Background and Context

Boards, as the top decision-making bodies in organizations worldwide, are central to good governance and viewed as guardians of corporate success. The global financial crisis of 2007–2008, on the heels of a number of high-profile corporate scandals, served to crystallize public awareness of the role of corporate governance, and the ultimate impact on economic and social stability when things go wrong. It is no surprise then that boards are under increased scrutiny, and their ability to function effectively is of significant interest to policymakers, regulators, shareholders and the wider public.

While there is a considerable body of empirical research on boards, formal analysis of their role is surprisingly thin (Becht, Bolton, and Röell 2002) and does not provide a consistent view. Research from a range of disciplines, including management, economics, finance, and sociology, has provided contradictory findings (Zahra and Pearce 1989), and the role of the board and its directors remains the subject of much controversy in both academic and practitioner circles. A number of theoretical perspectives are proposed in the literature, including agency, stewardship, and resource dependence (Jensen and Meckling 1976; Donaldson 1990; Pfeffer 1972; Pfeffer and Salancik 1978), and these are reflected in the commonly recognized control, service, and strategy roles of the board (Zahra and Pearce 1989; Stiles and Taylor 2001).

While agency theory, with its inherent implication that the board must control a self-interested management, has dominated research to date, its assumptions are questioned (Donaldson and Davis 1991; Aguilera and Jackson 2003). Much of the extant empirical research, motivated by the agency perspective, has focused on board structure and compositional issues in an attempt to relate these to the financial performance of the organization. However, results to date are inconclusive (Dalton and Dalton 2005; Finegold, Benson, and Hecht 2007; Dalton et al. 1998; Johnson, Daily, and Ellstrand 1996). A noted limitation of board research is that much of the work has been conducted at a remove from the actual workings of the board, with the result that board process has been largely implied rather than studied directly (O'Neal and Thomas 1996). As Pettigrew points out, “great inferential leaps are made from input variables, such as board composition, to output variables, such as board performance, with no direct evidence on the processes and mechanisms which presumably link the inputs to the outputs” (Pettigrew 1992, 171). This suggests a need to move beyond composition and structure, and understand what actually happens inside the boardroom.

In doing so, there is a growing recognition that board behaviors are relevant to effective corporate governance (Roberts, McNulty, and Stiles 2005; Huse 2005; Dalton and Dalton 2005; Pye and Pettigrew 2005; Leblanc 2003; Forbes and Milliken 1999). For example, a review of UK banks in 2009 following the global financial crisis found that the principal deficiencies identified were more related to patterns of behavior than to organization, noting that the contribution of nonexecutive directors was materially helpful in institutions that weathered the storm better than others (Walker 2009). From this perspective, how boards work together as groups influences their effectiveness (Janis 1982; Eisenhardt, Kahwajy, and Bourgeois 1997), and both researchers and practitioners are looking to better understand the processes and behaviors that make boards effective (Forbes and Milliken 1999).

However, the research and literature in this area does not yet provide a coherent alternative to agency theory (van Ees, Gabrielsson, and Huse 2009), and as Zahra and Pearce note, “there are countless lists of what boards should do. Yet, evidence on what boards actually do is not well documented” (Zahra 1989). Further work in understanding board behaviors is therefore called for (Huse 2005; Pye and Pettigrew 2005; McNulty, Florackis, and Ormrod 2013), bearing in mind that context is relevant (Perrow 1986; Pye and Pettigrew 2005) and that factors inside and outside the boardroom are important (Zahra and Pearce 1989; Pugliese et al. 2009).

Learning from the Banking Crisis

In this context, a study by Halton (2014) explored the experiences of directors and other key players in the Irish and Canadian banking sectors in light of the 2007–2008 global financial crisis. The purpose of the research was to build an understanding of the behaviors needed for nonexecutive director effectiveness and to explain how these behaviors are facilitated or constrained by factors inside and outside the boardroom. Ireland and Canada are two of six OECD liberal market economies (Hall and Soskice 2001), they have similar common-law traditions, and each operates a principles-based regulatory regime for banks. But in Ireland the banking crisis was profound and systemic, while in Canada, although the effects of the global crisis were deeply felt, the banking system itself was not destabilized. Notwithstanding that the banks in these countries had very different exposures at the time of the crisis (Ratnovski and Huang, 2009), the contrasting experiences nonetheless provide an opportunity to explore differences and similarities in the behaviors of bank board members, and to consider the external as well as internal determinants of their behaviors and the implications for the corporate governance of banks.

