leadership boards of directors

Strat. Change 11: 225–233 (2002)Published online 26 April 2002 in Wiley InterScience(www.interscience.wiley.com). DOI: 10.1002/jsc.585

Leadership boards of directorsAdrian Davies,1 Paul Joyce,2 Graham Beaver2∗ and Adrian Woods31 Trussler Davies Associates, London, UK2 Nottingham Business School, Nottingham Trent University, Nottingham, UK3 School of Business and Management, Brunel University, Uxbridge, UK

• Boards of directors that have a leadership role in corporate strategic planning gobeyond merely caring for shareholder interests and take a proactive role in the successof the business. They do this by setting the strategic direction and evaluating companyperformance.

• The cultural and organizational conditions for the development of leadership boardsare however, not well understood. The roles of executive and non-executive directorsneed to be clearly defined in order that such boards can be effective and assert controlover strategy and performance. Executive directors can only be effective when theyclearly differentiate their role of providing direction from their daily role of workingwith managers in the company.

• Recent research has begun to push back the ignorance surrounding the developmentof leadership boards. This will be examined in order to define the barriers standingin the way of more empowered directors. It will then be used to identify the actionsand approaches that can be used by directors to develop their involvement in, andinfluence over, corporate strategic planning.

• This is then followed by a discussion of boards that places the issue in theircontemporary policy context. It leads to the conclusion that the organization ofpartnership between board and management is important and that business successincreasingly rests on openness and trust supported by creative and challengingdialogue.

Copyright 2002 John Wiley & Sons, Ltd.

Leadership boards of directors:issues and contexts

Discussions of boards of directors often con-cern themselves with lists of responsibilitiesor activities attaching to the role of direc-tor (Demb and Neubauer, 1992). It mightbe useful, however, to ask how importantare the various responsibilities or activities indifferent types of company boards?

* Correspondence to: Graham Beaver, NottinghamBusiness School, Chaucer Building, Burton Street,Nottingham, Nottinghamshire, NG1 4BU, UK.E-mail: [email protected]

Much of the literature on boards hashad recourse to notions of weak or pas-sive boards. These simply ‘rubber stamp’decisions made by the chief executive andthe top managers. These weak boards arethen implicitly or explicitly contrasted withboards that are more active. The influenceof agency theory in this literature, with itsemphasis on the relationship between theprincipal (shareholders) and the agent (man-agement), has helped to construct the ideaof the board as a ‘watchdog body’. As a con-sequence, the board of directors has beenconceptualized as effective when it checks

Copyright 2002 John Wiley & Sons, Ltd. Strategic Change, Jun–Jul 2002

226 Adrian Davies et al.

up on managers to make sure that they aremaking decisions and acting in ways thatbenefit the shareholders. This suggests thatthe board of directors should be vigilant inreviewing how managers are using resourcesand monitoring how well the company is per-forming. It is also evidently consistent withthe view that the board has a vitally importantrole in recruiting, monitoring and dismissingthe chief executive officer.

The model of the watchdog board ofdirectors and the associated responsibilitiesand activities, implies that the businessorganization as an entity has little organicrelationship with shareholders. A watchdogboard is needed to ensure that profitability isdelivered to a passive shareholder interest.

Perhaps less obviously, this model of theboard can be linked to a simple view ofshareholder interest. Under the influenceof agency theory the board of directors isexpected to deliver profitability to share-holders that are only interested in the levelof profitability achieved, the dividend paidand the protection of their capital. The com-position of shareholder interests is not thissimple. Shares may be owned by insurancecompanies, unit trusts, pension funds, othercompanies, founders of the business, familymembers of the founders, employees, indi-viduals and many organizations that want toinvest in socially responsible companies, orhave other corporate or personal motiveswhich are often conflicting.

