directors and company performance. The

26
criticism of these studies is that the way these studies have been conducted has not

yielded definitive results.

More recently researchers such as Leblanc and Gillies (2005) have examined

qualitative issues that may impact on the way a board makes its decisions.

Behavioural concepts normally rest with the social sciences. However it is being

recognized that board dynamics and behaviour have an impact on board decisions and

should be examined in a business context. Given the paucity of qualitative research,

this exploratory research examines the views that directors have on their roles and on

some of the governance issues. A number of interesting viewpoints, not always in

agreement with current conventional wisdom, or the current academic literature have

emerged.

This study builds on the work of Leblanc and Gillies (2005) by determining the views

of some non-executive directors on some of the issues concerning corporate

governance. As this is small study, not based on random selection, it is difficult to

generalise the findings. Whilst the findings may not be representative of the

population, nevertheless the results and the issues raised by the directors themselves

indicate a growing interest and concern in corporate governance.

The objective was to present non-executive directors’ views based on their own

personal experiences in the boardroom, with the aim of identifying issues of concern

which are not always at the forefront of the corporate governance debate. The

research has identified some issues of concern. These include: the need for further

debate on whether boards should have a majority of non-executive directors; the need

27
to balance technical skills and interpersonal skills when appointing directors; the need

to balance board cohesion with vigorous debate and questioning in the boardroom; the

need for independence of mind during discussions; the increasing demands of

legislation and regulation placed on directors which they feel cannot be sensibly

achieved; the implied expectation that directors will act as ‘de facto’ managers by

knowing all the operating details of the organization.

Directors expressed concerns that the level of regulation had increased to such an

extent that the emphasis on compliance is leading to ‘ticking the box’, rather than

running the business and thereby missing opportunities. This did not necessarily lead

to better governance. In contrast, some felt that the ‘governance debate’ was overkill

and that their boards had already established good governance principles which were

really ‘a lot of commonsense’. This indicates a need for balance. Checklists are

important for boards lacking expertise or resolve. However boards already doing it

right feel aggrieved because of a feeling of being taken down to the lowest common

denominator. Regulators need somehow to achieve a balance between a ‘compliance’

culture and a culture of running a business in a risky environment.

These results suggest regulation and legislation are not enough. There is a ‘gap’

between what the legislators/regulators consider is necessary and what the

practitioners (the directors) feel needs to be adopted. Roberts et al (2005) also raise

the issue that there is a ‘relevance gap’ between practice and research. The relevance

of research to practitioners is an important issue, with studies such as Brennan (2004)

and Das (2003) indicating that there is a divide between academia and practitioners.

The readability of academic journals is questioned (Brennan 2004), as is the lack of

28
interaction with managers (especially senior managers) in the evaluation ‘of the

research question in terms of its relevance and significance’ (Das 2003, p.30). Aram

and Salipante (2003, p.190) point out that ‘knowledge becomes ‘relevant’ when it is

‘context specific’ for practitioners’. That is knowledge for practitioners ‘must be

customized, connected to experience and directed to the structure and dynamics of

particular situations’ (Aram and Salipante 2003, p.190). A major contribution of this

study is to address this relevance gap, albeit in a limited way.

There are some limitations to this research. It used a small sample of directors, which

may not have been representative of the population, and was not randomly chosen.

The criteria were that the interviewee had to be a current non-executive director,

irrespective of the type of organization or length of service. The researcher used her

own contacts and those of colleagues to approach potential interviewees. The

directors who responded did so because of their own interest in participating in the

research. They were also asked for names of contacts who also may be interested.

The problem with this method of selection is that ‘similar types’ of personalities may

dominate the research.

Qualitative research was chosen due to the richness of the data and as it explores

issues not amenable to survey or stock market research. However there are biases

common to such research. For example; the way a question is asked or the

interviewer’s body language may prompt the interviewee to respond in a certain

manner. Furthermore, there is a bias in the interpretation of the data. The

summarizing of the transcripts will have the researcher’s preferences for certain

29
expressions and words. Similarly the selection of quotes to illustrate a particular

viewpoint will also have a bias inherent to any text interpretations.

CONCLUSIONS

This research has gone some way to exploring corporate governance and corporate

performance in a broader context. The purpose of the study was to examine directors’

views on some of the issues of corporate governance and the executive/non executive

director debate. We found that directors see their roles as including monitoring

management and providing advice. However directors also make major decisions in

their own right. The extent to which directors will be involved in these three roles

will depend on the company performance, the complexity of the business, the

industry, the relationship with the CEO and whether or not shareholders are looking

for short-term or long term-results.

Directors are jointly responsible for the company due to the complexity of business;

individual directors may have more specialized roles. In a ‘smaller’ company, a

director may be more actively involved in the operational issues due to lack of

experience by management. Thus the divide between management’s role and the

directors may not be as clear as generally indicated in the literature.

Generally the directors’ role is to enhance shareholder value. This indicates that the

directors are accountable to shareholders. However the current trend also includes

‘corporate social responsibility’. Boards are increasingly being expected to accept

responsibility to other stakeholders such as customers, suppliers and employees. The

directors in this study expressed some concerns in being expected to keep abreast with

30
a large volume of regulations (for example health and safety, and environmental

issues) affecting other stakeholders besides shareholders.

Board independence has been extensively discussed in the governance literature and

used as a basis for governance principles as in the ASX Corporate Governance

Principles (2003). This is supposedly achieved by having a majority of independent

directors on the board. However the number of independents does not necessarily

lead to a ‘better’ board performance or improved company performance. Some

directors in this study pointed out that it is the individual’s skill base that is important.

Further, the ‘cost’ of having independent directors is their lack of knowledge of the

company (and possibly the industry) and limited time.

Whilst there is much discussion and research on the relationship between improved

corporate performance and some variables of corporate governance, this has not yet

conclusively been established. More research remains to be done on this relationship,

and on the behavioural aspects of boards. Researchers have recently started

examining board processes by attending actual board meetings (Leblanc and Gillies

2005). Such research needs to be expanded by others in their respective countries.

Leblanc (2004) has commented on the need to go beyond the quantitative research,

which is yielding a mixture of results, to perhaps a more qualitative approach as to

how boards work. Expanding this current research into a wider study of board

dynamics and decision making would be a start in developing a better understanding

of corporate governance.

31
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