1.1         Defining Boardroom Dynamics

People often use the term ‘board dynamics’ when they do not really know what is going on. However, here are some definitions of board dynamics that may help you initially orientate to what may be a new area and perspective of corporate governance.

Following the 11 Cs model (which will be discussed here in), board dynamics as a noun and as an area of study is:

1. The theory and application of the behavioral aspects of board

As an adjective describing the dynamics of boards, board dynamics are:

2. The psychological processes that influence how boards

If we combine these first two definitions, a slightly more technical definition is that board dynamics are:

3. The psychological processes that moderate structural and individual inputs to board

 

Furthermore, if we recognize that psychology is fundamentally about how people and groups relate to each other and that what happens in the boardroom can reverberate outside of it, then we reach this most complete definition of board dynamics as:

4. The interactions between board members individually and collectively, and how these influence, and are influenced by, their wider stakeholder system.

 

And finally, here are two additional, less technical definitions that add some explanatory colour following the themes that have been discussed in this chapter so far:

5. Board dynamics opens the black box of the boardroom behavior to see how things actually play out rather than what is supposed to happen on paper.
6. Board dynamics is about how boards behave, and indeed about how they misbehave, rather than about what tasks they do. It is about how they discuss issues rather than what issues they discuss.

 

1.2              The Evolving Focus on Corporate Governance

The topic of corporate governance is a vast subject that enjoys a long and rich history. It’s a topic that incorporates managerial accountability, board structure and shareholder rights. The issue of governance began with the beginning of corporations, dating back to the East India Company, the Hudson’s Bay Company, the Levant Company and other major chartered companies during the 16th and 17th centuries.

While the concept of corporate governance has existed for centuries, the name didn’t come into vogue until the 1970s. It was a term that was only used in the United States. The balance of power and decision-making between board directors, executives and shareholders has been evolving for centuries. The issue has been a hot topic among academic experts, regulators, executives and investors.

Corporate Growth Places Emphasis on Developing Corporate Governance

After World War II, the United States experienced strong economic growth, which had a strong impact on the history of corporate governance. Corporations were thriving and growing rapidly. Managers primarily called the shots and board directors and shareholders were expected to follow. In most cases, they did. This was an interesting dichotomy, since managers highly influenced the selection of board directors. Unless it came to matters of dividends and stock prices, investors tended to steer clear from governance matters.

In the 1970s, things began to change as the Securities and Exchange Commission (SEC) brought the issue of corporate governance to the forefront when they brought a stance on official corporate governance reforms. In 1976, the term “corporate governance” first appeared in the Federal Register, the official journal of the federal government.

In the 1960s, the Penn Central Railway had diversified by starting pipelines, hotels, industrial parks and commercial real estate. Penn Central filed for bankruptcy in 1970 and the board came under public fire. In 1974, the SEC brought proceedings against three outside directors for misrepresenting the company’s financial condition and a wide range of misconduct by Penn Central executives.

Around the same time, the SEC caught on to widespread payments by corporations to foreign officials over falsifying corporate records. During this era, corporations started to form audit committees and appoint more outside directors. In 1976, the SEC prompted the New York Stock Exchange (NYSE) to require each listed corporation to have an audit committee composed of all independent board directors, and they complied. Advocates pushed to get governance right by requiring audit committees, nomination committees, compensation committees and only one managerial appointee.

The 1980s Brought a Corporate Governance Reform Counter-Reaction

The 1980s brought an end to the 1970s movement for corporate governance reform due to a political shift to the right and a more conservative Congress. This era brought much opposition to deregulation, which was another major change in the history of corporate governance.

Lawmakers put forth The Protection of Shareholders’ Rights Act of 1980, but it was stalled in Congress.

Debates on corporate governance focused on a new project called the Principles of Corporate Governance by the American Law Institute (ALI) in 1981. The NYSE had previously supported this project, but changed their stance after they reviewed the first draft. The Business Roundtable also opposed ALI’s attempts at reform. Advocates for corporations felt they were strong enough to oppose regulatory reform outright, without the restrictive ALI-led reforms. Businesses had concerns about some of the issues in Tentative Draft No. 1 of the Principles of Corporative Governance. The draft recommended that boards appoint a majority of independent directors and establish audit and nominating committees. Corporate advocates were concerned that if companies implemented these measures, it would increase liability risks for board directors.

Law and economic scholars also heavily criticized the initial ALI proposals. They expressed concerns that the proposals didn’t account for the pressures of the market forces and didn’t consider empirical evidence. In addition, they didn’t believe that fomenting litigation would serve a purpose in improving board director decision-making.

In the end, the final version of ALI’s Principles of Corporate Governance was so watered down that it had little impact by the time it was approved and published in 1994. Scholars maintained that market mechanisms would keep managers and shareholders aligned.

The “Deal Decade” Leads to Shareholder Activism

The 1980s was also referred to as the “Deal Decade.” Institutional shareholders grabbed more shares, which gave them more control. They stopped selling out when times got tough.

Executives went on the defensive and struck deals to prevent hostile takeovers.

State legislators countered takeovers with anti-takeover statutes at the state level. That, combined with an increased debt market and an economic downturn, discouraged merger activity. The Institutional Shareholder Services (ISS) was formed to help with voting rights. Shareholders struck back with legal defenses, but judges often favored corporate decisions when outside directors supported board decisions. Investors started to advocate for more independent directors and to base executive pay on performance, rather than corporate size.

