THE ROLE OF THE BOARD IN CREATING A HIGH PERFORMANCE ORGANISATION.

The results of a research project by Dr. John Roberts of the Judge Business School, University of Cambridge, England and Don Young. The research was sponsored by the Performance and Reward Centre (www.parcentre.com)
A full copy of the report can be obtained by e-mailing

1 EXECUTIVE SUMMARY

1.1 THIS STUDY

This report explores what boards can do - in terms of behaviour, roles and processes - to ensure that they contribute to creating and sustaining high-performing businesses, and thus long-term shareholder value.

The research reported here allowed us to explore the state of UK boards two years on from Higgs. More importantly, its focus on the role of the board in creating a high performance business offered the opportunity to move beyond a defensive view of corporate governance and explore the positive role of the board in creating value for shareholders

In total we interviewed some 40 individuals, many of whom held several directorships; chairmen and chief executives as well as executive and non-executive directors. We also interviewed company secretaries and a variety of advisers and consultants who could offer us some insight into the current state of development of the boards of UK listed companies. For contrast, we also interviewed some top business leaders whose experience spanned a number of countries and directors of large private family-owned companies. Our coverage encompassed many companies whose performance could be characterised as 'good' - for example we interviewed directors of 10 of the top 30 FTSE 100 performers as rated by Total Shareholder Returns over the last three years.

1.2 INVESTOR-DRIVEN VERSUS STRATEGY-LED BOARDS

• While most large public company boards broadly comply with regulatory codes, we found this masks significant differences in the focus of the board's attention, individual director conduct and the dynamics of board relationships.
• Two opposing philosophies are highlighted that shape a board's purpose and conduct - we describe them as 'investor-driven' or 'strategy-led'.
• The investor-driven approach derives from the economics concept known as 'agency theory'. This assumes that executive self-interest is liable to be pursued at the expense of shareholders, and hence envisages the primary role of the board - and of non-executives in particular - as being to monitor executive conduct. 'Board performance' is thus seen as centring on 'control', adherence to regulatory requirements and rules and narrow financial outcomes.
• The focus on control has been heightened by reactions to recent scandals and abuses of executive power, such as Enron and Worldcom. Directors in turn are feeling pressured to devote greater time and money to investor relations, and to meeting regulatory and reporting requirements. Executive directors' rewards for delivering high performance are considerable, but so too are the risks - for example in job security. Non-executives spoke both of increased time commitments and risks regarding personal reputation and liability.
• Our research suggests that the dominance of this agency view of the role of the board in relation to high performance can, in many instances, produce unintended and negative consequences. High levels of executive pay, and in particular share-options, can be seen to have created rather than merely aligned executive self interest. Equally seriously the policing version of the NED role, under some circumstances, can weaken rather than strengthen the board's capacity to create high performance. Indeed it may unintentionally contribute to value destruction.
• The danger here is that the board becomes distracted from focusing on strategy, divisions are created between executive and non-executive directors, and the board can become divorced from the business.
• Our respondents regard business risk as more significant than the risk of executive self-interest. (This is borne out by objective research). While the latter should certainly be guarded against, the primary contribution of non-executive directors should be to facilitate strategic thinking and support effective organisational performance. Sensible code compliance is part of good reputation management.
• If high performance is interpreted as long-term value maximisation, then the board should achieve a sustained strategic focus on the drivers of value creation.
• This requires a boardroom culture of trust and openness through which executives are able to draw upon the experience and skills of their non-executive colleagues in support of their own and the organisation's performance.

1.3 ROLES AND RELATIONSHIPS

This report's findings provide a guide to how board roles and relationships should be shaped to contribute to organisational performance.
These are some of the headlines.

• Company chairmen. The work of the chairman can make or break a board's performance and contribution to organisational value. . Our research suggested that, in practice, there are big differences in the commitment and effectiveness of chairmen in different companies.
  We identify the essentials that should govern the selection and conduct of chairmen.
• The key relationship is the chairman's with the chief executive, and in this it is essential that the chairman understand his or her non-executive status. Executive responsibility lies with the chief executive. Ideally the two will have complementary skills, which, as the relationship develops, will provide the chief executive with a vital resource in support of his or her decision making. The chairman's relationship with the wider executive team and business then ensures that they bring a developed understanding of the business both to the relationship with the chief executive, and as importantly to the leadership of the board.
• Chief executives and executive directors. It is in the organisation's interests that information is shared openly with non-executives, and that robust, challenging discussion is welcomed. This realises the full value of non-executive contributions, mutual trust, and the ability of the board to demonstrate to stakeholders the value it adds.
• Non-executive directors. Board credibility depends increasingly on rigorous selection and induction processes - and on achieving a rich and deep diversity of experience and perspective. Non-executives need to retain their independence of view while building a deep and knowledgeable relationship with the organisation, it's business and its context.

In the high-performing company the strategic role of the board is the basis of effective control and the board's collective long-term memory a resource rather than a liability.

1.4 BOARD PROCESSES

To convert strategy into high performance, the Board needs to work hard to stay focused on the strategic and the operational drivers of value creation.

We provide a range of practical advice on how to achieve productive board discussions and decisions, illuminated by quotes from interviewees.

High-performing chairmen and boards are attempting a number of innovations that make debate around trends in markets, technologies, products and organisational capabilities a central feature of every board meeting.

Some of the 'levers' that will connect the work of the board to the performance of the enterprise are:

• Appropriate executive remuneration systems reward genuine long-term company performance and value creation as well as effective leadership, and do not create collusive relationships between executives and fund managers in share price management. Share Options are not felt to create these conditions.
• Performance metrics that shift from purely financial and short-term share-price measures to measures of company 'health'.
• In order to perform effectively, strategy-led boards need a 'clear line of sight' into the business. Where boards are divided by schisms between the roles and concerns of executives and non-executives, this is seldom possible.
  Non-executives as well as executive directors need to be enabled to 'see' into the enterprise in ways that investors can never hope to do.
• The creation of new forms of measurement and assurance can create new forms of transparency in relation to business performance.
  Recent years have seen the proliferation of new board policies on ethics, citizenship and diversity, with associated new forms of external reporting, as well as mission and value statements.
• Board evaluation processes, such as those suggested by Higgs, can be grasped as an opportunity for continuous improvement.