October 26, 2016 – Nothing is more important to a company than driving culture. What is sometimes overlooked is where this effort truly begins — in the boardroom. Corporate boards, therefore, need to be recognized, shaped and fostered for maximum effectiveness.
Jack ‘Rusty’ O’Kelley and his corporate governance team at Russell Reynolds Associates recently set out to capture the essence and behaviors that create a high performing board culture and drive board effectiveness. Russell Reynolds, like other executive search and leadership advisory firms, are now using trends and insights gleaned from companies around the globe to help their client base remain competitive.
In the case of Russell Reynolds, the firm’s consultants take this data to customize consulting solutions to meet their client’s talent and human capital management needs. At the board level, this has become an increasingly sophisticated endeavor and it brings skill sets to bear that go far beyond traditional recruiting methodologies.
For this survey, the firm captured analytics from 369 directors from 12 countries, a large data set focused solely on board culture — and not on board mechanics or board processes which other surveys have captured in somewhat great detail over the years. “This was a culture-focused survey,” said Mr. O’Kelley. More importantly, he said, ‘we wanted to have director behaviors we could screen against for recruiting purposes.” That tie-in to Russell Reynolds’ core search business has made this survey one of the more important it’s consultants have conducted in recent memory. “Many boards fall into a culture,” added Mr. O’Kelley. “But few of them try to actively set a culture.” This survey takes a close-up look at this phenomenon.
Today, firms like Russell Reynolds aggregate knowledge from corporate governance experts, lawyers, management consultants and current and former public company directors to drill down on how best to maximize a company’s performance, better align its people strategies and find new ways to bring competitive advantage to their clients. For the headhunting business, it is a new world order and executive search consultants focused on C-suite recruiting and board consulting are gunning for lead position in this expanding advisory business.
In many ways, any discussion around culture comes down to behavioral science. And that’s where Russell Reynolds Associates’ latest thought leadership report adds value. According to its just-released ‘Global Board Culture Survey,’ directors around the world were surprisingly consistent in the top five behaviors they named as key to a strong culture and an effective board.
The survey showed that the attributes that define an effective director transcend cultural and national differences. Most important director behaviors, this study found, include possessing the courage to do the right thing for the right reasons; a willingness to constructively challenge management when appropriate; an ability to demonstrate sound business judgement; asking the right questions; and possessing independent perspective and avoiding ‘groupthink.’
Although survey participants agreed on five key director behaviors, the survey also revealed that only the most effective and well-led boards are the ones that can incorporate the desired director behaviors into how the board actually operates. When Russell Reynolds’ consultants observed behaviors of the most effective boards surveyed, they identified three characteristics that drive an effective culture built upon the most important behaviors: 1) a chair who is an effective facilitator; long-term horizon for strategic solutions; and strong relationships with senior management.
The ‘Global Board Culture Survey’ asked directors which behaviors are most important in fostering a board culture that drives effectiveness and company performance. Research and global experience working with boards show that boards develop their own culture and behavioral norms. For boards to function optimally, this study concluded, the board must have the right mix of relevant expertise and experience, and the board culture should be constructive and engaged.
Given the wide range of corporate governance regimes that exist globally, Russell Reynolds expected that the behaviors directors would cite as most important would also vary widely, especially given that corporate boards exist within the context of a national culture.
Yet the study uncovered a surprising degree of consistency in the behaviors that directors believe are most critical for an effective board. Respondents identified and prioritized the most important director behaviors as depicted in the following chart:
The five most important director behaviors identified topped the rankings for every region surveyed. Remarkably, they were also ranked in the same order of importance in every region, with the exception of a small variation in Asia. This suggests that the desired qualities of an effective director transcend cultural customs and regional differences.
When the study compared the responses of directors serving on a board in their home country with those serving on a board outside their home country, the weighting and ranking of behaviors remained consistent. This suggests that rather than focusing on the traits that make a director suited to a board in a particular country, boards should focus on these five core attributes, which are the most important in any setting.
This global consistency can also be viewed as some evidence of the acceptance and use of the board-centric model of corporate governance that the largest long-term institutional investors (such as BlackRock, State Street, and Vanguard) and pension funds (such as CalPERS, Hermes, and PGGM) have been promoting around the world. This model holds the independence of the board as a central tenet, with heavy emphasis on the board’s ability to challenge management and hold it accountable.
Three Drivers Taking Boards From Good to Great
While most directors globally agree on which director behaviors are most desired, many boards struggle to incorporate those behaviors into the actual operating norms of the board. In analyzing the data on observed behaviors of boards that were rated extremely effective compared with those that were rated moderately effective or ineffective, the Russell Reynolds report found that the most effective boards were 25 percent to 40 percent more likely to consistently demonstrate the top five behaviors.
What are these highly effective boards doing differently? Initially, the report investigated whether the amount of time spent on board work was a key factor in driving board effectiveness. It is logical that hours invested preparing for board meetings and knowing the business may help make a board more effective. However, analysis found that the amount of time spent in the boardroom is less important than how that time is spent.
In this ‘Talent Talks’ podcast episode, Russell Reynolds’ head of board consulting and effectiveness practice, Jack ‘Rusty’ O’Kelley, explains why nothing is more important to a company today than driving culture. What is sometimes overlooked is where this effort truly begins: in the boardroom – where every decision carries the weight of the organization on its back. Corporate boards, therefore, need to be recognized, shaped and fostered for maximum effectiveness. Listen Now.
