Mutual Accountability – an effective dynamic for boards and management

Gavin Nicholson from QUT shares insights on creating a healthy dynamic between management and the board.

Building a strong, working relationship between the board and management is one of the most important things a board can do to ensure effective governance. This positive dynamic creates a healthy culture where directors can probe and advise management decision making to ensure both compliance and better performance. At its best, this behaviour is then modeled and replicated throughout the organisation. However, we know surprisingly little about what boards actually do to create this dynamic. Are there behaviours (beyond motherhood statements) we can observe that point to this positive dynamic?

To answer this question we undertook an intensive observation-based study of two boards over a 4 month period as they went about their work1. Our research involved interviewing the directors and senior managers, having them answer some questionnaires and, critically important for our study, video-taping their board meetings. The video tape allowed us to meticulously code who was doing what in the meetings.

We were particularly interested in the behaviours of informing the board, questioning or challenging, and judging the information presented.

Some of what we observed was what you would expect. Board meetings are fundamentally a set of habitual routines (the agenda, pre-circulation of papers, sequence of present-question-discuss during the meetings and so on). But what was interesting is that below this veneer of 'sameness' we noted significant variation - that this process was far more dynamic and variable that a first cut look seemed to indicate. For simplicity, we offer three summary insights based on our observations.

First, we entered the field thinking we would largely see management reporting to the board with the board members then questioning what was presented. Instead, our observations showed that in the boards we studied about half of all 'board informing' was undertaken by other (non-executive) directors (which makes a bit of sense in hindsight, if we think about the nature of committee reporting). In fact, there were very few long periods of presentation (and these often involved an outside presenter); instead one party would provide a relatively short foundation of information that others would build on. So, we would see a manager present for a few minutes before being supplemented by a director (or vice versa in the case of a committee). Thus, there was significant support provided by both managers and directors for the information being placed before the board.

Second, this supporting activity didn't mean things were rubber-stamped. Instead, a different director (and sometimes manager) would question the information presented - as would be expected. What was interesting was that different directors would predominantly question on different activities. Thus, any individual director would inform the board on one issue (and often be supportive of management) and then question the information presented on another.

We see this dynamic role switch (from advice/support to questioning) as the core to an effective board culture. It is very easy for a director who simply questions management to be perceived as the "opposition". If, however, the director is supportive on several items, this perception is hard to maintain, and so any questioning is more likely to be seen a constructive criticism. Critically, if management also sees the board members questioning each other (i.e. holding each other to account), it builds a positive culture where probing and challenge are seen as part of "how we do things around here" - the classic definition of culture.

Finally, we noted that the role switch was somewhat counter-intuitive: directors with the lower knowledge base in an area were more likely to question. With hindsight, this makes sense and the example with, say, an Audit Committee helps explain. Generally the Audit Committee contains directors with financial expertise. Thus, these directors will be providing the information in the board meeting - they have asked their questions in the Audit Committee. Instead, the directors who would probe this information are those not on the Committee - the ones less likely to possess financial expertise. While it is well recognised that directors can't totally rely on colleagues given their duties, we contend that directors need to take an interest in all aspects of board operations for a performance reason: it builds a positive culture. It is this questioning of each other, only possible with generalists engaging with their colleagues, that models the accountability culture we are trying to build.

We will end with some questions that your board and directors might consider around their dynamic.

The board might want to consider the following questions:

• Is management both (appropriately) supported and challenged during our meetings?
• Do all directors both support and challenge management - or do people play static 'roles'?
• Do directors (appropriately) challenge each other?
• Does our board (appropriately) interrogate Committee work?

Directors might want to ask themselves:

• Do I have a good balance of support and questioning in my interactions with management and directors?
• Am I willing to (respectfully) challenge both management and fellow directors?
• When my views are questioned, do I take it personally or as a component of good governance?

For detail on our studies you can see:

Bezemer, P. J., Nicholson, G., & Pugliese, A. (2014). Inside the boardroom: exploring board member interactions. Qualitative Research in Accounting & Management, 11(3), 238-259.

Nicholson, G.J., Pugliese, A., Bezemer, P.J. (forthcoming). Habitual accountability routines in the boardroom: How boards balance control and collaboration. Accounting, Auditing and Accountability Journal.

Pugliese, A., Nicholson, G., & Bezemer, P. J. (2015). An observational analysis of the impact of board dynamics and directors' participation on perceived board effectiveness. British Journal of Management, 26(1), 1-25.

About the author:

Gavin Nicholson is Associate Professor in the School of Accountancy at Queensland University of Technology. Gavin is an experienced director, governance researcher and board consultant. He has provided advice on corporate governance and strategy to listed and large public companies, government owned corporations, statutory authorities, not-for-profit organisations and local government. Gavin heads several large research programs aimed at understanding how to help boards make better decisions. He has published extensively in a range of leading journals in his field and currently serves on the editorial board of Corporate Governance: An International Review and co-authored a number of best-selling books with Prof Geoff Kiel including the practitioner-focused title “Directors at Work”.

1 We have since studied more than 10 boards across several industries in this way and haven't observed anything to change our views on the analysis