Financial Crisis of 2008

By 2007, banks had been taking excessive risks and there was growing concern about a possible collapse of the world financial system. Governments sought to prevent fallout by offering massive bailouts and other financial measures. The collapse of the Lehman Brothers bank developed into a major international banking crisis, which became the worst financial crisis

 

since the Great Depression in the 1930s. Congress passed the Dodd-Frank Wall Street Reform and Consumer Act in 2010 to promote financial stability in the United States.

The fallout from the financial crisis has placed a heavier focus on best practices for corporate governance principles. Boards of directors feel more pressure than ever before to be transparent and accountable. Strong governance principles encourage corporations to have a majority of independent directors and to encourage well-composed, diverse boards.

Advancements in technology have improved efficiency in governance and they’ve created new risks as well. Data breaches are a new and real concern for corporations. The first targets were banks and financial institutions. As these institutions have bolstered their security measures, hackers have turned their efforts to smaller corporations within a variety of industries, including governments.

Today’s boards of corporations and organizations of all sizes are finding that the best way for them to protect themselves, their shareholders and stakeholders is to use technology to their advantage by taking a total enterprise governance management approach. Diligent, a leader in board management software, provides for their needs with Governance Cloud, a suite of fully integrated and highly secure governance tools. Diligent’s software solutions help boards put their best foot forth in assuring transparency, accountability, compliance and efficiency.

The history of corporate governance continues to be rewritten. How we define corporate governance will continue to be in a state of evolution in the coming years. Diligent will be following the trends and regulations to help boards perform their best regardless of what the future brings.

 

1.3 The three phases of board evolution

1. Ceremonial board

2. Liberated board

3. Progressive board

Introduction

Boards of directors have undergone a rapid transformation since the Sarbanes-Oxley Act of 2002. The shift in power between the CEO and the board is perceptible. Directors are taking their responsibilities seriously, speaking up, and taking action. It’s a positive trend and an exciting time for boards. But the evolving relationship between the CEO and the board has yet to find the right equilibrium in most cases. It’s important that boards become active, but there is danger in letting the pendulum swing too far. Astute directors and CEOs sense the tension.

 

They recognize that just as past practices have failed them, recent attempts to make the board a true competitive advantage are not always hitting the mark.

The Real Risk of Value Destruction

The change in boardrooms today is not marked by the people but rather by the social atmosphere. Boardrooms have more energy, liveliness, inquisitive interactions among directors, and thoughtful engagement by CEOs. The difference today is a mindset, an emerging collective desire to do something meaningful. It appears that boards of directors, as an institution, are coming of age.

Much of the public outcry—and resulting regulation—of recent years is based on the failure of boards to root out fraud, some of which destroyed whole companies. But boards are recognizing that they have failed in another, arguably more widespread, way: by allowing (sometimes inadvertently contributing to) faltering performance.

Entire industries collapsed in the wake of the dotcom bust; too many companies failed to adapt their businesses to the different external environment after the recession began and after the 9/11 tragedy. No one could have foreseen global terrorism, but what about anticipating the fallout from the go-go years of the New Economy, or not recognizing the importance of emerging new channels? Couldn’t boards have prompted their managements to pinpoint and consider these issues? In some cases, boards have made costly mistakes. How about hiring a CEO from the outside who is a master of cost-cutting— when the company needed a leader who could grow the business? Or tying the CEO’s incentives to the wrong goals? Or approving a grand growth strategy with an unhealthy appetite for risk? Most boards want to do the right thing, whether it’s complying with the new rules (and there are a lot of them) or contributing in substantive ways on matters of choosing the CEO, compensating top management, ensuring that the company has the right strategy, and providing continuity of leadership and proper oversight. Their commitment and level of engagement marks a new stage in their evolution.

The good news is that these boards are unlikely to commit the sins of omission that were common among the passive, CEO dominated boards just a few years ago. The bad news is that they are now vulnerable to committing sins of commission. That’s because past board experience has not fully prepared directors and CEOs for the challenges they face today.

Without clear guidelines to take them forward, well-meaning boards can actually erode the vitality of the company and drain time and energy from the CEO. It’s a real danger, and companies truly suffer when this happens. To achieve their full potential, boards must continue to evolve. They must make a conscious effort to go to the next level.

The Evolution of the Board

 

Boards began their evolution in the pre–Sarbanes-Oxley era of passivity. Back then, they were “Ceremonial” boards, because they existed only to perform their duties perfunctorily.

Sarbanes-Oxley has driven many boards to a second evolutionary phase; directors have become active and “Liberated” themselves from CEOs who previously dominated the boardroom. But there is also a third phase awaiting boards, when active directors finally gel as a team and become “Progressive.”

1.      Ceremonial Boards

A decade ago, when one non-executive director joined the board of a paragon of American industry, a long-serving colleague told him, in private, “New directors shouldn’t speak up during board meetings for the first year.” That attitude is untenable today and, in fact, that board is much different now. But such comments are indicative of the culture of passivity that permeated the Dark Ages of corporate governance.

Some readers may remember when such Ceremonial boards were commonplace. Management had all its ducks in a row by the time a board meeting began. There was a scripted morning presentation that was rehearsed to the second in a tight agenda. The CEO communicated very little with the board between meetings, other than with the one or two confidants the CEO trusted and worked with if the need arose.

These boards perfunctorily performed a compliance role. Many directors served for the prestige and rarely spoke among themselves without the CEO present. They made sure to fulfill their explicit obligations, including attending the required board meetings and rubber- stamping resolutions proposed by management.

