Ever greater reliance is being placed on boards to act as custodians of the enterprise on behalf of shareholders and other stakeholders. Yet cases of inadequate board supervision do surface. In response, a number of inquiries dating back to the mid-1980s have concluded that non-executive directors (NEDs) should be more vigilant in the governance of their organisations.
The 1992 Cadbury report signalled the governance revolution through scrutinising company directors who benefited from mortgages offered at favourable rates from company funds. A decade later, the American Sarbanes-Oxley legislation demanded more stringent governance, resulting in a wave of protests from either side of the Atlantic. Greater attention to governance protocols in the UK followed. However, while disciplined governance processes are needed to tease out risks and vulnerabilities, an overzealous focus on compliance with procedure has resulted in many board directors being unwilling to face what is going on in their corporation.
A global survey my colleagues and I conducted in December 2009 showed that risk managers, principally of financial services companies, had been trying for more than two years to warn their management and boards of the folly of continuing to invest in questionable financial instruments. Their voice was unheard. Sales were prioritised in the full knowledge that economic calamity was just around the corner. So much for 'hard governance'.
In fact, having undertaken 10 or so international surveys of board and director performance, the overwhelming finding highlights a need to attend to 'soft governance'. Why?
From Cadbury onwards, the growing demand for governance has arisen as a result of scandal. Directors' inability to address uncomfortable issues has meant more requirements for monitoring. Among the 3,500 boards studied, many board directors privately admit they long knew of the weaknesses in their management and in their company. In some cases, the insight into what was wrong and how to put it right was so penetrating that the upper echelon of the organisation could predict corporate collapse 50 months ahead. But nothing happened and paralysis prevailed.
What emerges is that serious attention needs to be given to better understanding the reasons for inhibited boardroom dialogue. Too many boards have a culture of politeness that stops anything sensitive bubbling to the surface.
Clarity over board role, purpose and contribution is of great importance. Central is the CEO and chairman positioning their jobs so that the strategy, vision and mission of the enterprise can be realised. Once this sacred dyad works, and is seen to work, permission is implicitly given to the board and management for them equally to adjust their roles to be flexible in response to external conditions. Worst is stubbornness in persisting with a predetermined view of what a chairman or NED does despite changing markets and economic reality.
A shared understanding over role and contribution signals a collective strategic and operational sense of how to make the difference. Clear on the way forward, directors feel comfortable interrogating arguments put to the board. Can you imagine your CEO or vice-president facing the indignity of having a proposal turned down? High-performing boards and top teams view such experiences as positive: 'We jointly spotted a problem before it became cancerous.' The values of the company are jointly lived by top management and the board.
Disappointingly, only 10% or so of boards exhibit best practice. In fact, my studies highlight that 85% of UK board directors hold no shared view of the role, purpose and contribution of their colleagues. More worryingly, a further 85% cannot agree on what is the competitive advantage of the firm on whose board they sit. No surprise then that those UK executives who sit as board directors downrate their chairmen and NED colleagues by as much as 40% on all measures of board and director performance.
When 'hard governance' goes wrong, underlying 'soft governance' defects can be glaringly exposed. Take BP. Yes, Tony Hayward can be critiqued for appearing awkward in front of the media. But where was the board in all this? Did it limit itself to thinking about how to cap the offending oil well? Did the board push to enhance the BP image through sophisticated lobbying in Washington? In fact, who leads the US lobbying team, a Brit or an American? Has the BP board tried to influence EU commissioners to champion the BP point of view? Engineers deal with oil; the board has to take a broader point of view and exercise 'soft power'.
Hard governance disciplines need to be complemented by NEDs' and chairmen's sensitive soft governance skills. I doubt whether a nationwide commission will be appointed to examine the intricate relationship between soft governance capability and hard governance application. But, until that happens, only a few will admit that board directors and chairmen are insufficiently skilled to reverse dysfunctional board dynamics.
Andrew Kakabadse is professor of international management development at Cranfield and a visiting professor at US, Australian, French and Chinese universities. His research covers boards, top teams, government and policy design. He has published 36 books, over 200 articles and 18 monographs. Kakabadse has held positions on a number of boards, is co-editor of the Journal of Management Development and Corporate Governance and is a member of CMI's Academic Advisory Council.