A combination of board and group behavioral theories motivate the underlying proposition that behaviors matter for nonexecutive director effectiveness. Following a qualitative strategy and using an emergent design, data were gathered primarily through a set of forty semi-structured interviews with participants who, among them, have a variety of experience in the banking sectors in Ireland and Canada, including roles as chair, nonexecutive director, executive, regulator, government official, board advisor, and auditor. Thirty-eight of the interviews were conducted in person, fourteen were Canadian based, and seven were with women. Interviews examined the nonexecutive director role, and explored the complexities of the behaviors associated with it.

Building on the existing literature, findings indicate that challenge and contribution, underpinned by independent judgment and preparation, can positively influence organizational outcomes. Importantly, the absence of these key behaviors is associated with negative outcomes at times for banks in both countries. Results of the study provide a framework for understanding how director behaviors are shaped by a complex array of interrelated factors arising from directors themselves, the workings of the board, and the external environment in which they operate. While the study focused on the banking sector, contributors have significant experience in other sectors, and many of the findings are relevant elsewhere.

Drawing on a subset of the research study, this chapter delves into the boardroom to examine the important influences at play, in particular highlighting a number of warning signs that can indicate underlying problems with board effectiveness. These are manifest in a variety of areas, from the basics of agenda management to the complexities of boardroom dynamics and information flow. At the root of all are the chair and CEO, and the balance of the relationship between them.

Leadership in the Boardroom

Following best practice guidelines, organizations in many countries segregate the functions of the board chair from those of the CEO. In the circumstances, the role of the nonexecutive chair is imbued with significant responsibilities, the working hypothesis being that a strong independent chair can help to balance the power of the CEO and provide the conditions necessary for constructive debate and good decision-making. The experiences of bank directors in Ireland and Canada provide support for this perspective, with expressions such as “absolutely key” used to describe the importance of the chairman's role. An Irish director explained:

“The chairman is absolutely central. The chairman is charged with managing the board. So, the composition of the board, the size of it, how to balance it, how to conduct the meeting, the way presentations are made, how discussions are conducted, taking papers as read to allow ample time for debate, when to leave a discussion run, and when to draw a conclusion. When to recognize that a decision point has been reached…And you know, the chair sets all sorts of tones around ethics and integrity. The chairman has to balance all these things with being persistent about things that need to be persisted with” (former nonexecutive director, Irish pillar bank).

The authority of the chairman is considered almost sacrosanct, and nonexecutive directors will go to significant lengths to avoid undermining it. As another Irish director remarked, “I wouldn't undermine the chairman unless there was a breakdown in the relationship, and then you're at war.”

The chairman's choice of when to speak and the position he or she takes are important because nonexecutive directors find it difficult to go against his or her lead, in much the same way as executives will not conflict with their CEO in the open forum of the board. A warning flag pops up when the chairman either falls unquestioningly in line with management's views, or expresses very strong opinions of his or her own, as this director explained:

“[If] the chairman gives his view and then asks other members of the board what they think, you know, which does constrain your degree of freedom to some extent or certainly calls upon huge levels of tact if you intend to disagree.…Having a dominant chairman really does impact the way [you behave]” (nonexecutive director, insurance sector).

The impact of a dominant chairman can be significant, and evidence suggests that the chairmen in some Irish banks may have played a relatively significant role in the flawed strategies chosen. For example, the former CEO of Anglo Irish Bank went on to become chairman, providing continued opportunity to influence proceedings. Anglo's aggressive lending practices paved the way for its ultimate collapse, notwithstanding a multibillion euro bailout funded by the Irish taxpayers. Of interest is that other banks decided to follow the Anglo lead and, in at least one of the major banks, the chairman may have played a material role in this decision, as these comments indicate:

“The conventional wisdom is that the chair in [major Irish bank] had a very significant role in making the case that that bank needed to follow Anglo in terms of trying to replicate what was perceived then as its success” (senior governmental official).

