Directors' insights from inside the boardroom: a New Zealand perspective
Smith, Janine Laurel
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The corporate failures of the last decade have drawn attention to the performance of the boards leading the companies that shape nations’ economies. The structural and financial measures previously used to determine board effectiveness and company success are now being questioned, and governance research is shifting towards examining behavioural aspects of boards. This reorientation reflects a growing recognition that the board is a social system that operates as a work group, so its behavioural elements will influence board effectiveness. This view has been supported by research that has sought the views of directors - those inside the boardroom - on board activities and performance. Calls have been made for further studies that draw on the ‘insider’ perspectives of directors to expand this body of knowledge, but it is recognised that gaining access to those inside the boardroom presents practical challenges. This study used semi-structured interviews to access the views and experiences of 35 New Zealand boardroom ‘insiders’ on the characteristics and outcomes of effective and ineffective boards. It therefore adds to the important emerging strand of behavioural research into board performance and, as the first New Zealand study of its type, contributes to international studies on board behaviour. The findings identify insights from the different participant groups inside the boardroom - chairs, directors and CEOs - to identify the varying perspectives they may have based on their different board roles. In addition, comparisons are drawn between the experiences of board members from two company types – public listed companies (PLCs) and state-owned enterprises (SOEs) - which have differing characteristics that influence boardroom dynamics. Further, this study examines the characteristics and outcomes of ineffective boards, a perspective often neglected in prior studies. The findings point to certain board characteristics as having particular significance because of their potential to undermine board effectiveness. A key contribution of this study is that it has confirmed the importance of understanding behavioural, as opposed to structural, dimensions of board performance, since internal board relationships and board-management relationships in particular are seen as both a cause (characteristic) and effect (outcome) of both effective and ineffective boards. The findings also offer some notable extensions to these behavioural aspects of boards, which have been less apparent in prior research. First, the New Zealand board member participants identified the extent to which negative director characteristics and poor internal board relationships can negatively impact board effectiveness. Second, boardroom practice - a new concept developed from this study that encompasses boardroom atmosphere, debate, and decision making - was found to be both a driver and outcome of both effective and ineffective boards. In particular, poor boardroom practice was perceived to be the most significant contributor to an ineffective board. Third, the findings point to the potentially negative impact of board diversity (in terms of social and value diversity) on board effectiveness, as well as the positive impact of informational and skills diversity amongst board members. These insights emerged from this study’s unique comparison of directors’ experiences across two company types (SOEs and PLCs) that have differing approaches to board selection and diversity. Finally, the role of the board chair was seen as having the greatest influence (both positive and negative) on boardroom practice and board effectiveness/ineffectiveness. While the importance of the chair’s role is increasingly recognised in the corporate governance literature, the extent of the potential negative influence of the chair is less apparent in prior studies. In combination, the findings of this study provide insights into the drivers of board effectiveness and ineffectiveness and the sorts of outcome measures that are thought to signal good board performance. They have the potential to help improve board performance and evaluation, and to reduce the likelihood of perpetuating the corporate governance failures of the past.