Great to see the Australian Institute of Company Directors (AICD) finally recognise that the board and executive are a team.
Released in May 2015, When does good governance lead to better performance? is a report commissioned by the AICD into the relationship between governance and business performance.
The report's authors, Dr Robert Kay and Dr Chris Goldspink conclude that good governance is a team activity:
"The key finding of this current research, that ‘good’ governance is a team activity, may initially appear almost too obvious to warrant a mention. However, this presents a significant departure from the way in which the topic has been viewed in the past."
"'The team’, as a single unit of analysis, should be conceived of as the board and the executive leadership team"
“Good governance is a team activity...taken seriously and deeply, it represents a significant change in direction from the literature and the general approach adopted in exploring the topic in the past, particularly as this ‘team’ is generally taken to include the executive."
The report marks a shift in thinking that began many years ago.
As far back as 2009, Andrew Donovan and myself were writing in the AICD's own journal that the board and executive were a team:
"Most directors would have few problems with the notion that directorship is practiced by a team. They may, however, be surprised to discover they are not the only ones on the team.
Corporate governance has suffered from a form of tunnel vision, only seeing the directors and the board. We suspect the cause of this is to be found in debates that isolated directors behind the line defining their role and purpose from that of management. Whatever the cause, the focus of corporate governance is almost exclusively on the board and the roles and behaviour of the directors."
A year later I travelled from Australia to both sides of the Atlantic to present the novel idea that the board and management should be studied as a team.
From Directorship Theory presented at "Corporate Governance and the Global Financial Crisis, The Wharton School, Philadelphia September 24-25, 2010
The organisational “unit” of corporate governance is typically considered the board.
I propose that this assumption is blinding research to deeper causes of “dysfunction”. Models of corporate governance that focus exclusively on the board ignore the degree of influence that other participants, and in particular top managers, have on the performance of the roles, responsibilities and tasks associated with directorship.
Historically, the corporate governance roles of top managers have gone largely un-noticed by scholars, educators and regulators:
Academic literature generally re-enforces the idea that “Manager’s must [only] manage” (Drucker, 1986).
Likewise, with notable exceptions (Westphal, 1999), the positive influence of top managers on the practice of corporate governance is largely ignored.
While Nicholson and Keil argue that “the effectiveness of the management team (and how that team interacts with the board) is a fundamental confound in any board performance relationship (Nicholson and Keil, 2007) the question of how greater effectiveness can be achieved remains unresolved.
Corporate governance codes and guidelines pay little or no attention to the governance role of top managers. Directors are overwhelmed with exhaustive best practice recommendations, but no equivalent guidance exists for a top manager when working with a board.
Management education is no better. For example, in Australia, management students generally receive little or no instruction on how to work with boards.
Based on my observations, if a typical MBA syllabus reflected the time spent on what top managers actually did, 10% or more of the course content would be devoted to working with directors and boards.
The inexplicable absence of top managers from corporate governance theory makes even less sense in the context of the admission that directors could not do their job without the help of the CEO and her team (Carter and Lorsch, 2004) and the paradox that the two groups often do not get along (Tunjic, 2010).
I propose that the board and top managers are members of a temporal team that come together from time to time to practice directorship.
Based on the definition of Kozlowski and Bell a team is defined as a “collective who (a) exist to perform organisationally-relevant tasks, (b) share one or more common goals, (c) interact socially, (d) exhibit task interdependencies, (e) maintain and manage boundaries, and (f) are embedded in an organisational context that sets boundaries, constrains the team, and influences exchanges with other units in the broader entity” (Kozlowski and Bell, 2003).
It is arguable that the board and top managers meet many of these characteristics and are better understood and studied as a team. I adopt this approach in developing directorship theory.
To be clear, those in top management, and in particular the CEO, will occupy positions on both the management and directorship teams. For most of the time, the CEO leads the management team but for some of the time the CEO joins with the directors on the directorship team.
The team approach continues to be core to my work on directorship. This excerpt from Reframing the Relationship between the Board and Management published in 2013:
Let's recognize what's staring us in the face.
It takes more than a board to direct a corporation. Boards of large corporations would cease to function without the support of the CEO, the broader management team and a host of other board room participants. But read any book on corporate governance and it's all about the board.
The time has come to realize there are three teams at the top of the corporation - the board, the management team and the two together. When the board and management are working together in the boardroom they're on the same team. I call it the "Directorship Team".
Directors direct but managers don't just manage. Managers aren't directors but they are part of the team responsible for directing. Once you get this idea, the stumbling blocks that have plagued the relationship between the board and management start to disappear.
The AICD's report, When does good governance lead to better performance? shares this fundamental insight to produce great thought leadership.
It's worth remembering though that thought leadership is not about being the first to publish a breakthrough idea or standing out as the expert. It's foremost about standing up and explaining your ideas, year after year, even when no one's listening. In my book, a thought leader is someone who stands up knowing they'll be "thumped" and not the person who stands out for praise.
The AICD is to be applauded for supporting Dr Kay's and Dr Goldspink's research and bringing new ideas to a broader audience. Research that advances and improves our understanding of the relationship between the board and management is cause to be celebrated.