A board of directors, the organ that supervises the senior management of an organization, typically includes a mix of financial experts and experts whose main knowledge is of the sector. The status and influence of the two groups differs greatly. In practice, the financial experts run the show, conclude University of Groningen researchers Dennis Veltrop, Eric Molleman, Reggy Hooghiemstra and Hans van Ees.
‘This entails extra responsibility for the chair of a board of directors’, claims Veltrop. ‘The chair plays an important role in ensuring that all directors can speak their minds. He or she should not assume that directors with sector-specific knowledge will automatically voice any reservations.’ The researchers interviewed over 200 directors from the boards of 40 different organizations. They recently published their findings in the Journal of Management Studies.
To gain a detailed understanding of status and influence on a board of directors, the researchers asked the directors in the study to evaluate each other on the BoardResearch platform. ‘From these peer ratings, we could conclude that financial experts enjoy higher social status on a board of directors and that this higher status makes their fellow directors more likely to conform with them. At the same time, expertise in the industry in question by no means results in extra status and influence’, says Veltrop.
The researchers found it most surprising that these directors relinquish status and influence. ‘Directors who are appointed for their knowledge of the sector could include a medical specialist who sits on the board of directors of a health care institution or a professor who supervises the executive board of another university. They are, after all, people with significant knowledge, but this sector-specific expertise does not appear to lead to higher status on a board of directors. They generally have less financial expertise.’
The surprising results prompted the researchers to repeat their study twice with other data and to hold additional interviews with directors. Financial aspects again proved to take precedence. They found the difference in status and influence between financial and non-financial directors in all three ways in which they studied the effect. Veltrop: ‘To give an extreme example from the interviews: in some instances, the financially strong directors would leave meetings once sector-specific topics came up. The underlying message here seems to be: now the important financial topics have been discussed, you can manage without me.’
Status and influence are not only determined by the difference between financial and sector-specific knowledge. The researchers concluded that how directors behave also plays an important role. ‘Expertise only becomes visible if you show what you know at the six to eight times a year that a board of directors meets. Your personal tendency to demonstrate your expertise, so your motivation to show that you know rather a lot, influences your status. You often find at such meetings that multiple agenda items need to be discussed within a limited timeframe. In this one day or afternoon many decisions must be made by people who do not work together intensively during the rest of the year. This means that the tendency to showcase knowledge has a significant influence on the status of a director.’
The researchers made another observation that is very relevant to the practice; they found that group pressure also occurs on boards of directors. ‘People often have the idea that group pressure does not occur on boards of directors because these are unsullied and independent souls with plenty of executive experience. It is good to have now shown that directors too conform with each other’, says Veltrop. ‘It is not particularly revolutionary from the theoretical perspective, but being able to demonstrate the effect is most relevant to the practice. It is no different on a board of directors than in any other social group where people work together, and we now know that bit more about who exactly is in charge at the top of an organization.’
The significant influence of directors with a financial background and the tendency to conform on a board of directors has consequences for the chair of this body, says Veltrop. ‘The chair of a board of directors must be aware of these processes. He or she plays an important role in ensuring that all directors can speak their minds. For instance, further research that included interviews and video observations of board meetings has shown that psychological safety is extremely important on a board of directors. Now that we know that directors with sector-specific knowledge have lower status in the group, we cannot automatically assume that they feel safe enough to say what they think. The question is whether they will voice any reservations without being prompted. This is thus an important responsibility of the chair. Luckily, this has also been addressed in the recently revised Corporate Governance Code.’
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