Corporate Governance Findings
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.
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.
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