KEY POINTS:
New research suggests only a third of New Zealand's boards are highly effective, while many are too big and dominated by overbearing chairperson or chief executive.
And directors representing big investors are getting a bad rap, with concerns raised about their conflicts of interest.
Beverly Edlin, who has just graduated with a doctor of business administration degree from Massey University, has spent six years looking into the inner workings of a top New Zealand board, whose directors collectively have experience in more than 60 companies.
"They talked about the companies they served on - the characteristics and those things that made those boards stand out," says Edlin.
The directors saw only one-third of the boards as highly effective, the next third effective, and the last third as being ineffective.
"When they served on those [highly effective] boards they felt they were focused, had the right mix, right size and competencies, understood their strategies, had good CEOs, chairs that worked well with the CEOs - there were common traits that came through."
Ineffective boards have common traits too, says Edlin. They are too big, do not have complementary skills, have a dominant chairperson or chief executive, and are not aware of "robust governance processes".
Many boards are too big - seven is the "optimum number of people" for quality discussion and companies need to question if those people have the right competencies. "One company was talking about an area where they were going to bring in some high-tech development, and yet they didn't have anyone on the board who understood the high tech," says Edlin.
This board had come to rely on management decisions.
But a company chairperson has to see him or herself as the "process controller" - not the decision maker. Conflict between a chairperson and chief executive is a common factor on ineffective boards.
"There was usually a dominant party," says Edlin. "The dominant one felt they were so powerful they could make decisions outside the boardroom, so they would bring the decision to the boardroom, rather than getting the directors to discuss the issue and come up with a decision."
This dominant personality could be either the chairperson or the CEO, with the other being a weak party - one who followed or tried to please.
So what's the ideal?
"The ideal is when they both know their roles and one sees themself as process and the other sees themself as information, and they work together for the betterment of the total board," says Edlin.
Edlin's interview subjects gave a bad mark to directors representing the investors.
"Investor representatives on boards do not add value because they are wearing two hats and have conflicting roles," she says. "When investor shareholders go to a board and make a decision, the tension is - which hat are they wearing?"
The question is always there - are they working for the investors or are they working for the best interests of the company?
These directors felt the input from investor directors was not positive. They felt the boards are far more effective when they don't have that problem, because they don't have that conflict of interest."
Edlin says studying the board of a state-owned enterprise (SOE) was useful, because the directors had served on a wide range of boards - some large listed companies, others Government influenced.
SOEs have strong commercial objectives, but also have strong stakeholder and shareholder influences.
One of her conclusions is there is a greater need to get new directors practical experience. She says more boards need "learner directors", who does not have previous board experience.
"A company needs to be doing that to ensure they are getting new blood and thinking, but more importantly that the nation is getting new, strong directors - there's too many directors out there who see it as somewhere between management and a status symbol," says Edlin.
"Being on a board is a huge obligation and people need to understand that obligation and take it seriously."
Jens Mueller, Waikato Management School's associate professor and corporate governance researcher, says his data from looking at thousands of companies does not show the size of boards is much of a problem in New Zealand, with the median-sized board having between two and five directors.
Mueller is one of the founders of www.finddirectors.com described as a "Trade Me for directors". It's part of a joint initiative to help companies, many of them quite small, find independent directors. The website has 302 candidates listed.
He found that more than 65 per cent of directors in private enterprises were recruited by fellow directors or management.
"There's nothing wrong with managers and directors having rich networks of good powerful competent friends," says Mueller.
"The big problem that we're seeing in New Zealand is we have a huge demand for independent directors, we also have a very limited way of educating directors."
Mueller disagrees with singling out the potential conflicts of interest faced by those directors representing investing shareholders.
"I think it would be unfortunate if we were to beat up on investor interests only." Having an interest in a company is no disqualification to being on the board, but needs to be managed. "The conventional thinking is to bring in people with interest, to report what they have to say, but the decisions are made by a disinterested board - one interested only in the needs ot the company."
It is a good idea to keep the chief executive and those with other interests in the boardroom, says Mueller.
"But separate the fact finding from the voting, so when a board makes a decision, the facts are found from a wide range of sources, but when a decision is made, it is made on the long-term strategic value."
NEW SEMINAR
* The first of a new seminar programme for new directors starts in late February, at the offices of the Employers and Manufacturers Association in Auckland. The course is scheduled to last about three days. It will cover topics such as the legal duties of directors, risk mitigation, company filings, conflicts of interest, financial compliance, risk management, strategic awareness and operational awareness.
* Beverly Edlin's research found that more than 60 boards her subjects had served on, 20 per cent were highly effective, nearly 59 per cent were effective and 17 per cent were perceived as highly effective.
* She spent about 50 hours in board meetings of an unnamed state owned-enterprise.