The general interest media rarely reported directors’ names. So back then, the prospect of shame and embarrassment when a company ran into trouble wasn’t much of a threat.” Such were the norms and expectations of directorship during this era. Most readers will recall a few boards that fit this description at some point in time. Hopefully, it doesn’t sound like any boards on which they now serve, though these boards do still exist.

2.      The Liberated Board

Most boards left their Ceremonial status behind after the passage of Sarbanes-Oxley. A new generation of CEOs now expects boards to contribute. And candidates for directorship now expect active participation as a condition of their acceptance. There is a general sense of excitement as directors embrace an active mindset.

 

The transition to liberation had really begun about a decade earlier. In 1994, the General Motors board, advised by Ira Millstein, first published its “Guidelines for Corporate

Governance.” The document was widely praised as a model for corporate boards. BusinessWeek even called it a “corporate Magna Carta,” referring to the document signed in

1215 by King John that stipulated, among other things, that no one, including the King, is above the law

The comparison was fitting; GM’s CEO and Chair, Robert Stempel, stepped down late in 1992 after losing the confidence of GM’s non-executive directors. When the non-executive directors named one of their own as Chair, it signaled a distinct change in the general attitude of boards as passive bodies. No one dreamed such a thing would happen at the world’s largest company. Many directors around the country took note. In particular, the boards of several prominent bellwether companies, including those at American Express, AT&T and IBM, followed GM’s lead.

Still, not that many boards entered the ranks of the Liberated in the 1990s. Though board watchers and activists such as Bob Monks, Nell Minow, Sarah Teslik, Richard Koppes (of Calpers), and others pressed for reform, many companies under fire were reluctant to make wholesale changes in their governance practices.

There was no urgency for change until the scandals broke at Enron, WorldCom, Tyco, HealthSouth, Adelphia, and elsewhere. Then came the rapidly passed Sarbanes-Oxley Act of 2002, with its broad provisions on Audit Committee work, internal controls, and fraud prevention, along with the ensuing reforms enacted by the Securities and Exchange Commission and the stock exchanges, lawsuits filed against directors and corporate officers, and the public embarrassment of some very experienced directors. With so much shareholder and bondholder value evaporated in the scandals, the capital markets also began paying closer attention to corporate governance and to the possibility of pricing the perceived quality of transparency and governance into securities.

Directors saw their peers chastised and overwhelmingly heard investors’ calls to become active. Although some boards remain Ceremonial today, the pendulum swung decidedly toward Liberated boards. In many cases, incoming CEOs helped drive the change.

Liberation is good news. But while liberation can mean a high functioning team, it can also mean each director singing a different tune. If it’s not handled effectively, liberation can inadvertently make CEOs and management less effective, and can adversely affect the creation of shareholder value. It happens. Liberated directors often play to their own strengths individually, not as a collective body. They ask of their CEOs too many things, some of which are plainly minutiae or irrelevant. The limited time that these CEOs have to run their companies gets further diluted. This is the state in which so many Liberated boards sit today—though certainly not by intention.

The Progressive Board

The intent of directors who have liberated themselves is for their boards to become what I call “Progressive.” They comply meticulously with the letter of the law, and they also embrace its spirit. Further, they aim, as Andy Grove, founder, former CEO, and current Chair of Intel, is quoted by Fortune magazine as saying, “to ensure that the success of a company is longer lasting than any CEO’s reign, than any market opportunity, than any product cycle”).

To achieve this broader mandate, these boards become uniformly effective as a team, and they make their value evident while maintaining an independent viewpoint. Directors on a Progressive board gel into a coherent and effective group. All directors contribute to a dialogue that has lively debates, sticks to key issues while dropping tangents, and leads to consensus and closure. They challenge each other directly, without breaking the harmony of the group and without going through the CEO.

Directors find the give and-take in board meetings energizing. They enjoy the intellectual exchange, and they learn from each other. They look forward to meetings. The board and the CEO have a working relationship that is constructive and collaborative, but board members are not afraid to confront hard issues.

The lead director, or whoever facilitates executive sessions, is a liaison between the board and management who keeps executive sessions focused and running smoothly, and is very effective at communicating the heart of the board’s viewpoint, not a collection of opinions from individual directors, to the CEO. Feedback is constructive and highly focused in a way that helps the CEO. CEOs respect the Progressive board’s role and contribution, and are collaborative in their approach to the board.

The Progressive board adds value on many levels without becoming a time sink for management. The diverse perspectives of directors on the external environment, including legislative affairs, economic changes, global business, and financial markets, are a boon to management’s strategy-setting and decision-making efforts. Directors contribute most where their interest, experience, and expertise are greatest, and they know their viewpoints are expected. Directors also add value through their judgments on and suggestions for the CEO’s direct reports.

 

Progressive boards take their own self-evaluation—of the collective body as well as of individual board members—very seriously. There is a sincere effort to implement the findings of the evaluation on both a board and individual director level. In short, Progressive boards move the essence of their governance activities to comprise not only complying with changing rules and norms but also adding value to the long-term potential of the company. These boards are a competitive advantage in and of themselves.

Becoming a Progressive board is not beyond reach. Such boards exist at some of the largest companies in America, like General Electric, as well as at mid-caps like MeadWestvaco and smaller public companies, like PSS/World Medical.

The completion of this transformation is very much up to the CEO and the board. The first step is to realize where you are today to help a board realize where it stands and in what areas it could improve. Liberated boards like Jim Doyle’s don’t need dramatic overhauls. But they do need to recognize what is holding them back; the diagnostic can help. After that, it’s up to the directors and management to take conscious steps to change. The next three chapters are designed to help boards speed their transition.

