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E-MailSteve Boivie is Professor of Management at Texas A&M University Mays Business School; Michael C. Withers is Associate Professor of Management at Texas A&M University Mays Business School; Scott D. Graffin is Professor of Management at the University of Georgia Terry College of Business; and Kevin P. Corley is Professor of Management and Entrepreneurship at Arizona State University W.P. Carey School of Business. This post is based on their recent paper, forthcoming in the Strategic Management Journal.
Introduction
In the fifteen years since the passage of the Sarbanes-Oxley (SOX) Act in the U.S., several institutional and regulatory changes have helped reshape boards of directors. During this time, other factors have emerged to place greater pressure on boards as well. In particular, larger activist investors have applied pressure on boards to focus their efforts on managerial oversight. Increasingly third-party rating services and proxy advisors such as Institutional Shareholder Services (ISS) have suggested boards need to be more independent and focused on shareholder interests. Given this changing context, we conducted extensive interviews with 50 active directors and executives to try and better understand how directors view their jobs and what they view as some of the best practices.
How do directors view their board service?
Our informants consistently told us they view their primary task as working with the executive team to help improve and inform decision making. From this perspective, directors need to trust their CEO in terms of the strategic direction of the firm, and if that trust is not there, the CEO should be removed. Directors do not necessarily view their responsibility as explicitly monitoring for opportunism. Reflecting this point, one director stated, “The board has a separate fiduciary responsibility to work on behalf of shareholders, but that doesn’t mean that they’re beholden to someone other than the management team, because the management team has that same responsibility.” Interestingly, however, as managers prepare for and conduct due diligence in expectation of deep discussions and probing from the board on strategic issues, indirect monitoring often occurs through an “invisible hand.”
Are insider directors needed?
Our findings suggest that the interface between a board of directors and executives of a firm is more complex than previously conceptualized. Empirical research on boards of directors typically conceptualizes that the directors only interact with other directors and the only executives with whom directors have access are those that sit on the board. Indeed, recent research has suggested that when the CEO is the only insider on the board, this puts the CEO in a privileged position to broker and be the gatekeeper for organizational information. Our interviews reveal, however, that other executives, even those who do not sit on the board, regularly make presentations to the board, sit in on board meetings, and often socialize with members of the board.
How do directors want board service to feel?
A positive atmosphere on the board is critical to most directors, and they discussed this as an important aspect of board norms and culture that influences board effectiveness. In most cases, the board does not represent a director’s primary job, and they perceive their board work as “giving back.” As such, directors seek and highly value having a positive experience from their board service. As one director explained, “almost without exception the people I worked on boards with were really first-class people that work together as a team.” Board members clearly pointed out that the focus on a positive atmosphere did not mean boards avoid conflict and deep discussion (as we will discuss below); however, these individuals emphasized the need for healthy and constructive conflict.
How can boards increase diversity?
Our interviewees generally acknowledged the benefit that derives from diversity on the board, which is reflected in much of the recent research on board diversity. At the same time, many directors, after noting the need for diversity, would immediately pivot and note this was not automatically achieved through demographic diversity. One director noted, “well diversity and I don’t mean diversity necessarily of sex and race and so forth although that obviously is very important thing in today’s world but mainly diversity of thought and diversity of background.” Many directors also discussed the challenges they experience in recruiting diverse directors.
What role do executive secessions perform in the board’s work?
Our findings point to the important yet understudied role of executive sessions. Whether including or excluding the CEO, these discussions can be critically important to the functioning of a board. These discussions are “off the record” allowing the board and the CEO to talk about sensitive corporate matters. Executive sessions without the CEO allow individual directors to raise any concerns about the organization and its executive team. For those sessions involving CEOs, the executive session can be critical as well. As one executive stated, “if we’re doing something that is a discussion about, say an acquisition, we’ll do that in an executive session because I don’t want to minute it.”
Managerial Implications
The findings of our interviews have several implications.
- Cultivate trust and encourage the board to be involved in strategy. As we said, directors generally don’t really want to monitor, and they are not sure if they can do so effectively. They prefer to start from a position of trust. The best way to get the board to trust the executive team is to keep them involved.
- Bring executives into the board meeting. Legislators have pushed for increased structural independence and companies have responded. Only 20% of public firms have more anyone other than the CEO as part of the board. However, there is still a need for the deep expertise of the executives. In the firms we spoke to, many of the firms have responded by bringing the top executive team into the room.
- Encourage diversity in the boardroom. Directors say that they value diversity, but they are also worried about bringing in new directors who don’t understand how things work. Executives, especially CEOs have a big influence. They can work to actively promote minority directors, which will in turn help your board be more effective.
- Understand the importance of executive sessions for directors. Directors we spoke to all mentioned executive sessions. But the most effective executives scheduled the meetings so that these sessions wouldn’t go too long. Board members have other responsibilities, so by having executive sessions last, you don’t have to worry that the board will get too into their heads.
The complete paper is available for download here.