While businesses have become more sen-sitive to individual needs among customers(hence the phenomenon of mass customiza-tion), it is not yet obvious that the differ-entiation of shareholder interests has beenrecognized. If shareholders are highly differ-entiated it seems obvious that sooner or laterthey will expect more responsiveness frombusinesses. And if this responsiveness is notforthcoming there may then be more activeshareholders putting pressure on boards andtaking, on occasion, legal action. This wouldlead to criticisms of watchdog styles of com-pany boards.

Attempts are being made to create moreactive boards in the United States and

elsewhere. There have been concerns, forexample, about combining the roles of chiefexecutive and chairman of the board and thevery real concerns of inadequate monitor-ing and objectivity (see, for example, Beaver,1999). The balance between executive andnon-executive directors also remains a sensi-tive issue. The role and authority of the chiefexecutive in nominating new board mem-bers has also been questioned. All of theseare matters seen as important in influencingthe composition and model of the board.Changes in the arrangements of these mat-ters were not simply expected to change thestructure and functions of the board. Theywere expected to change the relationshipbetween directors and top management andthus to change the relationship between thebusiness and its shareholders. These detailedchanges in governance have been seen aseffecting a powerful adjustment in the rela-tionship to investors. The detailed changeswere meant to insert a real countervailingforce to management into the governancestructures. In consequence, the detail ofactivities undertaken by directors was meantto change.

The leadership model of the board is pred-icated on a different analysis. While thebalance of inside and outside directors, theseparation of the chief executive and chair-man roles and the procedure for nominatingdirectors may have material effects, theydo not necessarily imply greater attentionto the diversity of interests among share-holders. The leadership model requires that

The leadership modelrequires that boards of

directors shapestrategy formulation

boards of directors shape strategy formula-tion with a view to addressing the specificsof shareholder interests. It may even imply aconcern on the part of the board to develop


Leadership boards of directors 227

strategies that maximise the responsivenessto shareholders through enacting strategiesthat address the largest possible coalitionof shareholder interests. (These statementsreflect the current status of legal responsibil-ities under company law. Changes in the lawmight imply addressing a coalition of share-holder and other stakeholder interests.)

It is not the wishes of individual directorsthat will bring about the leadership model somuch as changes in shareholder constituen-cies and in the place of business in society.It will be brought about in our opinion, bythe dissatisfaction of shareholders and pub-lic policy makers with ineffective forms ofcorporate governance.

The relationships between the three dif-ferent models of company boards — rubberstamp, watchdog, and leadership — are sug-gested in Table 1. This identifies twomain dimensions of company board activity.Involvement in setting the strategic directionand involvement in evaluating company per-formance.

Judge and Zeithaml (1992), in a study of 42organizations, found that many boards hadlimited involvement in developing their orga-nization’s strategic direction. They also foundthat in most cases directors merely acceptedtop management evaluations of strategicdecisions. Using the terms we have beendeveloping so far, we would suggest thatmany of the boards in their study were func-tioning as rubber stamps or watchdogs and itis unlikely that many were leadership boards.

Critically for the arguments in thispaper, Judge and Zeithaml report that

the organizations with the greatest boardinvolvement in strategy formulation and eval-uation tended to be high-performing ones.They quote some comments of respondentsto support the link between involvement ofthe board in strategy and high performance.One respondent from a successful organiza-tion stated that the board helped manage-ment to avoid mistakes and a respondentfrom a low-performing organization said thechief executive did not listen to the boardvery carefully.

In the next section we concentrate on thedynamics between directors and managersthat account for the difficulty that directorshave in demonstrating leadership.

Boardroom power

Pettigrew and McNulty (1995) refer totheories of managerial hegemony and linkthis to recent empirical work on boardsshowing non-executive directors as passive(Lorsch and MacIver, 1989). Using data froma pilot study of part-time board members theydraw attention to different types of boardsand the processes by which individualshandle their situation as directors. In termsof the different types of boards they identifywhat they call minimalist board cultures andwe can associate these with the concept of therubber stamp board. They also report whatthey termed maximalist boards, which areproactive boards. They teased out the factorscreating passive directors. These includedthe chairing of the board, constraints ongetting knowledge, prior expectations ofnon-executive directors and social networks.