 

 

 

 

 

 

1.1              Building blocks of a progressive board

There are three building blocks of a progressive board.

 

1. Group dynamics
2. Information Architecture
3. Focus on substantive issues
   1. Group Dynamics

The tone of interactions among board members and between the board and management is a fundamental difference between Ceremonial, Liberated, and Progressive boards. Group

dynamics underpins the board’s ability to do all the components of its job—whether it’s compliance and monitoring or making contributions to strategy and CEO selection. Unless individual directors can gel into a working group, they simply cannot be effective. That’s why group dynamics is the first building block of a Progressive board. Whether or not the individuals gel into an effective group is an unmistakable characteristic of a Progressive board. Every director should feel comfortable adding to the discussion. As Jeff Immelt, CEO and Chair of General Electric, says, “The boardroom has to be a place where every voice is heard. Our

meetings are very open. Directors can interact with anybody, at any time.”

 

2.      Information Architecture

How boards get information, and in what form, is vital to how the board perates. The mechanisms are typically very different for boards at different stages.

Sophisticated information architecture is key to successful boards. An easy rule of thumb is that each director should profit from a balance of internal and external information, a balance of information dependent from top management and information independent from top management, a balance of formal information and of informal information. When this balance is achieved, information design is usually solid.

Indeed information is best when it is designed in a way that informs the board about all the essential activities undertaken by the company and the issues facing it. When thinking of information design, boards typically think of information coming from management (how brief, well focused and strategic it is, prioritized, with executive summaries, key issues to tackle and options to consider). But information architecture should include also external information (what can we source from outside the company, such as from social media). It should also include formal information and informal information sources (such as informal networks: the

 

ability of the chairman of Singapore Airlines to maintain good relationships with union representatives is an important source of information for the company).

For the formal internal information, jointly designed board briefings that include financials with forecasts, a CEO report, risks and opportunity maps, materiality maps, analysis of the genepool and summary of financial analysts’ views contributes to the quality of the information architecture. Additionally, regular communications between management and the board, for example management letters in between meetings adds to efficient information. Committee reports are also fundamental in fomenting the effective architecture of information. Adequate reports, nevertheless, encompass analysis of specific issues rather than just recommendations. A key checkmark is whether the board is actively involved in designing the information and whether that information design changes with the firm, its environment and its strategy.

Informal channels of information are key as well and should be well elaborated themselves; for example meetings with employees and informal meetings of board members, all need both structuring, to give them potential, and some freedom, to give them creativity without infringing on management’s rights. In short, sophisticated (but not necessarily complex)

3.        Focus on substantive issues

What boards focus their time and attention on will determine whether boards are able to add value consistently. Lack of focus affects the board. They become frustrated because their discussion time is lacking on the central issues on which they believe they should devote their scarce time.

Directors feel rushed and leave board meetings knowing they have not covered the right thing. They lose confidence in the boards’ ability to add value at all.

 

 

 

1.2         Impact of boardroom dynamics on organizational performance

 

 

 

There have being a strong presumption that the effective use of board as internal governance mechanism is crucial to improved firm performance and profitability. Some of the board dynamics reviewed here includes composition, size, CEO Duality and diversity.

The Impacts

 

1. Those directors and officers on the inside of board meetings would generally agree that the quality of the interactions among the participants—or “boardroom dynamics”—is a crucial variable in effective decision-making and achieving other desired meeting
2. Corporations whose boards follow certain principles and practices have higher corporate Return on Investment (ROI) than those whose boards do not.
3. Board Size

The board size represents the total head counts of directors seating on the corporate board. Size of the board is recognized as one of the unique features of board dynamics with considerable but strategic impact on the board independence as well as the overall quality of corporate governance

 

The size of board is vital to achieving the board effectiveness and improved firm performance especially from resource dependency perspective which place more emphasis on the board ability to co-opt limited and scares resource from various external links.

Board size affects the quality of deliberation among members and ability of board to arrive at an optimal corporate decisions. Identifying the appropriate board size is of high significance because size can be detrimental to board effectiveness beyond certain limit. An optimal board size is a function of many variables such as firm age, size, industrial classification as well as the degree of monitoring and value addition required amongst others.

Small board size of about 5-9 members promotes critical, genuine and intellectual deliberation and involvement among members which presumably leads to effective corporate decision making, monitoring and improved performance.

4. Diversity of board

Board diversity involves having a well-balanced board membership that is made of individuals not necessarily from different cultural background but those from different professional fields which create synergy that helps board in carrying out its statutory responsibilities. Thus, corporate board diversity represents both demographic (e.g. gender, age, and ethnicity) and cognitive elements such as the industry experience, professional and educational qualifications.

Keeping a well-diversified cognitive board create an in-house self-reliance whereby everything firm requires ranging from effective monitoring, resource co-optation, to quality decisions and sound corporate initiatives are all within reach. Further to the above, a well diverse independent board is more vigorous in promoting corporate fair play.

5. Good board dynamics cannot be legislated, but it can be built over By having an open and trustful atmosphere directors can fulfill their roles in a more efficient way without being trapped in a rigid position.
6. Critical selection of board members based on skills and diversity (more women, young people, and different cultural background), creates an open atmosphere and yearly evaluation of the work becomes the new standard for good board dynamics.
7. Boardroom dynamics enhances individual decision making process in terms of integrity and morality and the question of individual responsibility /accountability from a board member’s perspective.