This herd mentality, compounded by groupthink within the boards themselves, is implicated in the overall destabilization of the Irish banking sector (Nyberg 2011).

The skill of the chair in taking a balanced approach is therefore important, and many contributors drew attention to the role of the chair in setting the tone and ensuring that all directors have the opportunity to speak up, and importantly, that they actually do so. A Canadian chair, for example, noted, “There was a time when the rule for a new director was that they shouldn't say anything for a year. That's a long time ago.” In contrast, an Irish director explained that he was discouraged from speaking because he was new to the board:

“Myself and the person who joined at the same time, we were treated very much as [novice] directors, as new and inexperienced, and we were explicitly addressed, ‘Do the new directors have anything to say here? I don't expect you to have anything worthwhile to say yet, but if you have something to say, you may feel that you want to say it.’ Making it perfectly obvious ‘don't bother’” (former nonexecutive director, Irish pillar bank).

As this director points out, he did not conform to these expectations and the situation changed quickly, but nonetheless, this is the framework into which he arrived at the height of the Celtic Tiger, a boom period that preceded a significant property crash and subsequent recession in Ireland. Nonetheless, many chairmen do encourage open and constructive input, and when nonexecutive directors make a contribution, management's reaction can provide another indication of the health of the board.

The CEO's attitude to the board is of critical importance to a productive boardroom process. For example, a Canadian chairman believes that this is the “biggest single determinant of board effectiveness,” and warns that when the CEO places little value on nonexecutive input, “the better directors will leave and you get left with the timeservers.” The comments of an Irish director underscore the importance of the CEO's approach:

“In my experience, the CEO's openness to his board and willingness to be engaged by his board and be challenged by his board is more, is a vital component, over and above the skill of the chair” (former nonexecutive director, Irish pillar bank).

Experiences in Ireland and Canada provide interesting lessons in this regard. A Canadian director indicated, for example, that the relationships between bank CEOs and their boards have become healthier, with attitudes moving from “get out of my way” to “there's a responsibility I have to the board.” Notwithstanding this, comments indicate that, in general, management in the banking sector may be more insular than in other industries. Another Canadian director finds that board meetings are more focused on delivery, noting that executives “don't spend a whole lot of time asking [questions].” Another director echoed this, remarking that “management doesn't leverage the board knowledge as much as in other companies” (Halton, 2013, 436). This director questioned for instance the lack of openness to board involvement when the financial crisis broke:

“[There was a] lack of special meetings during the meltdown. Every other company I was on we were having special meetings even though we weren't banks…so that's not in their nature, I guess they felt they were well controlled…So that was I thought a weakness from the board's point” (nonexecutive director, Canadian big 5 bank).

In Ireland prior to the crisis, management insularity appears to have been more pronounced. The comments of a corporate secretary about attitudes during the Celtic Tiger era provide insight:

“[the executives] used to see in the past the nonexecutive involvement as something of a nuisance, something that had to be done, rather than them engaging fully with nonexecutives as colleagues on a board” (corporate secretary, Irish pillar bank).

Comments from a number of contributors in Ireland provide evidence of the prevalence of this issue, their experiences indicating a significant lack of regard among some executives for the nonexecutive role. For example, one director noted that “by and large, executives regard the board as a bloody pain.” As a senior Irish regulator remarked, “there's clearly a culture of having nothing to learn from anybody going on in some of the bank boards here.”

In problematic cases, management insularity can manifest in a culture of defensiveness and resistance to input from nonexecutive colleagues. A key warning sign is when management justifies this on the basis that a particular issue is outside the scope of the nonexecutive director role. This approach plays on the ambiguities inherent in the role, and the effect is often to stymie challenge and contribution. The experiences of a former director of an Irish pillar bank provide useful insight into how this dynamic can operate in the boardroom:

“Over the first number of months, six months, twelve months, I began to be struck by what I felt was a remarkable culture in [Irish pillar bank], reinforced by management and further reinforced at board level, of a phrase that I had never heard before. And that phrase was, ‘That's an issue for management.’ There was no board meeting that I didn't hear that, five, six, seven, eight times…And over time I formed the certain view that that phrase was a way of not engaging with the board, of keeping the board out of the details of the business, and that's what it was going for. I guess the individuals who used the phrase didn't really intend it like that, but that's what it was…Their intent was to avoid engagement and detail which they perceived the board couldn't add value to.

