Boards 'hampered by non-executives'

Released: Thursday 23rd February 2012

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Boards 'hampered by non-executives'
Mark Williamson
Group Business Correspondent

Having more non-executive directors on company boards only reduces their effectiveness, according to the findings of research that could undermine a key claim of corporate governance activists.

A study by one of Scotland's most successful pharmaceuticals executives found that increasing the percentage of non-executives cut down on the critical debate crucial to ensuring boards make good decisions.

The results to date also cast doubt on claims that having a wider range of people on boards helps them make better decisions.

The findings fly in the face of received wisdom that recruiting more independent directors on boards to keep an eye on executives helps avoid a repeat of the kind of corporate disasters that brought some of Scotland's leading companies to their knees.

The board of Royal Bank of Scotland has been blamed for failing to keep a check on Fred Goodwin's drive for global domination, which ended with the group leading the catastrophically ill-judged acquisition of ABN Amro.

A consortium led by RBS won the battle for control of the Dutch bank in October 2007. Ten non-executive directors sat on Royal Bank's board throughout 2007.

It is widely assumed that similar problems could be avoided if companies recruit more experienced independent directors to their boards.

However, after conducting research into what actually happened in boardrooms across the UK, Alan Walker found that the assumption that having a greater percentage of non-executives led to better corporate governance was misplaced.

A former commercial director of ProStrakan, the Borders-based drugs firm, Mr Walker teaches at Wolverhampton University and sits on the boards of a variety of companies.

Working with the university's Dr Silke Machold, Mr Walker set out to test if boosting boardroom numbers led to an increase in the amount of effective debate – this is known as cognitive conflict in management speak.

The results to date dash expectations that more equals better.

"The higher the percentage of non-executive directors, the less critical debate there is," Mr Walker told The Herald.

"While governance theory says we need more non-executive directors as it's assumed they will bring independent governance to boards, what we are finding is non-executives don't seem to be doing that, they seem to be toeing the line."

Mr Walker said the findings also suggest that companies that fill their boards with a wider variety of people in the hope of improving the standard of debate are likely to be disappointed.

The results show the less diversity there is on boards the better.

Mr Walker said: "We found that the more similar the people on the board are the more effective the board is."

Faced with the apparent gulf between what reformers say about board composition and the results of the research, Mr Walker suggests some aspects of human relationships may be hard to reconcile with corporate governance theory.

He says the more similar personalities are, the higher the level of critical debate tends to be. He notes that people who are unfamiliar with other board members may hesitate to challenge them.

Sceptics wonder if some directors may be reluctant to challenge executives for fear of not getting their appointments renewed.

The preliminary findings are based on analysis of the results of research involving 16 boards, around half in Scotland.

The study covered companies in a range of sectors including banking. Some of the firms involved are household names. The study involved all members of the boards completing an online questionnaire. Some 97 directors participated.

Mr Walker is analysing the results from members of 13 other boards.

He wants three more companies to participate in the study. Mr Walker has presented the findings at seminars in Copenhagen in Denmark and Tallinn in Estonia.

He is preparing a paper with Dr Machold for publication in International Studies in Management and Organisation.

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