 

8. Facilitates collective responsibility/accountability within an corporation while taking ethical business behavior into account in the decision-making process.

 

 

 

1.3        Interest in human factors (Gross national happiness, human resources, management of talent, organizational culture, leadership development and succession, politics etc.)

·         Gross National Happiness (GNH)

Gross national happiness (GNH) is a measure of economic and moral progress that the king of the Himalayan country of Bhutan introduced in the 1970s as an alternative to gross domestic product.

Good governance is one of the nine domains of Gross National Happiness (GNH) aimed towards enhancing the well-being of the Bhutanese people. Unlike other domains, governance cuts across all domains/sectors and therefore, its effect on the society at large arises from the cumulative efforts of all sectors.

Rather than focusing strictly on quantitative economic measures, gross national happiness takes into account an evolving mix of quality-of-life factors.

The “four pillars” of GNH are good governance, sustainable development, preservation and promotion of culture, and environmental conservation.

 

These pillars provide the foundation for the happiness, which is manifest in the nine domains of GNH: psychological well-being, standard of living, good governance, health, community vitality, cultural diversity, time use, and ecological resilience.

 

·         Human Capital

 

Serving as members of boards, directors bring human capital to their companies. Directors provide the companies with their human capital in the form of education, or their prior work experience. The human capital improves directors’ ability to determine and take advantage of business opportunities or monitor managerial behaviors. This, in turn, may have a significant effect on firm outcome on governance–performance association.

 

·         Talent Management

 

Boards have always been advised to stay out of organizational management and that includes human resources issues. Yet, as organizational culture continues to emerge as critical to organizational performance, boards are finding themselves having to engage in some non- traditional behavior.

Boards in today’s world are expected to work with the CEO to define the organizational culture expected and the measures that will assure adherence to the values.

 

More and more boards are holding CEOs responsible for leadership development and succession programs, tracking regular measurements of employee engagement and innovation and conducting regular outside reviews of human resources policies, pay and compliance.

 

·         Corporate Culture

 

The board bears responsibility for ensuring the values of the credit union’s corporate culture meets its expectations. Corporate culture refers to the way the organization goes about treating its internal personnel and the expectations for behavior across the organization.

 

Defining these expectations is customarily done by working with the CEO to lay out explicit values for how the board wishes the organization to run. Values like integrity, innovation, employee development investments, respect, being member-centric, and stewardship, all tend to show up in culture values statements.

 

In conjunction with defining the culture expected in the credit union, the board should have regular metrics that confirm the team is meeting the cultural values as defined. Consistent evidence suggests a clear relationship between a high-performing organizational culture (consistency across the values publicly identified) and organizational performance in both financial and member value.

 

·         Innovation

 

Everyone talks innovation but not everyone sees it as an expectation and tracks how well the organization does with it. A board should take this seriously with the CEO reporting quarterly on innovation initiatives and their progress, including those that didn’t work out.

 

·         Leadership Development and Succession

 

The board also bears responsibility for ensuring there is a robust leadership development program and a well-defined succession plan all the way through to front-line supervisors. The foremost employee engagement resource, investment in developing leaders pays immediate dividends across all performance factors. Encouraging employee career development and

 

having clearly identified career paths represent some of the most important characteristics of the highest performing organizations.

 

These aspects of “organizational culture” should not be left to happenstance but should be defined, expected and measured in regular executive reports to the board. The frequency with which a board may check in on development and success is a board’s prerogative. It could range from annual to quarterly in high-performing boards.

 

 

 

1.4              Shifts in approaches to leadership

 

Leadership is one of the most complex and multidimensional phenomena. It has been studied extensively over the years and has taken on greater importance than ever before in today’s fast-paced and increasingly globalized world. Nonetheless, leadership continues to generate captivating and confusing debate due to the complexity of the subject.

Researchers have proposed many different definitions and theories of leadership. Scholars

define leadership as ‘an influencing process aimed at goal achievement’, focusing on leadership as a process directed at influencing a specific group of people to meet a stated objective’.

Effective leadership is recognized as key to the success of any organization. In fact, there has been a shift towards acknowledging the importance of human capital and organizational management.

 

 

Trait era: Great Man theory (1840s) and trait theories (1930s–1940s)

In the 19th century, research on leadership was focused on the innate characteristics of a leader and on identifying the personality traits and other qualities of effective leaders.

The core belief of the Great Man theory is that leaders are born, not made or trained. In other words only a few, very rare, individuals possess the unique characteristics to be effective leaders and attain greatness by divine design. Examples were often drawn from popular historical figures such as Julius Caesar, Mahatma Gandhi, Abraham Lincoln and Napoleon Bonaparte. It was believed that these individuals were natural born leaders with innate characteristics of leadership, which enabled them to lead individuals while they shape the pages of history.

The Great Man theory then evolved into the trait theories. Trait theories argue that leaders can be born or made. In other words, that the traits of successful leaders can be either inherited or acquired through training and practice. The aim was to identify the right combination of characteristics that make an effective leader and focus was on studying the mental, social and physical traits of leaders. However, a consistent set of traits was not produced and by 1950, it

 

appeared that there was little advantage in continuing with this approach and hence it was abandoned. Today, psychometric tools are an example of trait theory principles in action and are often used in staff recruitment. These tools highlight key personality traits and are used for personal performance and team development.