“Now, as things developed, the culture encapsulated by the phrase ‘That's an issue for management’ continued. It was broadly supported by the two chairmen of the bank under which I served, neither of who had any significant financial services or banking experience” (former nonexecutive director, Irish pillar bank).

These comments provide a reminder of the powerful influence on behaviors when the chairman acts in concert with or simply defers to the CEO, in this case serving to constrain nonexecutive involvement in issues. The comments also highlight the subtlety with which power is claimed in the boardroom. By suggesting that various matters are issues for management, executives make it difficult for nonexecutive directors to dig in without being perceived as overstepping the mark and undermining management authority, behaviors prohibited by the unwritten rules of the board.

Board Norms

Boardroom norms, the unwritten rules about how directors should behave, provide another piece of the puzzle as to why some boards work well while others do not. In particular, two interrelated norms are of significant importance. Labeled here as supportiveness and collegiality, the intent behind these norms is to promote input that is constructive and presented in a way that fosters productive working relations between the board and management (Halton 2013).

Supportiveness conditions nonexecutive director behaviors by requiring that they fulfill their agency role in a way that supports rather than threatens management's authority. The relationship between these players is unequal because nonexecutives interact only episodically with the business and yet must scrutinize, to use the terminology of the UK Corporate Governance Code (FRC 2014), the work of the executives who actually run the business. This imbalance has the potential to heighten sensitivities, particularly around challenge in the boardroom. Conscious of this, effective nonexecutive directors are careful to avoid being seen to take charge or undermine management's authority, and as a former Irish bank chairman observed, “It's a question of trying to influence rather than actually trying to dictate.” Underscoring the importance of this, a Canadian chairman noted that “if it isn't their idea, it will never happen.” With good intent therefore, the aim is for nonexecutive directors to provide guidance while allowing management to retain charge of the operations.

Further conditioning behaviors, the requirement for collegiality springs from the need for collective decision making by the board. To achieve this, directors endeavor to work on a consensus basis that can significantly shape their input, and challenge in particular. The decision to persist with an unsupported challenge poses a dilemma for directors because they can find themselves isolated, and therefore restricted in the influence they wield around the table. Ultimately, the expectation of collegiality suggests that where a nonexecutive director's vote differs from that of colleagues, he or she will withdraw the vote in order to achieve a consensus. This can result in a director discontinuing a challenge if the sentiment around the table is not conducive, even when he or she believes the issue to be important. For example, a former Irish director ceded his objection in a key decision made at the brink of the crisis in Ireland:

“The reason I tell you this story about board behavior is that because I was in a minority of one, I then said ‘Look, this sort of stuff, I think unanimity is important and helpful. So I will now withdraw my position in order to leave the conclusion as unanimous’…It's got us all sorts of brickbats subsequently, but I wasn't going to carry the day in any event, that was already clear” (former nonexecutive director, Irish pillar bank).

In a boardroom where the dynamic is one of healthy, open debate these norms serve proceedings well. However, warning lights flash when the dynamic is closed and defensive, because the norms of supportiveness and collegiality can become distorted, thereby discouraging constructive challenge and contribution. In these circumstances, supportiveness can tip into being overly agreeable, setting a tone that is focused on personal feelings at the expense of effective task-oriented debate (Halton 2013). Challenge is then often couched in nuanced language that can mask its real significance, leaving it unsupported by others and therefore unsuccessful. Likewise, an overemphasis on a collegial approach may make a challenge appear to be offside, failing to show team spirit. Challenge that does not comply with prevailing norms is commonly described as dysfunctional or destructive, and as a Canadian corporate secretary remarked, “It is a fine line between being disruptive and being constructive” (Halton 2013, 432). Integral to successfully treading this high wire is the level of trust around the table, another key driver of board behaviors.

