How are boardroom behaviour and organisational performance linked?

Author: Elizabeth Henshilwood, Client Director

May 2010

Sir David Walker ’s Review of Corporate Governance in UK banks and other financial industry entities was requested by the UK government as the vehicle to understand what prompted the financial crisis and how a repeat can be avoided in the future.

Crelos, an organisational change consultancy and partner Tavistock Institute of Human Resources were one of the main contributors to the Walker report as expert psychologists, social scientists and organisational consultants working with and consulting to senior Boards across industries.

Drawing upon the expertise of Crelos and the Tavistock Institute, Sir David identifies a clear link between board behaviour deficiencies and poor business performance and suggests a series of reforms. The debate on how to improve boardroom behaviour in order to maximise the impact of the board on the success of the organisation is ever-increasing.

What is the impact beyond the Financial Sector?
Sir David ’s review has repercussions beyond the financial sector. The FRC, custodian of the Combined Code, proposed revisions to the Code with a view to publishing a new version in May 2010. The revisions include a greater focus on board behaviours, new principles on the role of the chairman and non-executive directors; and new “comply or explain” provisions on the frequency of board evaluations and directors development reviews.

Critical Challenge
Utilities organisations have some challenges that, while not being specific to only them, may be more pronounced. For example, managing risk, specifically when the health and safety of employees and the wider British public might be impacted, is an on-going focus. Indeed, as part of his review Sir David asked the pivotal question (albeit specifically with regards to the Finance industry), “how can we address risk more strategically and sustainably?” Of course, this question might be applied equally to the environment of a utilities organisation.

Risk is the assessment of expected gain and loss. Risk management requires the analysis of all positive and negative outcomes, along with probing of decisions and consideration of options and contingencies. No group of people assessing risk is immune to “groupthink” – the unquestioning acceptance of obviously wrong answers simply because it is socially painful to disagree. In his review Sir David discusses the “failure of individuals and of NEDs as a group to challenge the executive on substantive issues as distinct from a conventional box-ticking focus on process”. Therefore, one of his recommendations is that a key behaviour to develop in NEDs is the ability to constructively challenge the decisions and strategy developed by the executive. It is the role of the Chairman, supported by the CEO and HR, to develop the boardroom to be one where individuals are encouraged to state their mind and give a clear point of view.

Evaluation and Development
Both the Walker Report and the review of the combined Code advocate that to enhance the board ’s performance and awareness of its strengths and weaknesses, board evaluation reviews should be externally facilitated and take place at least every three years; “Boards and their sub-committees should regularly undergo a ’ formal and rigorous evaluation process […] with external facilitation”.

Ali Gill, CEO of Crelos, explains “Board evaluation is an ongoing process of development not a one-off-event. This requires Chairmen and their Boards to realise their infallibility and engage in the task of developing themselves and the way that they interact”.

How do people change their behaviour?
Fortunately for the future of the UK economy, scientific research and Crelos’ experience of working with boards have proved that behaviour can be learned and is predictive of performance. Behaviour describes how we get things done and is not to be confused with personality (our preferred way of doing things) or motivation (what we want to do). Behaviour can be used to describe day to day activities such as searching for up to date information, developing options and contingency plans, influencing, communicating, facilitating teams and asking open, probing questions. However, these positive examples of behaviour have contra-indicators including ignoring information, using threats and coercion, centering discussion around oneself and over-talking others so that they can not put across their point of view. These negative behaviours, if encouraged to be “the way we do things around here” can often prove extremely detrimental when used over a sustained period of time.

However, behavioural change is not easy. Consultants at Crelos work with clients by using a process for behavioural change based on the Transtheoretical model (Prochaska and DiClemente, 1986). This approach takes individuals through five stages – pre-contemplation, contemplation, preparation, action and maintenance to increase the likelihood that the desired change will be made and embedded. The development of positive boardroom behaviours requires Chairmen and NEDs to be open to feedback, be supportive of on-going personal development – and most importantly see the need for and have a desire to change.

What does this mean to me?
Enlightened chairmen, non-executive directors, regulatory bodies and HR professional are now busy interpreting what this means both for them and for their organisations.

The chairman will be required to take on more of a leadership role, coaching and developing the members of the board and evaluating their performance as individuals and as a whole. He or she will also be expected to encourage the use of behaviours in the boardroom that will develop honest, frank, open discussion and encourage critical challenge.

The role of the non-executive director has been under scrutiny and the responsibilities that come with it are ever increasing. NEDs are now expected to have substantial industry expertise and really know their organisation by spending more time with it. They are also expected to challenge the authority of the chairman, query decisions and make suitable recommendations to move the business forwards.

HR practitioners have an opportunity to be at the very sharp end of supporting the Chairman and NEDs and in implementing some of the recommendations such as regular (preferably externally facilitated) board reviews; changes to reward and remuneration practices and considerably more thorough and stringent selection and development processes for executive and non-executive directors.

What can the Utilities sector learn from mistakes leading to the financial crisis?
Alison Gill and Mannie Sher of the Tavistock Institute, key contributors to the Walker Report are in the process of a research study titled: Inside the Minds of the Money Minders - Deciphering Reflections on Money, Behaviour and Leadership in the Financial Crisis of 2008. The research involves in-depth interviews with selected senior officials of banks and other financial institutions and they are providing profound insights about the finance industry.

Respondents have said that the financial crisis has been a shattering experience that has rocked the foundations of financial institutions. Individuals involved are now better able to take a candid look at themselves and acknowledge where they have been found wanting. Very senior people are acknowledging that they knew that their behaviour was excessive, but they persuaded themselves otherwise. Their behaviour was described as delusional and had the characteristics of herding. Group mentality had developed and was embraced enthusiastically; throwing caution to the winds and believing “this time is different”.

The Utilities sector provides the British people with the basic requirements such as water and fuel to enable health and sustain life. An ill-thought through decision or poorly executed strategy can have dire impact. With this in mind, the challenge to the Utilities sector, specifically to Chairmen and NEDs, is how to develop the right behaviours in the boardroom to ensure a situation similar to the financial crisis of 2008 is never experienced by the utilities sector.

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Elizabeth Henshilwood Client Director for the Public Sector and Education

'The public sector is an exciting sector to work with. It brings a totally different set of challenges from the private sector. There is a lot we can do to help transfer the knowledge from private to public.'