Behavioral era: behavioral theory (1940s–1950s)

Behavioral theory evolved from trait theories and asserts that leaders are largely made, rather than born and that particular behaviors can be learnt to ensure effective leadership. It puts emphasis on the actual behavior of the leader and not on their traits or characteristics, but it largely ignores the situation and environment of the leader.

Today, this theory is exemplified in the numerous leadership-training programmes, which involve the development of leadership skills and behaviours, thus supporting the belief that leadership is largely learnt.

 

 

Situational era: contingent and situational theories (1960s)

It was later recognised that the environment plays a significant role in the leader-follower dynamic and this belief dominated the situational era. As the name suggests, the situational era is focused on leadership in particular situations, rather than on the traits or behaviours of leaders. This implies that leaders must be able to assess the context in which they operate and then decide what style will ‘fit’ the situation best. Because the best style is dependent on the situation, this approach is known as the contingency theory of leadership.

 

New leadership era: transactional, transformational theories (1990s) and others (2000s) For the first time, it was recognised that focusing on one aspect or dimension of leadership cannot address all the complexity of the phenomenon. In a world that has become more

complex and challenging, a need emerged for leadership theories that support circumstances of

rapid change, disruptive technological innovation and increasing globalisation. This led to the new leadership era, moving away from the above-mentioned traditional theories of leadership, which define leadership as a unidirectional, top-down influencing process, drawing a distinct line between leaders and followers. Instead, the focus became on the complex interactions among the leader, the followers, the situation and the system as a whole, with particular attention dedicated to the latent leadership capacities of followers.

Transactional and transformational theories

The above-mentioned context encouraged the popularity and adoption of two leadership theories: transformational and transactional theories, and also gave rise to approaches such as the Lean strategy and agile methodology to help deal with the fast pace of change and increasing complexity of the challenges faced. Transformational leadership is a theory in which leaders encourage, inspire and motivate followers. Examples of transformational leaders include the likes of Jeff Bezos, Steve Jobs and Bill Gates.

 

Transactional leadership, on the other hand, relies on authority to motivate employees. The leader exchanges reward for follower effort and punishes any follower who fails to meet their goals.

Others

The continued shift in leadership concepts led to the development of shared, collective and collaborative leadership practices. According to these, success in an organisation is more dependent on coordinative leadership practices distributed throughout the organisation rather than the actions of a few individuals at the top. Servant leadership became popular once again, emphasising the importance of followers. Servant leaders seek to support their team members and are most concerned with serving people first. More recently, inclusive leadership also emerged, focusing on a person-centred approach. It is based on the dynamic processes that occur between leaders and followers and focuses on empowering followers to becoming leaders. Finally, contemporary leadership theory also includes complexity leadership, which emerged as a means to deal with the complexity of our modern world. This theory takes a whole-system view, considering contextual interactions that occur across an entire social system.

 

Conclusion

Leadership theory is a dynamic phenomenon and continues to change over time. It has been studied extensively over the years and several theories have emerged. Traditional leadership theories include the Great Man theory, which maintains that leaders are born to lead thus possessing certain inherent characteristics that destines them to lead. Trait theory evolved from the Great Man theory and specifies that leaders are can be born or made and that the combination of certain characteristics is needed to be an effective leader. Behavioural theory then followed, asserting that leaders are largely made with a focus on the actions of the leader as opposed to their personality traits. There was then recognition that certain environmental factors are important and contingency and situational theories were added to the mix.

The modern era followed and involved a shift from focusing on the leaders and their attributes to considering the complex and continuous interactions and interrelationships among the leader, the followers and the situation. The resulting theories include shared, collective and collaborative leadership as well as inclusive leadership. Finally, complexity leadership also emerged, focusing on the whole system of an organization.

 

 

 

1.5         Focus on ethics

Ethics is the branch of knowledge and practice that seeks to answer the practical question ‘What ought one do?’ This question applies to both individuals and organizations. Ethics is the choices we make and actions we take – as informed by the values and principles we hold and the purposes we serve – as individuals, communities and societies. Ethical issues vary in scope.

 

Some relate to organizational matters, such as conflicts of interest. Others are of broad societal concern, such as how to respond to climate change.

 

The ethical landscape traversed by company directors has always been complex. They are legally bound to act in the best interests of the company as a whole. That is, their duty is to protect and advance the interests of an entity that exists only in the ‘abstract’ realms of the human mind. On the other hand, there is a diverse range of real people whose interests are intimately linked to and affected by the corporation.

While in the ordinary course of business there is no direct, legal obligation to shareholders, the practical reality is that directors are constantly being pressed to advance the interests of shareholders, as well as employees, customers, suppliers and the wider community. It would be comforting to think that all interests can be perfectly aligned – at least in the long term.

However, that is mere ‘wishful thinking’. The truth is that directors are frequently required to make decisions that will annoy one group or another.

As always, the directors’ touchstone must be the interests of the company as a whole – not its shareholders, not its employees, not anyone else. But how are those interests to be defined? And on what basis are directors to exercise their discretion? Are they to draw on a personal set of values and principles? Are they to attend to the standards of the communities within which they work? Is there a framework of ‘absolutes’ that transcend all other considerations?

The answer is that directors are bound to apply the values and principles of the company.

However, unlike others, company directors have the capacity to define and amend a

corporation’s ethical framework. Indeed, the board of a corporation is, in effect, its mind and conscience. All that a corporation does and its effects on the world, is ultimately traced back to directors and their deliberations. Thus, the heavy ethical burden carried by directors.