Table 1. Models of company boards

Directors ratify, or reviseand ratify, managementproposals on strategy

Directors involved (withmanagement) in

developing strategicdirection

Directors merely accept managementevaluations of strategic decisions

Rubber stamp

Directors specify information requiredfor evaluating strategic decisions andperformance and probe data suppliedby managers

Watchdog Leadership



This same study began to illuminatethe active process by which non-executivedirectors can build up to personal activism onthe board. This involves what we could callpersonal strategies relating to the legitimacyof an active role, mobilizing power and finallythe will and skills to use the power. If we wantto trace the theoretical connections of suchconcepts we could look to institutionalisttheories of how individuals are faced byissues of legitimacy and role expectationsin organizational roles and rational choicetheories of how individuals handle theirsituation.

What then do we learn from this pilotstudy? First, it goes beyond merely support-ing the usefulness of distinguishing typesof board to understand the nature of aboard of directors. It begins to explore howthese boards might change from one typeto another in terms of behavioural dynam-ics in and around the boardroom. Second,implicitly we are left with the propositionthat proactive boards only emerge with diffi-culty and as a result of a struggle to changethe board from the ‘normal’ state of affairs.

Westphal’s (1998) study of interpersonalinfluence processes between chief execu-tives and board members provides differentinsights to that of Pettigrew and McNulty.Whereas the latter indicated the importanceof non-executive directors mobilizing powerto become active, Westphal showed thatmanagement might deploy social skills toneutralize a board’s proactivity. In particular,he found that levels of ingratiation and per-suasion by chief executives correlated withvarious indicators of the independence ofthe board, e.g. ratio of outside directors, chiefexecutive and board chair roles being split.

Leadership: monitoring and support

The work reviewed so far could be seen asfitting a zero-sum game paradigm. Either themanagers are in charge or the board is incharge. They cannot both be providing lead-ership. However, is this the only paradigmfor understanding the relationship betweenmanagement and the board?

Judge and Zeithaml’s (1992) study sug-gested that a board that merely ratifies man-agement proposals and takes at face valuethe managers’ evaluations of strategic invest-ments is to be found in poorly performingcompanies. The directors have to be a forceto be reckoned within any successful com-pany. However, another study by Westphal(1999) indicates the existence of benefits of acollaborative relationship with managementin terms of the provision by directors ofadvice and counselling. Not only did he findthat, board monitoring of chief executives

Board monitoring ofchief executives waspositively associated

with businessperformance

was positively associated with business per-formance, he also found that the offer andacceptance of advice and counselling waspositively associated with business perfor-mance.

Our reading of this evidence is that aleadership board is skilled in combiningboth monitoring and support. It is possiblethat the relationship between directors andmanagers takes the form of a challengingpartnership in which the directors as thesenior partners are not afraid to monitor andaudit managers, as well as help and guidethem. There seems to be a growing elementof mentoring and coaching in progressivecompanies where much of this is done bynon-executive directors.

Westphal (1999) comments on his findingsby suggesting that top managers and non-executive directors should be helped toform a single cohesive team. We wouldsuggest that the partnership concept is moreapplicable than the team concept. This isbecause directors and managers should sharecommon goals but have distinct roles inpursuing them. While both should share



the task of crafting strategy, only managershave the knowledge of the business and theworking tools to deliver the agreed strategyand provide the appropriate operationalsupport. Within the framework of the strategyfor external relationships, directors look tothe interests of shareholders while managersneed to engage the support of employees,customers, suppliers and other stakeholdersin achieving the long-term goals of thecompany.

The challenging board

How can the partnership between directorsand managers be made effective? First, theroles of each should be clear. Directors donot manage a company, they provide direc-tion to those who do so. Their role is to artic-ulate a vision, mission and strategic directionfor the business that its shareholders andother stakeholders can share and support.The role of managers is to help to shape thestrategies to deliver the vision over time andto ensure that they are fully implemented.Second, power should be shared to enablethe process to work.

