Boards of Directors are asked to execute a complex array of tasks; many of which sit beneath the twin headings of Service and Control. Service includes enhancing the reputation of the organisation, building relationships with external stakeholders and giving advice to executive management; and Control encompasses evaluating the Chief Executive Officer (CEO) and the business performance to ensure growth and the safeguarding of shareholders’ interests. Key to the execution of both is the notion of relational risk defined as the ‘probability and consequences of not having a satisfactory co-operation’. This short paper examines the key determinants of effective relationships both within boards, between boards and with other stakeholder groups. Such relationships do not exist in a vacuum and are influenced by a number of structural and relational variables such as Power and Influence, Trust, Role Clarity and Board Culture.
Power and influence
The efficacy of good relationships amongst board members will be impacted by the power and influence in and around the boardroom. Executive power remains within the top management team, and the success or failure of the business, therefore, lies primarily with them and not the board. This has important implications for the exercise of board power; especially for the non-executive directors (NEDs), whose part-time role makes it hard for them to convert their mandate into effective power, particularly over the CEO. In this sense, power is a relational issue; it is created, supported, and lost in the context of relationships with other people – in other words, influence. However, power also has a structural component reflected in the hierarchal nature of the board and its ability to harness and control information, rewards, and sanctions. This differentiation is important for the NEDs, who may lack structural power relative to the top management team members and thus their hopes of exercising real influence rests on their skill and will in actioning the relational power sources available to them. This is important for a number of reasons but especially in understanding the way in which the dynamics of board room power significantly impact relationships both within the board itself and between the board and the executive management team. Also, in recognising that the selection criteria for aspiring board directors should measure both their ability and comfort to exercise relational power effectively.
The UK Corporate Governance Code (2016) is specific in calling for the separation of the roles of Chairman and CEO, with the former running the board and the latter running the company. Thus, it is critical that the division of responsibilities between Chairman and CEO is sharply defined and that each understands and respects the other’s role and objectives and to express these in formal job descriptions that are shared across the board. Transparency about their roles and responsibilities will build trust between the two individuals and with internal and external stakeholders. Communication is obviously paramount especially over key items such as the agenda for board meetings.
Such role clarity should also extend to the Chairman and Senior Independent Director roles. The Senior Independent Director can be available to shareholders in times of conflict or where contact with the Chairman is inappropriate. Role clarity enables newcomers to the board to ‘learn the ropes’ quickly and to build the necessary skills and behaviours to discharge their duties. In this sense, role clarity has a significant impact on the development of relationships through reducing both ambiguity and the opportunities for unproductive conflict. In addition, it facilitates new board members’ acculturation, enabling them to develop positive relationships quickly and thus be more effective sooner.
The concept of trust is commonly cited as a hallmark of effective relationships and can be defined as ‘a group’s shared psychological state characterised by a willingness to be vulnerable to others in the group based on positive expectations about their intentions and behaviours’. Research is clear that there are links between trust and a number of critical team behaviours including open communication; commitment to the team’s objectives; team performance; and increased co-ordination and co-operation. The notion of trust as an enabler of effective relationships is grounded in the idea of reciprocity; we do things for others who do things for us. In this way, board members subsume personal agendas to work towards the attainment of collective goals.
There are two forms of trust. The first, cognition-based trust, is rational in nature and refers to the relevant personality characteristics (e.g. integrity and honesty) of another person. The next, affect based trust, is relational in nature and refers to the emotional bond between people that arises from reciprocated care and consideration. Cognition based trust is critical at the start of a relationship and affect based trust is more relevant as the relationship develops. Indeed, we can link this temporal variable to the notions of power and influence. It takes time to establish credibility and confidence to a level where board members feel that they can contribute meaningfully and effectively and it is likely that the quick transition from cognition based to affect based trust will facilitate this.
Some research suggests that the idea that groups with high levels of trust deliver improved process and performance over groups with low levels of trust, is too simplistic. Rather, trust may be better viewed as a motivational variable that influences how team members direct their energy. The implications for relationships at board level are clear. When board members do not trust each other, the temptation is to direct energies towards personal rather than collective goals with a consequential reduction in board performance.
The concepts of role clarity, trust, power, and influence are not discrete entities. Rather, the ways they interact are key for defining the board culture. Role clarity provides a bedrock for effective relationships as it reduces the opportunities for misunderstanding and confusion. Power and influence are motivational factors that provide the energy to produce more board effort and trust helps to channel that energy toward collective goals. Using a space analogy, motivational factors are the rocket that propels the star ship towards its destination, but it is trust that provides the direction towards it.
The UK Corporate Governance Code (2016) is specific in stating that ‘one of the key roles for the board includes establishing the culture, values and ethics of the company. It is important that the board sets the correct ‘tone from the top’. Social norms are ‘implicit or explicit rules specifying what one ought to do or neglect’ and form a key part of defining culture in every organisation. They can become destructive, however, if board members implicitly learn that they are expected to see things in the same way and to behave in a conforming manner. This will impact negatively on the development of effective relationships as too much conformity will impinge upon the willingness of board members to indulge in productive challenge and debate that is at the very heart of effective board decision-making.
Within this context, it must be a part of every Chairman’s role to foster a culture where robust and challenging debate are a core part of communication to deliver good decisions. For the most part, this is driven by a belief that the board makes and takes logical decisions although there are some researchers who assert that this notion of rationality in decision-making is an illusion. Our feelings direct us to what matters and what is relevant and not just to what makes rational sense. That said, positive emotions such as confidence, satisfaction and enthusiasm typically generate high emotional energy and render feelings of solidarity with the group. Low emotional energy is related to negative emotions such as depression, lack of initiative and low solidarity which results in alienation from other group members. Thus, different moods amongst board members will impact upon their relationships and it is the Chairman’s role to foster a positive climate delivering high emotional energy amongst board members. Effective board cultures promote positive relationships amongst board members; clear communication protocols; create equality in relationships; are fully accountable and regularly evaluate the board’s performance. More specifically, the creation of a healthy board culture involves ensuring that culture is listed as a key board agenda item; assessing the current board’s culture and its development over time and finally, being very clear as to what kind of board culture will best suit strategic purpose.
The task of board service stresses the requirement for effective stakeholder relationships. This is especially important when working with shareholders, and section E of the UK Corporate Governance Code is specific in stating that ‘the board as a whole has a responsibility for ensuring that a satisfactory dialogue with shareholders takes place.’
The task of board control stresses that the relationship between the board of directors and the executive team is key to effective governance. As a result, although the board overviews the decisions taken by the executive team, it is also ultimately accountable for their actions and decisions. This requires trust between both boards founded on open role clarity and rooted within an enabling cultural environment. Therefore, the relationship between the board and the executive team is symbiotic rather than hierarchical as structural power is shared, and relational power directs where influence will lie especially in times of crisis or transition.
Finally, Blackwood Group offer a range of advisory services to assist our clients with human capital strategy, planning and development. More specifically, we work with boards across a number of areas from sourcing Chairmen and Non-Executive Directors to conducting board assessments and diagnostic analyses into Board Effectiveness.
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