Fortunately, there are tools available to directors to improve the quality and character of their decision making. Those tools are informed by a rich tradition of thinking in which humans have sought to analyze and improve the way in which we make choices – the field of ethics.

Ethics both informs the law and goes beyond its limits. For the most part, law sets boundaries for what may or must be done. Ethics concerns what should be done – even if not required or prohibited by law. Directors will often seek legal advice about what can be done. Whether or not to approach or cross the limits of the legal ‘envelope’ of possibilities is an ethical question. The fact that something can be done does not mean that it should be done. At the most basic level, boards can help individuals working within an organization – and the organization as a whole – to consistently make decisions that are ‘good’ and ‘right’. They discharge that

 

responsibility by setting the organization’s core values and principles – and by demonstrating their practical application through their own decision-making and conduct.

Acknowledging and addressing the ethical dimension of a sensitive issue can be challenging. However, boards that fail to take account of such matters are not effectively fulfilling their governance responsibilities.

 

 

 

1.6         A broader model for corporate governance

The 11 CS Model: board structures – board demographics – board attributes – board dynamics Note: For simplicity, the model can be summarized by the 11 Cs of corporate governance being

configuration and compliance (board structures), capacity, capability and connections (board demographics), competence, commitment and character (board attributes) and cohesion, challenge and culture (board dynamics).

 

 

The two axes of technical versus behavioral and individual versus board create four specific areas of corporate governance (board structures – board demographics – board attributes – board dynamics) focus each of which comprise a list of components.

These components can be summarized into 11 areas all beginning with the letter ‘C’, hence the model’s name: the 11 Cs model of corporate governance.

The framework of the model will also be useful in providing the structure for the following chapters of the text and for you to orientate the newer behavioral areas of governance into your existing knowledge of the traditional technical considerations.

The main questions four areas of the model are described in the figure below-:

 

 

 

 

 

 

 

 

 

 

 

1. Board structures

This quadrant is the traditional area of focus of corporate governance.

The key question that this area asks of boards is: ‘Does the board and committees have appropriate configuration and is the board compliant?’ This question (and its subsequent answers) are obviously a vital starting point for approaching corporate governance.

 

However, they are not enough if we are aspiring to better-quality governance. In short, effective answers to these questions are necessary but not sufficient.

2.      Board Demographics

The second area on the model is the dynamic interaction between technical and individual factors, and is named the ‘board demographics’.

The board demographics factors are those that one would usually find in a corporate curriculum vitae or indeed the brief pen portrait from the annual company report under the ‘Directors and senior management’ section. They are the high level technical expertise and, potentially, professional network aspects of one’s career which pertain specifically to someone’s board role.

This is what is known as professional capital and social capital. The broad question,

therefore, that this quadrant asks of a board is: ‘Do directors have capacity, capability and are they well connected?’ As the answers to this question are usually within the public domain, they are often used as the proxy for board potential and performance by interested stakeholders such as investors, regulators, headhunters, the media and the public more generally. However, we know that a track record can contain significant bias and does not always predict future performance (hence the rise in popularity of tools such as competency-based interviews, psychometric tests, blind auditions and anonymous resumes in recent years).

3.      Board Attributes

The third area in the model is the dynamic interaction between behavioral and individual factors, labelled ‘board attributes’. Whereas the ‘board demographics’ captures some of a director’s surface characteristics, the ‘board attributes’ dig deeper into the more psychological and emotional competencies of a director’s personality as they play out in the boardroom and beyond.

These are also sometimes known as their ‘behavioral capital’. The key question that this quadrant asks of the board is: ‘Do directors display competence, commitment and

character?’. For a board to be high performing, these attributes need to be true for all its members. However, there will also be some specific competencies required depending upon the role that each director is taking in the boardroom.

4.      Board Dynamics

 

The fourth and final area of this broader model of corporate governance is the dynamic interaction between the behavioral and group level boardroom factors, labelled ‘board dynamics’.

This factor is the ‘black box’ of corporate governance because it is the area which, even though largely responsible for shaping boardroom culture and performance, has been largely under-researched and under-acknowledged until now.

The main question that this quadrant asks of the board is: ‘Does the board model a culture of cohesion and challenge?’ This question is one of many versions that could be asked to capture the essence of board group and team working to ensure appropriate cultural remodeling, prudent risk management and effective decision-making.

 

 

1.7         Organizational    failures    and    impacts    on    boardroom dynamics

In a perfect world, we would see boards operate smoothly and harmoniously with no undercurrents or power plays, no elephants in the room, with all voices being heard and valued. However, the greater complexity facing business today, tightening regulatory environments, and increased public visibility and scrutiny, are leading to heightened pressures in the boardroom. Under such demands, director behaviors, group dynamics – and the boardroom cultures these create – are defining factors when it comes to board effectiveness.

 

 

1.      Loss of Shareholder Confidence and Trust

 

When a company deviates from its corporate governance strategy it sends a signal to its

shareholders that it cannot be trusted. This erodes any confidence that the shareholders had in the business and leads them to feel cheated or misled. If shareholders believe bad business decisions are in the company’s immediate future, they may jump ship to avoid any potential loss.

2.      Ineffective board cultures

Unbalanced, weak or inappropriate values, beliefs and behaviours held by board members, embedded over time and through repetition, can perpetuate dysfunctional group behaviours that are largely outside the realm of consciousness. Board culture affects how directors’ work

 

together, treat each other, and relate to management, and culture goes on to shape the way the board sets priorities, makes decisions, provides oversight, and manages risk.