‘All power tends to corrupt; absolutepower corrupts absolutely.’ Lord Acton’saphorism applies to company boards asmuch as to rulers. The process begun bythe Cadbury Committee to review corporategovernance was aimed primarily at diffusingpower within companies in order to restrainexcess and to encourage open debate. Cad-bury has encouraged the wider use of boardcommittees (such as audit committees, nom-ination and remuneration committees) inorder to facilitate scrutiny by non-executivedirectors of certain key processes. Audit com-mittees are becoming more common, eventhough the London Stock Exchange has notyet imitated its New York counterpart in mak-ing their existence a condition for companyquotation. Most quoted companies now haveaudit, nomination and remuneration com-mittees, controlled by non-executive direc-tors in order to accord with the HampelCode of governance.

The powers given to non-executive direc-tors by the Hampel Code have encouragedgreater scrutiny of performance and of thechoice of human resources. The risk offraud should be diminished, though auditcommittees still tend to be backward look-ing. Use of a rear-view mirror is not alwaysconducive to safe or purposeful driving. In asimilar analogy, non-executive directors needto develop their powers of challenge as wellas those of scrutiny and focus them on thefuture direction of the company.

The Hampel Code looks for balance oncompany boards:

‘The board should include a balanceof executive and non-executive directors(including independent non-executives)such that no individual or small groupof individuals can dominate the board’sdecision taking’ (A.3)

This rather static statement of principle hintsat one of the key dynamics of a successfulboard — the interplay of challenge andresponse that tests proposals with rigourand which shapes good ideas into oneswhich will be resilient into the future. Manychairmen seek to develop and preserveharmony on their board. Wiser ones knowthat healthy conflict can be a force forgood and that an effective partnership isbuilt on mutual respect, involving everybodyand favouring none. Few winning sportsteams are zones of comfort. Why thenshould company boards not work throughcreative tension in order to achieve a bettersynthesis?

For boards to develop an effective part-nership, chairmen need to select directorswith a wide range of complementary talentsand personality types. The Henley study ondirectors’ competences (1996) identified alarge number of interacting talents. Studiessuch as that of Meredith Belbin have mappedthe basic personality types required for effec-tive teamworking. One key competence thatis as essential in the boardroom as in thecourtroom is advocacy. Too few directorsare schooled in preparing and presenting a



convincing case and most lack the debatingskills that can sustain it against challenge. Thechallenging board requires skills in advocacy,which includes the ability to listen construc-tively, if it is to be effective.

Recent high-profile company collapsessuch as Marconi illustrate the difficulty infinding directors that have sufficient businessskills to act effectively, whilst not in somematerial way connected to the firm or otherdirectors that could affect their judgementand objectivity. At Marconi, for example, SirRoger Hurn also chaired the board of thePrudential that was the largest shareholderin the company. Hurn also had links to otherdirectors such as George Simpson as theywere both on the board of ICI. Furthermore,Simpson was on the board of the Royal Bankof Scotland, one of Marconi’s biggest lenders.Other links between directors included SirAlan Rudge, the deputy chief executive ofBT, one of Marconi’s principal customers.While these directors had the necessarybusiness expertise they were in a complexweb of interlocking social and businessrelationships that may have made it difficultfor them to act with sufficient detachmentto detect the warning signs when Marconi’sstrategy began to go astray. There is nosuggestion of anything fraudulent or illegalhappening at Marconi but the questionremains why so many skilled professionalsused to operating at this level failed to spotthe problems which with hindsight couldhave been prevented.

Even more serious concerns have beenraised with the collapse of Enron wherethere is an active investigation taking place todetermine whether criminal charges shouldbe levied against particular board members.Our point here is not so much aboutthe possibility of fraudulent activity takingplace but whether the board members hadsufficient ‘distance’ from the company to beable to ask the difficult questions necessary tocheck that the strategic direction determinedby the board was still ‘correct’ given the manychanges in the business and competitiveenvironment.

