Using behaviours to drive board performance
High-performing boards proactively manage two critical dimensions of their work: the frameworks and systems that support good governance and the way directors interact, contribute and make decisions. These dimensions are intertwined and should be complementary to drive good performance. However, the way directors interact and make decisions is often left to chance and many boards have an opportunity to enhance their performance by focusing on that dimension of their work.
Behaviours are a critical element of the “human” dimension of board work. They are part of how the board goes about performing its role. A precursor to knowing how a board discharges its role is for it to first understand exactly what its role is. It’s pleasing to see more and more boards proactively investing time and effort to ensure clarity in their role and how it differs from that of management.
However, fewer boards have taken the next step and agreed on how they are to perform their role and what behaviours they expect of directors in and outside the boardroom.
Why are behaviours important to board work?
The first factor to consider is that boards only make decisions as a group or a collective. How the individual directors work together as a collective is fundamentally important to a board’s success. Ensuring group decision-making is as effective as possible is an important task for any board. A critical part of that task is ensuring desirable behaviours are exhibited in the boardroom – behaviours conducive to effective decision-making by the collective. In my view, this is not something that should be ignored or left to chance.
A second factor is that directors are usually recruited for their extensive skills, experience and knowledge. They bring an enormous amount of potential value to the organisation. Non-executive directors (NEDs), in particular, are in a unique position to add value through their highly skilled and predominantly external perspective.
It is incumbent on boards to ensure the directors’ collective skills and knowledge are put to the best possible use. One way of promoting that is to articulate how directors are expected to apply their capabilities to the work of the board. This should be done in an observable way so that it is clear to other directors when and how a director is applying his or her skills and knowledge. Behaviours are observable by others and it is useful if the behaviours conducive to good performance are agreed to and articulated as a guide for the contributions of directors.
Third, NEDs spend very little time together. Research by UK consulting firm Institutional Design indicates that the boards of large, global companies spend on average 107 hours or just 13 days in board meetings each year. Directors typically spend about another 15 hours in committee meetings annually – so that’s about 120 hours each year spent in board and committee meetings.
In that time, directors are being asked to make the most important decisions the organisation faces, often in an extremely ambiguous environment. Their roles are highly complex and they are accountable for the organisation’s performance. Yet they spend only around 120 hours each year performing their role and they do that as individual members of a collective.
For these reasons, there is a compelling case for boards to invest time and effort in first agreeing to and then fostering the desired behaviours conducive to the effective working of the board, in and outside the boardroom.
After the UK government bailed out some of the British banks, it commissioned Sir David Walker to review corporate governance in the banking sector. Sir David found the “principal deficiencies in [the bank] boards related much more to patterns of behaviour than to organisation”.
He emphasised the inherently behavioural nature of governance and concluded that substantive behavioural change was much more important (although much more difficult to achieve) than further regulation. His recommendations focus very much on trying to drive constructive behaviours rather than increasing regulation, which risks promoting “box-ticking conformity”.
Interestingly, Sir David highlighted the asymmetry between errors of commission, which are focused on by regulators and enforcers (with the benefit of hindsight) and errors of omission, which tend to stem from behavioural failings and are more difficult to pin down.
Sir David’s recommendations were adopted by the Financial Reporting Council (FRC) in its recent review of the UK Combined Code. In doing so, the FRC reiterated that the principles of the code “are intended to encourage appropriate board behaviours”.
The FRC has introduced various amendments to the code to encourage a greater focus on board behaviours. These include creating individual development plans for each director and requiring annual board performance reviews to be externally facilitated at least every three years. Note that the UK code operates on the same “comply or explain” or “if not, why not” basis as the Australian Securities Exchange Corporate Governance Council’s Principles and Recommendations.
Eminent governance commentator Professor Bob Tricker recently summed it up nicely: “Companies are not moral beings. They do not have consciences. The morality of companies has to be supplied by their directors.”
Morality is only visible through the behaviours exhibited by individuals. For companies, it is up to the directors to demonstrate the behaviours that define the company’s morality.
Good governance necessarily requires effective human interaction and appropriate, constructive behaviour as well as robust frameworks and systems.