 

3.      Difficulty Raising Capital

Lack of adherence to a company’s corporate governance strategies can also scare away investors. For investors, one of the most important aspects when making an investment decision is the level of implementation of corporate governance principles (public disclosure of information, protection of shareholder rights, and equal treatment of shareholders) and profitability, which ensures return on their investment.

4.      Increased Government Oversight

A company with a reputation for lack of adherence to corporate governance strategies may incur increased government oversight from departments looking to verify that the company is operating within the bounds of the law. This puts the business in the spotlight if anything was to ever go wrong.

5.      Unhealthy company culture

Poor company culture is another major culprit in terms of corporate and board failure. Businesses that place a hyper-intensive focus on driving profits often foster cultures of double standards – which go on to facilitate questionable risk-taking.

 

6.      Risk blindness

A crucial reason boards often fail is their inability to engage with risk in the same way they engage with opportunity and reward. This so-called risk blindness perpetuates a wide range of problems for companies. Risk blindness means that problems are ignored – which gives them time to grow and to fester.

“Blindness is insidious because it bestows a sense of comfort (‘if I ignore it, it will go away’), whereas in fact it makes everything worse. Most problems are a great deal easier to tackle when they’re small.”

 

7.      Unhealthy company culture

 

Poor company culture is another major culprit in terms of corporate and board failure. Businesses that place a hyper-intensive focus on driving profits often foster cultures of double standards – which go on to facilitate questionable risk-taking.

 

8.      Information glass ceiling

Corporate failure is often facilitated by the presence of a so-called ‘information glass ceiling’, in which internal audit teams or those responsible for risk management fail to report on risks that are coming from above in terms of an organization’s hierarchy. When an information glass ceiling is present, executives tend to overrule red flags generated through audit processes, or information is heavily sanitized by the time it reaches board-level.

The refusal of managers to report and act upon internal compliance red flags demonstrate how an information glass ceiling can lead to corporate failure.

9. Dysfunctional group dynamics – Unaddressed individual behaviors that trigger reciprocal patterns between directors, creating tension, miscommunication, and division, which then compromises effective decision making.

 

 

1.8         Role   of   the   corporate   secretary   in   Board   room dynamics

 

 

 

1.      Typical existing studies outline the role of company secretary as having formal responsibilities such as organizing board meetings; supporting the chairman/CEO, directors and stakeholders; inducting or training non-executive directors; dealing with latest governance developments; board evaluations; annual reporting; statutory compliance issues; administrative duties; accurate Companies House filing; and stock exchange listing.

2. The company secretary has to adopt additional higher-order skills when relating to leadership practice.

The company secretary’s challenge is to resolve tension between being the invisible power behind the throne, i.e. in the shadow of the chairperson, and knowing how to diplomatically challenge individual board member effectiveness towards higher collective board performance.

This includes resolving dilemmas, dealing with complexity, making judgments, acting as advisor and/or confidante, and maintaining high levels of trust.

3. The role of company secretary is particularly critical, as it is the crucial link that binds the other board roles together as a body; it always protects the interest of the

 

company and tries to seek consensus amongst the board members as a leadership practice.

4. The law defines the company secretary as an officer with administrative duties and responsibilities, but because of its foundation in law, this role sets the tone for, and is central to, the provision of an underlying internal framework for corporate governance structures. Hence, the company secretary is required to provide administrative and legal governance support to the board of directors and the CEO.

5.      The company secretary engages with internal and external stakeholders; negotiates critical and asymmetric information between different interests; and balances the board and management interface in a way that avoids undue antagonism, placates differences, and achieves alignment between the demands of two, and often more, bipolar cultures.

6. The role is mandatory for publicly listed companies, which are obliged to follow statutory and reporting requirements.

Beyond that, there is flexibility and discretionary capacity. Characteristics and required competencies include administration, business awareness, communication skills, compliance, guidance, information impact, knowledge shaping, maintenance, management, organization, process, procedure, qualification, relationship, and shareholder and stakeholder engagement.

Activities include keeping the company register, filing, recording, monitoring, supervising, educating, advising, managing, and coordinating.

7. As it channels information flows between the board of directors and executive management, the role is significant to board members as an ‘up to date source of

information. The company secretary manages the information flow. Planning formal communications with board members requires an understanding of who needs to be informed; what information is needed; how to present it; and the frequency and form of communication.

8. Although the company secretary often has a low profile in the boardroom, the role is critical to board resolutions and actions.

In the majority of cases, it is the preparatory work in advance of board meetings that influences outcomes, enabling the conversion of strategy into implementable action plans.

 

Preparatory work influences the frequency, venue and duration of board meetings; interactions between the CEO and the board; finding solutions to issues; ensuring a level of consensus among directors; the form and technicalities of board proceedings; and involvement of boards in self-evaluation.

It is the company secretary who facilitates timely meetings; ensures the discussion of issues to the required depth; respects disagreements between directors; ensures that directors participate in the decision-making process rather than just ceding the decision to the CEO; and ensures that minutes are well formulated and documented to monitor.

9.      The company secretary is the lynchpin in the communication process between the CEO and the board overcoming inadequacies, manipulation, reliability issues or delays that may impede board effectiveness.

10. The company secretary possesses knowledge not only of processes and procedures, but of associated ‘corporate memory’, enabling greater indirect ability to influence board-level decision making through less observable behaviors, and acts of consensus- building and prevention of conflict.
11. The company secretary takes the minutes, so if a board member wants to ensure that his/her points are recorded elegantly, they need to ‘become their friend’.