Over recent years, organisations in all sectors have become increasingly aware of the need for sound governance design, leading to an examination of traditional board structures and processes for determining board membership.
The representational system is the approach to board membership that has received the most attention. Because this system reflected ‘organisational democracy’, it was rarely questioned or challenged. In some sectors, such a system is so central to the culture and thinking of organisations that it is something of an article of faith.
Change has, however, been forced on many organisations in Australia and New Zealand. Many have moved from board membership based on representation to skills or merit-based selection. The recent intensive world-wide focus on boardroom performance has led a renewed challenge to the effectiveness of ‘representative democracy’ as the best way to structure a governing board and to serve the best interest of stakeholders.
Conceptually, there is widespread support for change to a different form of board selection process, but there has been uncertainty and concern among those who might lose their representative status. There is concern that this will inevitably lead to the loss of organisational democracy or, more fundamentally, to a loss of control and influence by individual stakeholder groups.
The recent trend towards merit or skills-based boards reflects a growing understanding of the importance of good governance, with less public and political acceptance of governance shortcomings than there was a decade ago. This is no less true of, say, a small, publicly funded community health group than it is of a large, listed commercial enterprise.
This changing sentiment is also reflected in the increasing standards being applied by various regulatory authorities. So, a widening range of organisations is questioning how to achieve a higher level of board performance. To the extent that this can be achieved through different governance structures we thought it timely to review some of the issues.
A representative governance structure tends to be one in which board members are appointed or elected based on their membership of a particular group or category—such as stakeholder organisations or particular classes of stakeholders, eg, clients or consumers.
Another common basis for representation is geographical. Here, a board’s membership is designed to cover people from the different parts of an organisation’s territory, such as provincial branches or associations. A third common basis for representation is demographic. People become board members based on, for example, their ethnicity, gender, or age.
A representative arrangement appears to offer stakeholder groups a sense of close participation in the organisation’s governance; an assurance that their ‘voice’ will be heard and that their position will be reflected in the decision-making process. Board members also perceive that they have direct access to the perspectives of other stakeholder groups represented.
Representative board structures are common in the commercial environment where the board’s composition is usually designed to match the pattern of ownership. For example, those with a larger ownership stake would normally expect to appoint more board members.
In not-for-profit and government-related enterprises, the driving force for representation is both similar and different. They are similar, for example, in the way that those who make the greatest financial contribution would commonly expect to exercise effective control through the ability to make board appointments. This is often thought of as proportional representation and is particularly common in sporting organisations where regional, provincial and territory membership determines the voting power at an AGM and, not uncommonly, the number of directors.
It is different in the way, for example, there may be a desire to achieve a social equity objective by allowing various interest groups to have a direct voice around the board table.
Another aspect may be the desire to ensure that people (such as representatives of client groups) who can reflect important dimensions of the organisation’s work are at the board table.
The formation of representative board structures in government-owned or influenced organisations may also be associated with the implementation of public policy objectives such as affirmative action.
Merit or skills-based directorship
The main governance design alternative is to base board membership on some form of qualification or attributes considered directly relevant to effective governance practice. Just what such qualifications might be is a wide subject, worthy of separate exploration and debate. The aim of this alternative approach is to recruit a board whose members are perceived to have the personal knowledge, experience, or skills necessary to provide effective leadership at board level. Typically, a selection process is held to assess the individual abilities of potential members. Appointment is thus based on ‘merit’, however defined.
Concerns about representative structures
Governing boards in all types of organisations face the pressure to ‘perform’. Many boards and stakeholder groups are questioning whether boards with a representative-type structure can meet increasing expectations. Common concerns tend to be expressed in the following terms:
1 Representative structures encourage fragmentation
The core accountability of a governing board is to translate the intents or aspirations of the ‘ownership’ group as a whole into effective organisational performance. For that reason, a board should mainly be preoccupied with why the organisation exists—what it is for and what it should achieve.
Board members who are representatives tend to become preoccupied with the comparatively narrow, parochial interests of their constituencies. These can easily conflict with their fiduciary duty as directors to govern, holistically, in the best interests of the organisation.
Constituencies represented on a board are often users or beneficiaries of an organisation’s services. Being preoccupied with the detailed interactions such groups have with the organisation is a related issue for many representative boards. Many board members in such situations genuinely believe that their primary responsibility is to fight the corner of their constituencies and individual consumers.
‘Representation’ in this sense works directly against the board’s being able to fulfil its ‘big picture’ stewardship responsibilities. The failure to address the ‘big picture’ then inevitably leads to a pre-occupation with operational detail (the ‘how’) and a clash with management and staff who rightly assert that the operational prerogatives are theirs to exercise.
2 Representative structures are unrealistic and unfair
Paradoxically, expectations that an individual board member can truly ‘represent’ a specific (and often large and complex) group of stakeholders are often unrealistic. For example, regardless of its validity in terms of the governance role, how realistic is it to expect one person (or even two) to represent ‘staff’ interests on a university council? The interests of such groups are not necessarily homogeneous, and it would be dangerous to pretend otherwise. Such board members can become ‘the meat in the sandwich’ between organisation-wide interests on one hand and constituency needs and expectations on the other. This burden can be stressful for individuals and detract from their potential contribution.
