Corporate Governance Findings

Topics: Corporate governance, Management, Board of directors Pages: 63 (12138 words) Published: November 24, 2013
442

CORPORATE GOVERNANCE

A Framework for Diagnosing Board
Effectiveness*
Gavin J. Nicholson** and Geoffrey C. Kiel
Pressure on boards to improve corporate performance and management oversight has led to a series of inquiries and reports advocating governance reform. These reports largely reflect an agency perspective of governance and seek to ensure greater board independence from and control of management.

While board independence is important to good governance, we contend that frameworks, models and advice centred on one element of governance ignore the complexity of how boards work. We develop a holistic board framework based upon the concept of board intellectual capital to address this concern.

Our framework proposes a series of inputs (e.g. company history, company constitution, legal environment) that lead to a particular mix of board intellectual capital. We contend that the balance of the different elements of board intellectual capital will lead to a series of board behaviours. Further, the board needs to mobilise its intellectual capital to carry out a series of roles. The exact nature of these roles will depend on the company’s requirements. Thus, the governance outputs of organisational performance, board effectiveness and director effectiveness will depend on the match between the board’s intellectual capital and the roles required of it.

We conclude by demonstrating the benefits of this framework as a diagnostic tool. We outline how boards wishing to improve their governance systems can diagnose common governance problems by evaluating their own board’s capabilities in relation to the different components of the framework. Keywords: Intellectual capital, boards of directors, board roles, board effectiveness

Introduction

A
*This paper was presented at
the 6th International Conference on Corporate Governance
and Board Leadership, 6–8
October 2003 at the Centre for
Board Effectiveness, Henley
Management College.
**School of Business, University of Queensland, PO Box
2140, Milton, QLD 4064, Australia. Tel: +61 7 3510 8111;
Fax: +61 7 3510 8181; E-mail:
g.nicholson@competitivedy
namics.com.au

Volume 12

s the ultimate corporate decisionmakers,1 boards of directors are assuming an increased importance in business life. Understanding how boards work is not a
simple task, however. If grasping how an individual will behave is difficult, the complexity involved in understanding how a group goes
about overseeing the operations of organisations, often comprising hundreds or thousands of individuals, is daunting. Despite this complexity, the health of our organisations,
economies and society rely on us understanding how boards can influence firm performance. There are three major factors that

Number 4

October 2004

dictate how a board functions and how it
achieves a greater degree of control over governance outcomes. First, institutional and historical factors constrain a board’s composition, powers and actions. Second, each board has a
capability set that will enable it to carry out the
role set required of it to varying degrees.
Third, various board-level interventions will
result in changes to this capability set and so
different organisational outcomes.
Understanding how these factors interact
requires a range of tools. The conceptual
framework or model is a key tool, because it
indicates which factors (in the board, for
example) are central to the topic of interest. A
framework highlights how these factors are
© Blackwell Publishing Ltd 2004. 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

A FRAMEWORK FOR DIAGNOSING BOARD EFFECTIVENESS

related to one another or which factors (or
combination of factors) will cause changes to
others. Thus, developing an understanding of
how boards work requires a holistic framework to guide investigations. Models of how boards work are central to
corporate governance research and...

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