How to judge a director’s character

The reputations of many boards have been tarnished because of the questionable behaviour of one or more of their directors, but how does one assess a person’s integrity?

This question has gained more prominence since the recent release of the third edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, which highlights the importance of doing character checks on new directors.

Recommendation 2.1 suggests that listed entities should “undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director”.

But while it is relatively easy to check a candidate’s experience, education and criminal or bankruptcy history, Jane Stuchberry, a principal of Guerdon Associates, says the assessment of someone’s character is far more challenging and can be complex and time consuming.

She notes that most researchers agree that a person’s character develops throughout life and is relatively fluid and responsive to context, rather than a static set of underlying traits.

She adds: “Organisational psychologists frequently use instruments, such as personality tests, to assess temperament and there are some instruments available that purport to measure character. However, these assessment tools are most useful when used for professional development purposes, rather than for selection.

“It is not difficult for candidates to respond to the questions in a way that creates a favourable impression (many tests have a built-in ‘fake good’ scale designed to control for this problem, but it is still possible that test results can be manipulated despite these indicators).

“Interviews, too, are widely used to assess character, but they are also not particularly effective. A person’s strength of character tends to emerge only under certain circumstances (such as when the person needs to make a difficult decision or is under enormous pressure), and even in a Behavioural Event Interview where the candidate describes in detail such challenging situations, character traits may not be revealed. It is also not possible to probe for these attributes directly (for example, a question such as ‘Tell me about a time in which you acted honestly or behaved with integrity’ is akin to ‘leading the witness’ and thus can be readily manipulated).”

Stuchberry believes the “deep reference check” is a more effective way of assessing character. It involves talking to many referees in some depth, including those who were not provided by the candidate.

“It is possible to ask the referees provided by the candidate for a referral to others who may have worked with or served on a board with the candidate previously,” says Stuchberry.

“These referrals will lead to a second or even third tier of people who are likely to be more unbiased than the original referees. It is also possible that directors can use their own networks to identify people who know, or have worked with the candidate, or may even use professional networking sites such as LinkedIn to identify and make contact with people who have worked at the same organisations as the candidate. These are known as ‘backdoor’ reference checks.”

Stuchberry says another way of assessing a person’s character is to thoroughly analyse their resume and conduct due diligence on their previous board positions. Who else served with them on those boards? How did those boards perform at the time that the candidate served on that board? Is there any evidence of impropriety or unethical conduct?

“While this approach may provide some indicators as to a person’s character ─ that is, we are in part ‘defined by the company we keep’ ─ it could also be extremely misleading. In other words, just because a director served on a board with someone who has a track record of unethical behaviour, does not necessarily mean that this director also behaved unethically. It does, however, provide you with an opportunity for deep exploration of the candidate’s possible role in any questionable activity or decision-making.”

Stuchberry notes that many boards also arrange social occasions to assess the “chemistry” between a candidate and the directors, and to obtain directors’ input into the nomination process. But she warns that there are a number of drawbacks associated with this approach.

“The first problem is known as the ‘halo effect’ ─ that is, people have a predilection for observing attractive personality traits, such as being energetic, optimistic, confident (which are easy to recognise in a social setting), and assuming that the person also possesses positive character traits. For example, we tend to unconsciously assume that if a person is energetic and optimistic, they are also honest, moral and trustworthy. It is important to remember that positive personality traits and character traits do not necessarily co-exist or are positively correlated.”

Stuchberry adds that because character traits are typically only revealed in specific, uncommon “character-challenging” situations, they cannot be reliably assessed in a social situation where the candidate is likely to be on his or her best behaviour.

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