Searching for the “mythical unicorn”- the missing link between boards of directors and organisational effectiveness
The performance of boards and their ability to influence organisational performance is a question that has long vexed researchers. There is general agreement that understanding how boards influence organisational performance is important. The accepted view is that a poor performing organisation has a poor performing board and conversely a high-performing organisation has a high-performing board.
Research investigating links between Boards and organisational performance has generally focused on single theoretical approaches (e.g. agency theory, or stewardship theory, etc), while ignoring the complex relationships and interactions that exist and occur between the board and the organisation’s executive. This focus while being informative and opening avenues of research has failed to substantiate a connection between any one theory of the role of the board, or of corporate governance, and improved organisational performance.
In general, the extant research has studied how boards influence organisational performance by identifying either single or multiple components of a board’s function, behaviour or structure, e.g. composition, size or CEO/chair duality, etc. and linking these to organisational performance. While causal relationships have been determined, the resulting outcomes, e.g. a stipulated number of independent directors, have not reduced the numbers of high-profile corporate failures (e.g. WorldCom or World Financial Crisis etc) and have failed to mitigate the effects of the Global Financial Crisis.
The fundamental questions have remained unanswered – what do boards that govern high-performing organisations have that the boards which govern poor performing organisations do not, and by what mechanism(s) do boards of high-performing organisations influence organisational performance?
Boards and the directors that constitute them are not homogeneous in their ability to govern high-performing organisations. Indeed, metaphorically speaking, just as the human gene and DNA determines what we will become as a species, the genes and DNA of a board will determine its capability of governing a high-performing organisation.
Drawing from the literature, the research in this thesis proposes that: 1) multiple genes (constructs), namely, intellectual capital and its components (human capital, social capital, structural capital and cultural capital), knowledge sourcing, team effectiveness and leader-member exchange when analysed, would reveal the DNA (characteristics) that determines the performance (high-performing or poor performing) of the organisation the board governs. 2) That when combined inside a new vehicle (model) called the “Third Team”; these enable boards to influence organisational performance.
Answering these questions has required new approaches to researching boards and their influence on performance. Identifying the “genes” of boards governing high-performing organisations necessitated the identification of high-performing organisations from within the sample. This entailed analysis of financial data covering a 10-year period (1999–2009) for each of the 64 (43 corporate and 21 not-for-profit) organisations involved in the study. The decision to include both corporate and not-for-profit sectors in the one study was purposeful. From a governance perspective, these two sectors are often viewed as being homogeneous. An additional outcome desired of this study was to identify if indeed there was a one-size fits-all approach to governance for these sectors. The results show that this is a false assumption. In fact, the two sectors differ in significant ways regarding their needs, with the differences highlighted throughout the results.
The participant groups selected for inclusion in the study were the chairperson, CEO, directors (minimum of 2) and executive staff (minimum of 2). The analysis identified 13 of the total 64 organisations (covering both sector groups) included in the study as high-performing organisations; the remainder were classified as poor performing.
From the constructs, 97 aspects of board characteristics (60 board attributes and 37 executive characteristics) were analysed using fuzzy set qualitative comparative analysis (fsQCA). The analysis detailed the subset relationships between board characteristics and high-performing organisations for each construct. The resulting causal recipe (mixture of characteristics) was tested for consistency (significance) and coverage (strength) using fsQCA software. Conducting semi-structured interviews with a range of participants from the sample organisations provided supporting qualitative data.
The results confirmed the existence of the third team – consisting of the board and the executive – and that the third team is the model through which the board influences the executive, which in turn, influences organisational performance. The results also supported the propositions that a board’s intellectual capital is the means by which it influences organisational performance through the executive, with the constructs of knowledge sourcing, team effectiveness, and leader-member exchange facilitating the board’s influence within the third team.
A third and significant result was identification of three defining characteristics of a high-performing third team: “trust, confidence and synergy”. These three elements are woven into the very fabric of the third team’s characteristics. They are indivisible and inseparable from those characteristics identified in the causal recipes.
The implications of this study for practitioners and researchers are significant and the findings may be generalisable to a wide range of organisations. The results provide insight into the types of characteristics within each of the constructs required by third teams of high-performing organisations, which clearly differ from the characteristics displayed by poor performing third teams. In addition, the results demonstrate that corporate and not-for-profit boards are not homogeneous, suggesting that future research should not treat them as if they require the same models or structures of governance.
The results argue against the widely accepted, unwritten rule, that the CEO is only point of contact the board has with the organisation, finding instead that organisational performance improves when boards take a proactive approach to developing and maintaining good interaction with the wider executive group with the context of the third team.
Finally, and importantly, the identification of the “genes and DNA markers” identified in these results provides a base for a new stream of future research. This future research may verify these results or identify new genes and DNA required by the third team.