The Self-Managing Board Of Directors
The Enron scandal and bankruptcy of the early 2000s was a financial debacle for thousands, sent former CEOs to prison, and led to the…
The Enron scandal and bankruptcy of the early 2000s was a financial debacle for thousands, sent former CEOs to prison, and led to the extinction of a Big Five accounting firm. It also transformed corporate governance, ushering in the era of Sarbanes-Oxley transparency and accountability. Important transactions into which Enron entered with Board approval suffered from crucial accounting and governance defects.[i]
As Enron’s implosion and later investigation demonstrated, the director’s job in a non-profit, foundation or corporate setting can be maddeningly complex. Are agency relationships correctly aligned so that agents act in a fiduciary capacity on behalf of the principals they are supposed to represent? Should the CEO participate as a full board member with voting rights? How does the board review and approve strategic plans? Are there conflicts of interest? How does the board recruit new members? How does the board review executive performance? How does the board monitor its own performance, if at all?
Francie Ostrower of the University of Texas in Austin served as the principal investigator for a 2005 study of over 5,100 nonprofit organizations for the Urban Institute National Survey of Nonprofit Governance.[ii] The study found that a significant percentage of boards were not engaged in many fundamental roles. Forty-five percent of respondents reported that their boards are not even somewhat active in monitoring the board’s performance. Nearly one-fourth of respondents do not regularly evaluate whether their organization is even accomplishing its mission.
Corporate boards (like Enron’s) are vulnerable to governance failures. While such failures are often attributed to incompetence or lack of incentives, a review of nearly 300 academic journal articles on board governance by a team of researchers concluded that even competent, motivated board members face challenges in monitoring management because of a variety of structural barriers like external job demands, board size and business complexity.[iii]
How can board effectiveness be improved? Studies suggest possible approaches. A follow-up study to the Urban Institute found that encouraging board members to influence the board agenda was associated with higher engagement.[iv] Chuck Blakeman’s Crankset Group uses a shared online document that allows team members create a monthly meeting agenda.[v] In such as system, team members can take ownership of their self-selected agenda items and facilitate discussion of those items. Boards of Directors could fashion similar structures to drive engagement. Given the prevalence of board member role dissatisfaction, some researchers argue that directors should pursue a generative mode beyond finance and strategy to probe topics like value and purpose.[vi]
Open social technologies like Open Space and World Café can be thoughtfully and selectively employed to energize, augment, and expand traditional board discussions around fiduciary and strategy topics. These social technologies have the added benefit of ensuring that every voice is heard, contributing to better decisions.
For that matter, why not invite directors to creatively sculpt board roles that fit their interests, so long as the board collectively fulfills its mandatory responsibilities and effectively allocates decision rights? While not obviating the role of standard committees, an open invitation process would encourage directors to think deeply about aligning their personal board roles and areas of interest.
While the complex agency relationships and decision rights of boards will continue to present challenges and tradeoffs, there is no reason to silently suffer director disengagement and lethargy (which surely affects recruitment). There are social technologies readily available to engage directors and align their interests with the principals they represent.
Fully engaged, self-managing board members creating their own agendas together, learning together and invitationally leading together while simultaneously fulfilling vital legal, fiduciary, and strategic responsibilities would seem to be an experiment worth trying.
[iv] Boards as an Accountability Mechanism, Francie Ostrower, University of Texas at Austin, 2014, p. 11.
[vi] Boards as an Accountability Mechanism, Francie Ostrower, University of Texas at Austin, 2014, p. 20.
Originally published at https://www.forbes.com.