3 Representative structures produce contrary effects
The presence of board members representing various minorities or underrepresented groups—for example women, indigenous people, or people with a disability—may be resented and contribute to them being isolated or marginalised. Such board members often feel they must deliver standards of performance well above that of their fellow board members to be accepted. Some report that, rather than thinking for themselves, they are forced to become boringly predictable in their advocacy for the group they represent. As a ‘stuck record’, they further alienate their board colleagues and risk disappointing the group they represent, adding further to their stress.
If they do not also have other personal characteristics that would help them to be effective board members, placing a person on a board for no other reason than, for example, their disability or their ethnicity, can easily mean they are set up to fail. Unless they are exceptional individuals, old barriers or prejudices are likely to be reinforced rather than new bridges built, hindering rather than helping the constituencies these board members are supposed to represent.
By definition, a ‘representative’ board is intended to assist certain groups of stakeholders in respect of the governance process. Unfortunately, there is a strong tendency—and incentive—for any governing body made up of ‘representatives’ to take for granted that it knows as much as it needs to about key stakeholders. Boards without representatives ‘on board’ have more incentive (and need) to engage stakeholders explicitly in their deliberations. Ironically, therefore, representative boards are often less well connected to stakeholder needs and aspirations than boards that are forced to adopt a more active approach!
A better approach to engaging stakeholders?
So, is a representative board structure the best way to address and advance specific stakeholder interests? Every board needs to regularly question how it can engage various stakeholder perspectives in its deliberations. The governance questions that should be asked, however, are: Which consumer (and other stakeholder) perspectives should be heard? How best can these be obtained?
Many techniques can give a board a more comprehensive and reliable ‘stakeholder picture’ than relying on permanent representative at the boardroom table. These other approaches could also give various stakeholders a greater sense of participation. Such techniques typically include:
- membership of board-established committees or task forces, or ‘advisory boards’
- participation in special forums on key strategic issues being addressed by the board
- involvement in tailored surveys of stakeholder views.
To provide effective governance of the whole organisation, a board needs to be open to and able to empathise with stakeholder views without being captured or diverted by them. Individual members must be able to think both independently and collectively based on a range of considerations that must often go far beyond the perceived best interests of specific interest groups. It must continually seek to form a holistic and integrated view. It should have a helicopter perspective—sitting above the organisation, understanding how all the pieces of it fit together.
Board membership based on what qualification?
A merit-based approach to board building also has its perils.
When assessing the merits of different approaches to board composition it is important to keep in mind what value the board should contribute to the performance of the organisation. Its job is to give direction and hold management accountable, seeing to it that the organisation achieves something worthwhile on behalf of its ‘owners’. In so doing it must also avoid situations and circumstances that might impede the organisation’s ability to achieve desired outcomes. It is not the board’s role to be another tier of management.
A governing board should progressively acquire the cross-section of skills, experiences and perspectives it needs to provide well-informed and intelligent strategic leadership of the whole organisation. All board members should be expected to bring to the boardroom a perspective independent of the self-interest of different stakeholder groups.
A shift from a ‘representative’ to a ‘merit’ or qualification-based governance structure does not mean, however, that the board should be loaded up with a quota of ‘experts’. Some boards fall into the trap of trying to replicate the types of professional and management expertise that should be engaged and applied by the chief executive. For example, it is common to seek members with expertise in generic professional spheres like law, accounting, marketing etc, or in specific professions related to the functions of the organisation eg, nursing or engineering. It is understandable in small organisations without a great depth of staffing that people will be appointed to the board as an alternative (and often cheaper) source of ‘in-house’ advice. In such organisations, however, this approach often encourages an operational preoccupation at the expense of strategic leadership.
In larger organisations with a competent chief executive and at least some professional staff, an expectation, whether explicit or not, that board members have been appointed because of their ‘day-job’ professional expertise simply invites them to adopt a narrow operational focus. This is just as likely to divert the governing board’s attention onto lower-value issues as a representative structure. As part-timers, even a group of professionals can add little value to the internal management process. They can, however, easily frustrate the organisation’s chief executive and management with ill-directed ‘second-guessing’.
People with professional expertise may and often do make very good directors but not because of the subject matter their profession deals with. They will be effective board members because, for example, they have strategic thinking ability and big picture conceptualisation skills; because they can ask ‘the hard questions’ that expose unsound assumptions and superficial conclusions; because they can contribute effectively to a group decision-making process; and because they have personal attributes such as an ability to think independently and the courage to ‘swim against the tide’. A board also benefits from having a high quota of ‘intelligent naivety’ (ability to ask and insist on answers to ‘dumb questions’).
Both the above approaches to board membership have their advantages and disadvantages. The starting point for any consideration of board membership is clearly understanding the value the board is expected to add to organisational performance. Once that is clear, it will help greatly in evaluating alternatives and making the inevitable trade-offs between inevitably imperfect alternatives.