Barriers to Corporate Governance

We live in a blame culture. Every time a corporate scandal erupts we look for someone or some people to blame. What was the board of directors doing? They must be incompetent or negligent. Or were they not incentivized to do the job properly?

In fact, in most cases, board failures are not due to lack of motivation or competence of the individuals on the boards, but are the result of clear structural barriers from board size to the complexity of a firm, which can lead to the failure of the board to effectively obtain, process and share information as individuals and as a group.

New research from Professor Ruth Aguilera at ESADE Business School, Joel Andrus and Steven Boivie from Texas A&M University Mays School of Business, and Michael Bednar of Illinois Urbana-Champaign, reveals 10 structural barriers that explain why boards of directors can fail to effectively monitor their companies. Barriers that can be addressed to ensure better corporate governance.

These 10 structural barriers can impede information processing capabilities, leading the board to fail in its monitoring duties: 

INDIVIDUAL FACTORS (related to the individual board members):

• Outside job demands: As successful and busy professionals, many board members simply do not have the time and availability to do their jobs effectively;
• Complexity of outside job demands: With outside responsibilities involving complex issues and situations, the board member is unable to focus on the firm’s priorities;
• Dissimilarity of outside job demands: A board member may not have the experience or knowledge required to make effective decisions for the firm.

GROUP FACTORS (related to the dynamics among the directors on the board):

• Board size: Large boards are less effective because of difficulty in coordinating actions, lack of cohesiveness, etc.;
• Meeting frequency: The board meets too infrequently to build trust-based working relationships;
• Diversity of the board: While diversity can add new perspectives, different backgrounds and experiences can hinder communication and assumptions about how to approach tasks;
• Norms of deference: Some board members follow social norms that call for undue deference to the CEO;
• CEO power: Powerful CEOs can control the agenda or board meetings — and who sits on the board.

 FIRM FACTORS (related to the characteristics of the firm):

• Firm size: Firm size will lead to increased complexity;
• Firm complexity. Due to multiple products, multiple geographic markets, foreign ownership, etc. Part-time boards that meet infrequently do not have the time to fully understand the broad range of information technologies, products and markets of multi-product firms or the variety of cultural and regulatory environments of multi-geographic firms, leaving then unable to effectively monitor the activities and decisions of fully informed, full-time executives and managers.

This research can help boards address these structural barriers by tailoring responses such as: more frequent meetings — perhaps using information technology alternatives to reduce travel issues; and longer shared tenure to increase cohesiveness and trust on larger boards; norms of openness without fear of retribution to alleviate issues such as social values that encourage deference to CEOs; and strategic recruiting to avoid function diversity where board members are unfamiliar with the issues and environment of the firm.

Finally, the researchers also suggest that it is important to recognize what boards can do well — such as allocating resources and influencing key events — and temper the expectations of a board’s monitoring capabilities.

Access the original research paper: Are Boards Designed to Fail? The Implausibility of Effective Board Monitoring.  The Academy of Management Annals (January 2016).