We can all think of examples of inappropriate behaviour at board level being a contributor to poor outcomes. It’s easy to focus on these examples because they are often publicised – almost always with the benefit of hindsight. There are also countless examples of constructive behaviours by directors leading directly to excellent outcomes, although these are less publicised.
What do directors think?
Institutional Design has found that directors generally express high levels of satisfaction with director behaviours on their boards, even though some of these boards have not articulated their desired behaviours and so may not have a shared understanding of that. There tends to be a lower level of divergence of opinion on director behaviours than on other matters.
Generally speaking, directors expressed greatest comfort with the board’s working style and the openness and quality of discussion at meetings. They expressed the lowest levels of comfort with the diversity of opinion and language in board discussions and the approach to continual learning and development.
This data suggests many boards do a great job fostering the desired behaviours in and outside of the boardroom, and that some of them do so without necessarily having debated, agreed to and articulated those desired behaviours. Presumably, those boards have not seen the need to devote precious board time to doing so.
That is a perfectly valid approach. However, the risk in that approach is that there will almost certainly be differences of opinion between directors about whether certain behaviours are constructive and conducive to the effective functioning of the board.
We each see the world through our own unique lenses and have our own personal values and preferences. Directors see things differently and behave in different ways in response to a particular circumstance. If the board’s expected behaviours have not been agreed on by all directors, it can be very difficult to challenge specific behaviour. It might be seen by some as inappropriate and others as entirely appropriate in the circumstances. Context will be a major factor, as well as each director’s individual paradigm and preferences.
Leading practice
Leading practice involves the following elements:
- The board analyses the behaviours critical to it successfully performing its role (based on an existing clear understanding of its role). Directors debate these and reach a shared understanding of the behaviours necessary or desirable for the board to perform its role most effectively. These then become the behaviours expected of individual directors. Having a clear, shared understanding of what is expected is fundamentally important to maximising performance. Directors are far more likely to subscribe to, and thus display, the desired behaviours if they have contributed to the debate about which behaviours are critical to the board’s success.
- The next step is for the expected behaviours to be articulated and made clear to all, using practical examples. Directors are more likely to demonstrate the expected behaviours if they have been clearly set out in a tangible way. Doing so also gives the chairman and other directors a platform to challenge undesirable behaviour. Sir David argued for greater clarity in relation to behaviours, recognising the dynamic and complex nature of governance and the risks associated with undue specificity.
- Directors should regularly give each other feedback and hold each other to the expected behaviours. This could be formalised by having a director present a plus/delta critique at the end of each board meeting. Immediate “real time” feedback is highly desirable because it fosters desirable behaviour and enables potentially problematic behaviour to be detected and addressed early, before it becomes entrenched.
- Periodic reviews should be done of the performance of the board as a whole and individual directors. They should include an assessment of the extent to which the expected behaviours have been demonstrated. A formal process is desirable to focus attention and to provide a forum for directors to comment anonymously if required.
- In a leading board, undesirable behaviour is identified quickly and addressed and directors are supported in their efforts to change behaviour. This will include development plans for individual directors. Discussing concrete examples may lead to an understanding of why the behaviour occurred, which potentially fosters trust and deepens awareness of the diverse paradigms directors bring to the board.
- The board might invest in enabling directors to understand their different decision-making styles and behavioural preferences (constructive and otherwise). It is not unusual for executive teams to invest a lot of time and effort in optimising the interactions between team members to enhance team effectiveness. It is far less common for boards to do the same. A key reason for this is the scarcity of time available for boards. However, given the vital importance and the nature of the board’s work as a collective, it is worthy of consideration, particularly if the board is not in a steady state.
The role of the chairman in fostering constructive boardroom behaviours cannot be overstated. In all probability, the chairman’s views will largely determine the board’s approach to behaviours. They will also have a great effect on the conduct expected of directors.
Taking the time to proactively agree and articulate the behaviours expected of directors can be a powerful tool to enhance board performance. The key challenges are to invest the necessary time and to translate lofty concepts such as accountability, fairness and transparency into tangible boardroom practice.
Sam Butcher is a director of Drascombe and senior adviser at Institutional Design