The least effective boards invest 150 hours per year on board-related activity, a full 50 hours (or one third) less than other boards. However, investing time appears to yield a diminishing return: moderately effective boards spend the same 200 hours per year on board-related activity as the most effective boards. In other words, going from good to great is not about adding hours, but rather about optimizing how those hours are spent.
When the report compared the actual observed behaviors of the most effective boards to the rest of the group, three differentiating characteristics emerged. These characteristics contribute to a culture that encourages directors to demonstrate the five key, foundational behaviors that were previously identified. The three differentiating factors of the most effective boards are: a chair who is an effective facilitator; strong relationships with senior management; long-term time horizon for strategic decisions.
A Strong Chair Who Is An Effective Facilitator
Survey analysis shows that the effectiveness of the chair was the single biggest differentiator between the most and least effective boards. Specifically, respondents with an effective chair rated their board’s overall effectiveness almost 50 percent higher than those with an ineffective chair.
Of course, a great board chair should demonstrate the five most important behaviors of a good director. Of these five, courage may be the most underrated and yet most important behavior for a board chair. The chair must possess the courage to make tough decisions in a way that encourages participation and engagement, rather than discourages it.
The Russell Reynolds report also examined the behaviors and leadership qualities of the chair, and its analysis found three chair-specific behaviors that emerged as important in distinguishing the most effective chairs from chairs of average effectiveness: fostering and facilitating high-quality debates, encouraging independence, and actively seeking different points of view. Chairs on the most effective boards are 44 percent to 64 percent more likely to consistently demonstrate these behaviors. Together, these behaviors depict a chair who encourages lively discussion of the issues from multiple perspectives and seeks to expand the board’s points of view.
The chair is clearly instrumental in establishing the overall culture of the board and encouraging the directors to behave in ways that will increase the board’s effectiveness. By fostering debate, encouraging independence, and actively seeking different points of view, a chair creates a board culture where directors are encouraged to voice their independent perspective, constructively challenge management, and exercise sound judgment.
It is interesting that American, Brazilian, and French directors, who are statistically more likely to serve in a combined CEO/chair role, had a similar perspective on chair behaviors. This indicates that the particular governance structure is less important than the leadership quality and effectiveness of the individual in the role.
Additionally, female directors were in general more positive about their board’s effectiveness, but uniformly more critical of their chairs, particularly in areas relating to the chair’s ability to draw out relevant expertise from directors and provide constructive feedback. This may be a leadership and awareness opportunity for some chairs with respect to their style and ability to encourage inclusive discussion and harness the benefits of board diversity.
Building Relationships With Senior Management
The second distinguishing factor of highly effective boards was that their directors go further in getting to know management: these boards are 41 percent more likely to actively cultivate relationships with the broader executive management team.
These relationships provide the board with more opportunities to learn about the particular strengths and challenges of the various business units and functions, enabling them to ask better questions and demonstrate better judgment in the strategic guidance they provide to management. Moreover, getting to know the depth of the talent bench beneath the CEO significantly improves a board’s effectiveness in CEO and executive succession planning. However, directors must balance building good relationships with management and maintaining their objectivity, independence, and oversight role.
Using a Long-Term Time Horizon
The report found that the most effective boards are 38 percent more likely than the least effective boards to use a time horizon of five or more years when evaluating opportunities and making decisions. “Long-termism” has been the focus of an intense debate in the business community worldwide, with institutional investors such as the CPPIB and BlackRock leading the call for boards and management to use longer time horizons when making decisions.
A board that takes a long view is more likely to encourage the most important behaviors from its directors. Taking a longer-term view makes the most of the diversity of perspectives around the table. A long-term time horizon should encourage a robust discussion and a challenge to management based on the different scenarios that can be considered. When short-term gain is not the paramount consideration, directors are more likely to do the right thing for the right reasons, ask better questions, and ultimately exercise more sound judgment.
Indicators of a Forward-Looking Board
The most effective board cultures encourage directors to display the courage needed to do the right thing, constructively challenge management when appropriate, demonstrate sound judgment, ask the right questions, and possess an independent perspective. Russell Reynolds Associates’ analysis suggests that boards can become highly effective by focusing on three differentiating factors, in addition to promoting the five key behaviors among directors.
The report suggests that the three differentiating characteristics discussed earlier are forward-looking indicators of effectiveness. When boards focus on these three differentiating drivers of effectiveness, they are also laying the foundation for the company’s future success. Steps taken now to focus a board’s attention on these three drivers will yield dividends for years to come.
What Boards Should Do Next
Based on experience and insights from the ‘Global Board Culture Survey,’ Russell Reynolds consultants suggests that boards and directors do the following:
- Undertake a board effectiveness assessment review against the five behaviors and three factors identified that drive effectiveness;
- Review the roles, skills, and attributes of board leaders (chair and committee chairs), and pay particular attention to the additional behaviors identified for chairs;
- Ensure that the strategy development process is taking a long-term perspective (five or more years), and that the board adequately reviews and challenges the strategy to hold management accountable;
- Review the CEO succession planning process and identify the board’s role in the development of top talent;
- Review board composition against the emerging strategy and key board behaviors.
In addition to Mr. O’Kelley, the ‘Global Board Culture Survey’ report’s other co-authors include Anthony Goodman, a member of the firm’s board consulting and effectiveness practice; Harm Van Esch, who leads the firm’s European board services practice; Rae Sedel, a member of the firms’ European board services practice; and Emily Meneer, global knowledge director for Russell Reynolds’ board consulting and effectiveness practice.
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; Adam Shapiro, Director of Marketing & Brand Management — Hunt Scanlon Media