The pay-off

A ’harmonious’ board may often be foundto be one whose members have a high tol-erance of personal agendas. Harmony maybe achieved through a pattern of personaldeals, often unconsciously, so that there isno common agreement to put the interestsof the company consistently above those ofits directors. It is interesting to comparethe principles underlying the codes nowintegrated into the Hampel Code with the‘Seven Principles of Public Life’ developed bythe Nolan Committee (Selflessness, Integrity,Objectivity, Openness, Honesty, Leadershipand Accountability). Selflessness and objec-tivity do not emerge from the private sectorcodes, yet they lie at the heart of any effectivesystem of corporate governance.

The challenging board is firmly focusedon the long-term interests of the company.

The challenging boardis firmly focused on

the long-term interestsof the company

It assumes that there are rarely simpleanswers to complex situations so that ittakes a sceptical and exploratory approachto decision making. It is aware that thecompany’s future is largely determined byfactors in the external world over whichit may have little control. It thereforeencourages processes which improve itsunderstanding of the external world and ofhow it may evolve in the future. It is awarethat knowledge is the key to business successand that knowledge is like a jigsaw puzzle inwhich many different people hold the pieces.

The challenging board is committed tomaximizing the use of the talents of itsmembers. Many chairmen seek to workentirely through plenary sessions of theboard but this rarely enables sufficient time tobe devoted to the long-term direction of thecompany. The model that is evolving ensures



that all substantive decisions are taken bythe whole board but encourages the use ofother bodies that report back to it. Greateruse of a management committee, chairedby the chief executive and involving theexecutive directors and key managers, is tobe encouraged provided that its deliberationsare reported to the board in full. The creationof audit, nomination and remunerationcommittees has opened up the way to usethe talents of non-executive directors morefully and provide an appropriate degree ofscrutiny.

There remain key areas of the company’sactivity that are not open to independentscrutiny. These include the developmentand implementation of strategy, marketing,purchasing and relationships with key stake-holders (including government). Boards areoften involved in creating policy for theseareas but executive management communi-cates the results. Principle D2. of the HampelCode states:

‘The board should maintain a soundsystem of internal control to safeguardshareholders’ investment and the com-pany’s assets.’

The Turnbull Committee of the Institute ofChartered Accountants has reported (1999)on how this principle should be realized andits proposals are now adopted by the LondonStock Exchange for listed companies to use.It sees its task in the following terms:

‘A company’s system of internal controlhas a key role in the management of risksthat are significant to the fulfilment ofits business objectives. A sound system ofinternal control contributes to safeguard-ing the shareholders’ investment and thecompany’s assets.’

This statement is the nearest the documentcomes to pronouncing on corporate strategy.It also fails to mention non-executive direc-tors. Its checks and balances may well bedealt with outside the boardroom — indeed,all scrutiny seems to be offline!

A challenging board would ensure thatthe range of committees controlled by non-executive directors was widened to includethe key functions of strategy, resources, self-renewal and relationships with key stake-holders. The model of a Strategy Committeealready exists in some companies, initiallyproposed by Andrews (1980). The conceptcan be taken further using the committeelike an audit committee under the control ofnon-executive directors (Davies, 1991).

In such a model the development ofstrategy would be driven by the chiefexecutive and involve the whole board. TheStrategy Committee would act as a watchdogto oversee implementation and ensure thatthe short-term interests of executive directorsor others did not compromise the long-term interests of the company. Creation ofa Strategy Committee would complete therange of board committees needed to ensureindependent scrutiny of the processes ofdirecting the company and would balancethe inbuilt power advantage of executivedirectors.

This would enable the board to work effec-tively in its plenary sessions, with executivedirectors proposing strategy and reportingon its implementation, non-executive direc-tors stimulating challenge and debate froma position of greater knowledge of the com-pany’s business and ensuring that the keydevelopmental processes of the companywere subject to independent scrutiny. Such aregime would strengthen the role and influ-ence of the chairman and ensure a widerspread of power and greater accountabilityof all directors. It is as well to be remindedthat: ‘The price of good governance is eternalvigilance’ (Davies, 1998).

