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How to improve your supervisory board performance

Datum:03 maart 2022
Auteur:Fabian Ahrens
How to improve your supervisory board performance
How to improve your supervisory board performance

Supervisory boards around the world are tasked with supervising the firm’s managers and with improving firm strategy, both with the aim of ensuring the survival and prosperity of the firm. To do so effectively, they are required by governance laws or by stock exchange regulations to fulfill certain criteria – most prominently independence criteria. However, organizational scholars repeatedly highlighted that only changing the composition of boards does not necessarily improve their performance. Consequently, they suggest that more consideration should be put on the way supervisory boards actually work together and how they manage to harvest the full potential sitting at the board table.

The way of working together is generally referred to as “board processes” and, already more than twenty years ago, organizational scholars suggested that board processes are important to understand when trying to improve board performance. When speaking about board processes, one can mean multiple things. They can refer to issues such as increasing group participation, whether members prepare diligently before meetings, how information is exchanged, or whether there is an environment where everyone speaks up and raises issues openly [1]. While the presence of board processes should generally be beneficial for board performance, it is questionable whether changing the composition of boards may matter much for the way boards work together as governance regulation implies.

To better understand the role of board processes in improving supervisory board performance, we conducted a quantitative review of original empirical research [2]. Our quantitative review of 82 studies shows that supervisory boards should be wary of expecting that board members automatically use all their existing resources to benefit the board’s performance. To be more specific, we find that only board human capital, that is the expertise of members, improves board processes and board performance. Other characteristics such as independence or social capital that we examined do not show a strong influence. Interestingly, we show that board processes are very important for well-performing boards but in light of the other findings, they may need to be addressed directly and not by changing the composition of the board.

As a practitioner or regulator interested in boards, this means that it may be interesting for you to better understand the challenges your board faces and whether establishing certain board processes may help to improve performance. Achieving this probably takes time and resources but may allow you to bring out the full potential of your current members. When adding new members to the board, instead of basing your decision on the status as independent directors or the knowledge in specific areas, maybe try to understand how this person may help in creating a rich environment that allows everyone on the board to contribute to successful board work.

Fabian Ahrens (f.k.ahrens@rug.nl) is a final-year PhD candidate at the Department of Human Resource Management and Organizational Behavior. He works with Prof. Dr. Floor Rink, Dr. Dennis Veltrop, and Dr. Laetitia Mulder in the field of behavioral corporate governance with a focus on boards of directors, top management teams, decision making, and behavioral processes.

References

[1] Forbes, D. P., & Milliken, F. J. (1999). Cognition and corporate governance: Understanding boards of directors as strategic decision making groups. Academy of Management Review, 24(3), 489–506. https://doi.org/10.4324/9780203888711

[2] Ahrens, F. K., Rink, F., Hermes, N., Veltrop, D., Mulder, L., & Wong, C. Y. E. (2022). The missing link? A meta-analysis of board processes and their mediating role in the board characteristics-effectiveness relationship. Working paper.