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How to enhance boardroom effectiveness – Part 2

In the second part of this series on boardroom effectiveness, Loretto Leavy, Professor Ruth Sealy and Dr Greg Molecke argue that it is crucial to understand a board’s ecosystem as a complex social group

4 July 2024

To understand a board, we need to understand how behavioural dynamics influence decision making to deliver board effectiveness, inclusion, and ultimately accountability. Behavioural dynamics are the continual interplay between the contexts of the board, the board processes, and the expected and achieved outcomes as individual directors become a collective board. We believe strategic inclusion is achieved when these are managed effectively. We need to verify that this corresponds to real board experiences – help us do this by joining our consultation!

Understanding Board Change

To understand how to enhance a board’s effectiveness, it is not sufficient to look only at decision making or the make-up of its members. In large organisations, boards are complex social groups, comprised of individuals who collectively form a single decision-making body. They have become more diverse, are increasingly required to deal with amplified stakeholder and societal problems, and have increased external accountabilities. We reviewed 50 FTSE disclosures to better comprehend how the people side of the board works. Our research finds that enhancing a board’s effectiveness requires fundamental understanding of the board’s full ecosystem beyond the boardroom. This includes the complex network of institutional, organisational and board contexts, facilitating processes driven by the Board Chair, and their resultant outcomes.

The Board’s Changing Ecosystem

Our research finds that although there is a significant variation in approach to behavioural dynamics in boards, there are core elements which underlie each. To demonstrate this, our model highlights the continuous flow of change between elements of the Board Ecosystem (figure 1, below). Our model details the symbiotic interconnections between why change happens (the contexts pressuring the board to change), what changes (board-level outcomes of decisions, behavioural dynamics, and accountability), and how change happens (Chair-led processes). Boards are continually changing with interactions at each level of the cog and between each cog.

For example, focusing on the people side of the board for FTSE firms, regulatory contextual pressures drive the expectations of compositional outcomes, such as independence or gender balance. Regulation also drives the people processes we expect to be put in place with requirements for appointments, evaluation and succession, although there is significant variation of approach. A key outcome is the formal regulatory reporting, which is part of the accountability of the board.

Looking at each of the interconnected cogs:

Why do boards change? Internal and external pressures to change.

Board demography and expertise are regularly referenced as the primary inputs to board effectiveness. However, we have found that the contextual influences which drive board changes, and ultimately performance, are much wider than this and need to be understood more fully. Our research highlights how contexts are a key explanation of the variance in board performance and how they influence the board’s approach to enabling change.  These contextual influences place varying levels of pressure on the board to change. The pressures occur within the board from diversity, expertise, relationships, and structures). Pressures within the board are also felt from the result of processes such as evaluation highlighting the need for succession plans. Additional within board pressures may come from the actual and expected outcomes, such as pressure for leadership change to address poor company performance. External to the board, pressures are felt from the organisational situation (strategy, performance, and organisation structure), and from the external (regulation, legal, and industry) environment. The influence on change can be radical, such as a significant shift of legal requirements, or incremental adjustments such as replacements for directors at the end of their term. These contextual pressures influence the whole board and at an individual board process level.

What changes? Decisions, behavioural dynamics, and accountability, which ultimately lead to organisational performance.

Our study highlights how board-level outcomes relate to the decisions taken by the board, the behavioural dynamics of how the Board continues to work together as a group, and the accountability to internal and external stakeholders for their actions. Decisions taken are highlighted succinctly within our sample of 50 FTSE boards via their public disclosures (itself an accountability outcome). However, behavioural dynamic outcomes are not as developed and not discussed as consistently. For example, inclusive cultures have become a key factor for boards as they have become more socially complex, but only a small number of boards have begun reporting specifically on inclusion as a board outcome. We will investigate strategic inclusion further in our consultation over the next year.

How does board change happen? Processes undertaken to address change requirements and influence potential Board-level outcomes. These changes are the responsibility of the Board Chair.

Different processes can be used to assist in managing board change. These are heavily influenced by the Chair whose leadership of the board drives the response to change. An effective Chair will oversee multiple actions relating to decision making, relationships, and communication. Recent research has shown that effective Chairs with inclusive behaviours deliver better board environments for decision making. In boards of larger organisations, the Chair will be assisted in these actions by the Nomination Committee.

Our research finds that there is a consistent bundle of behavioural dynamic processes being deployed in boards: composition and design; appointments; re-appointment and continuity of roles; induction, training, and development; NED succession planning; director, committee, and board effectiveness. However, these are deployed in varying ways and degrees, from basic reactive processes to proactive exemplar practices. Within each process, we have highlighted the interaction between the individual processes, their key contextual influences, and the influences of the expected and achieved results. Importantly we propose three levels of maturity for each underlying process.

Investigating Behavioural Dynamic Experiences

Our research, through its focus on relationship-based behavioural dynamics, investigates how a board’s underlying ecosystem affects board performance, effectiveness, and inclusion. We find that the boards and Chairs achieving strategic inclusion can be identified through their use of more proactive (as opposed to reactive) behavioural dynamics. We would like to investigate this further with real board experiences.

Our strategic inclusion consultation will run from September 2024 until July 2025. We will interview FTSE Chairs and Senior Independent Directors to establish the drivers for change in boards, their actions, and how to define an inclusive Chair. We will also consult with Board members, Company Secretaries and Governance Advisors to create and validate detailed, bottom-up process-views of the ecosystem via presentations, workshops, and surveys.

Let’s talk differently about boards!

Join the conversation, find out more about our research and opportunities to participate:

Read Part I of this series here.

Start today. Change tomorrow.

If you would like to contact us to discuss potential study options, research partnerships or other collaborations then please complete the form below and we will be in touch.