Boards of directors are, under most legal regimes, the ultimate decision-making body in corporations. Yet, as researchers, we know surprisingly little about what they do and how they operate.
With a handful of rare exceptions, most of what we know is based on studying information in annual reports or asking directors (via surveys or interviews) their views after the event. While there is value in these approaches, there are also clear problems. Archival research is a blunt instrument at best and surveys/interviews may not reflect what actually happens in the boardroom.
The scale of the problem is easily demonstrated by one question we ask in one of our ongoing research programs. In our survey of around 1,400 directors drawn from more than 250 boards, we have asked directors the following question: “How many board members do you have?” Around 85% of the time, we do not get a unanimous answer; in fact around half the boards have at least half their directors disagreeing on the answer to that question. This shows that in surveys board members can’t even agree how many colleagues they have around the table.
At Queensland University Technology (QUT) we have embarked on a major research program to collect data on boards via video taping and the use of sociometric sensors so we can better understand what boards do. We are studying boards as they operate, and our early results (while tentative) indicate that several aspects of board work may not reflect the idealised view of academia or practice.
An example of the advantages of our approach is provided by our insights into questioning behaviour during the board meeting. The predominant view of boards posits that questioning is a critical aspect of what boards do. It helps to control errant managers and safeguard the shareholders or members.
In the boards we have studied, there is a clear difference between the time taken up by questioning and the rate of questioning. Around 5% of meeting time is spent asking questions - which doesn’t seem like much for such a critical role. But questioning accounts for 15% of the interactions; questions are short while answers tend to be much longer.
If we did not study this directly, our understanding of questioning behaviour in the boardroom would need to rely on directors accurately recognising and remembering this distinction. Given the lack of recall on basic aspects of the board (i.e. number of directors), we think this highly unlikely. They would likely underestimate how much questioning occurs.
Furthermore, our early work indicates that the people asking the questions in the boardroom are not the “expert” directors on the topic under discussion. For instance, it is much more likely that a director without a financial background will ask questions about the finances than a colleague with a financial background.
At this stage, we suspect this is because directors with specific expertise often review the materials in another forum - for instance directors with a financial background will likely sit on the Audit Committee and have raised any concerns or points for clarification in that meeting. The financial “experts” have had their financial questions answered prior to the board meeting.
But what does this mean for the board meeting? We have inferred that it changes the nature of the interaction in the board meeting. The meeting materials are often vetted by members of the board, and the actual discussion and decision around an item at the board is a final check that it makes sense to a relatively savvy, but non-expert director.
Boards that ignore or don’t understand this as a last important step in the decision process do so at their peril. The judgement in the recent and highly publicised Centro case provides some context for our advice.
A board should be established which enjoys the varied wisdom, experience and expertise of persons drawn from different commercial backgrounds. Even so, a director, whatever his or her background, has a duty greater than that of simply representing a particular field of experience or expertise. A director is not relieved of the duty to pay attention to the company’s affairs which might reasonably be expected to attract inquiry, even outside the area of the director’s expertise.
Boards that delegate important aspects of their decision making to management or committees still need to bring their independent judgement to the decisions they make. This means that directors who are not expert or experienced in a field still need to be asking questions of a decision in that field. Does the decision make sense?
In the Centro judgment, Justice Middleton made it clear that directors do not need to always “get it right”.
“…I do not take the view…that the directors should have done it all themselves and become familiar with the complexities of various accounting standards. Of course, they cannot and are not required to take on that task.”
However:
“Directors cannot substitute reliance upon the advice of management for their own attention and examination of an important matter that falls specifically within the Board’s responsibilities …”
A lack of questioning following a management or committee report would appear to be an important marker for boards to indicate whether directors are focusing sufficiently on the tasks before them.
By investigating what directors do in meetings (for instance, how questioning takes place) we hope to illuminate and provide guidance on this and other important issues.
If boards are interested in participating in Gavin’s research, you can contact the team at dyb@qtu.edu.au.