Conclusions

Much remains to be done by leadershipboards to develop relationships with share-holders and other external stakeholders whocan influence the development and perfor-mance of their company. To do so boardsmust be rigorous in delegating operationalmanagement to the executive group, while



building stronger controls and processes thatensure that power supports the needs of thecompany and not simply the ambitions ofindividuals.

Greater openness is needed to balancethe increased accountability of both directorsand managers. This will ensure that justice isseen to be done and make arbitrary decisionsmore difficult to implement. Business isbecoming a multi-dimensional partnershipand openness is crucial to build the trustneeded to succeed.

The difficulty in finding suitably qualifiedindividuals to serve on boards that arenot in some way linked either to eachother, or to the company should not beunderestimated. The pool of individualsthat are capable of operating effectively atthis level while not being connected tothe business probably diminishes as thesize of the business involved increases.This is because the number of similar-sizedbusinesses also diminishes and therefore thepool from which directors can be recruitedis also consequently smaller. It is perhapsinevitable therefore that potential directorsget to know each other prior to beingrecruited and when in post, a ‘club culture’can emerge that makes it hard for individualsto ‘blow the whistle’. Yet the evidence fromrecent high-profile collapses in both the UKand the USA suggest that more attentionneeds to be paid to this area.

Finally we believe that there are two sug-gestions for public policy that should be con-sidered which unfortunately are too late forthe current revision of the Companies Act:

• A revision to company law to place onboards of directors a duty for strategicleadership of the organization to cover thewhole strategy process from formulationthrough to evaluation.

• A requirement within company law forcompanies above a certain size to estab-lish a scrutiny committee to carry outannual evaluations of company perfor-mance and the effects of strategic planson performance.

Biographical notes

Adrian Davies has had extensive experienceas a company director, both executive andnon-executive. He is currently a managementconsultant, specializing in strategy, market-ing and corporate governance, operatingboth in the UK and internationally. Adrianis a former Chairman of the Strategic Plan-ning Society and former President of theEuropean Strategic Planning Federation. Heis author of Strategic Leadership (WoodheadFaulkner, 1991) and The Strategic Role ofMarketing (McGraw-Hill, 1995). His thirdbook, A Strategic Approach to CorporateGovernance (Gower, 1999), builds on ear-lier experience and research to achieve anew synthesis.

Paul Joyce is the Professor of StrategicManagement and Head of the Departmentof Strategy and Marketing at NottinghamBusiness School. Paul has worked in both theinsurance and engineering industries and hasbeen a senior manager in local government.His current research interests centre on theroles of leadership and strategic managementin innovation and change. His recent bookson strategic management include Strategy inthe Public Sector (Wiley, 2000) and StrategicManagement (Kogan Page, 2001) with AdrianWoods.

Graham Beaver is the Professor of Corpo-rate Strategy and Business Development atNottingham Business School and is respon-sible for much of the academic work onbusiness growth and strategic management,particularly as it affects small and emergingenterprises in the economy. He was a found-ing Editorial Board member of the journalSmall Business and Enterprise Development(and Reviews Editor from 1996 to 1999) andthe Editor of the international managementjournal Strategic Change, now in its 11th

year of publication. Graham is a Fellow ofthe Centre for SMEs at Warwick BusinessSchool and his latest book on Small Business,Entrepreneurship and Enterprise Develop-ment (Financial Times/Prentice Hall, 2002)was published in February.



Adrian Woods is Professor of Managementand Dean of Brunel University GraduateSchool. For several years he was the Deanof the Faculty of Social Sciences at Brunel.Adrian has written extensively on strategicmanagement, training and innovation. Hisconsultancy roles have included work forboth the public and private sectors as wellas for the European Union in the CzechRepublic and Lithuania.

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