For most nonexecutive directors, trust is a critical element of a constructive relationship with management because the part-time, cognitive nature of the role means that they are “100 percent getting things done through other people,” as one contributor observed. Unsurprisingly then, an imbalance in the trust around the table has a fundamental impact on the operation of the board. When it is compromised, nonexecutive directors become more intrusive and challenging in an attempt to find assurance. Left unchecked, this can develop into a destructive cycle of push and pull between management and the board, significantly impairing effectiveness. A significant loss of trust can signal the end of the relationship because nonexecutive directors are no longer sure that they have the information or influence to discharge their role. As a former Irish director noted, “Once you've lost trust in management, either you go or they go.”

Equally, directors can be too trusting of management, with the result that behaviors such as challenge and independent judgment are constrained. One Irish board advisor noted that the more nonexecutives trust management “potentially the less impactful they can be because they take it as read, or they tend to work in concert or by agreement with the executives, particularly the most senior executives.” This overly trusting approach is implicated in poor outcomes for some banks in the crisis, as the experiences of a director and secretary of a major Irish bank illustrate:

“So, where did we go wrong? The quality of the risk department is certainly one. The other is that I, and all of the other directors, placed too much trust in [the CEO] and I guess [the finance director] principally…I think it all does very much stem from us all putting too much faith in the individuals. One or two individuals, particularly. And you know, we were wrong” (former nonexecutive director, Irish pillar bank).

“I think the nonexecutives probably put too much dependence on the executive directors in the past. And they would have assumed that the executive directors were in touch with and on top of everything that was going on in the organization. As it has come to pass, that necessarily wasn't the case” (corporate secretary, Irish pillar bank).

Fundamental to building trust, and conditioned by executive openness, is the quality and flow of information.

Information Flow

Without an adequate understanding of the business, a director's ability to prepare well and apply independent judgment is constrained, leaving him or her unwilling or unable to challenge or contribute (Halton, 2014). Having timely access to the appropriate information is therefore fundamentally important to effectiveness, but nonexecutive directors face a number of difficulties in this regard. First, they commonly find themselves battling with large volumes of information and unwieldy board packs. In complex businesses such as banks, for example, the onerous regulatory and legal requirements mean that dealing with information flow is like “drinking from a fire hose,” as a Canadian contributor remarked. These comments of an Irish director illuminate the problem:

“One of the directors recently weighed how much paperwork he'd got in the last I think was just six months and he'd got 55 kg, it's just huge…and so it's trying to absorb that…and making sure that you fully comprehend and remember” (nonexecutive director, Irish pillar bank).

Managing the volume of information is particularly difficult in the context of the part-time nature of the nonexecutive role, and as a Canadian bank director remarked, “It's really hard, not only to absorb material, but to retain the material because you're not working with it on a day-to-day basis.”

A second issue therefore is a significant and growing asymmetry of information between nonexecutives and executives, making nonexecutive directors acutely reliant on their executive colleagues for the information they need to be effective. A Canadian director explained it this way:

“The information chasm is deepening, the world is getting more and more complex. You've got management over there on that side of the Grand Canyon, 3,000 hours, a lifetime of experience in the business surrounded by similar colleagues and working in it every second of every day. Over here, the board, maybe 200 hours a year, they're all drop-ins, life is full with many other things, they're otherwise engaged and they don't even speak the same language” (nonexecutive director, Canadian big 5 bank).

Here again the CEO has a particular role to play because, as one Canadian director remarked, “The CEO controls information.” Tellingly, some Irish directors noted a lack of openness around information in the years prior to the crisis, as these comments illustrate:

“There was a presumption that the executives were being candid with you, and in most cases that was a reasonable presumption. But, there were some people who were, that wasn't their nature, you know” (former nonexecutive director, Irish pillar bank).

“Some of them [the executives] are resentful and remain resentful and are parsimonious with the information they would share on their particular project” (former chairman, Irish pillar bank).

At times however, the problem is that executives themselves do not have the information needed. Again, this is an issue noted in some Irish banks in the run up to the crisis, and a former director remarked that “If there was a serious, serious issue it was that [the executive] just didn't know what was happening.” Supporting this, another former director believes that the CEO and finance director were not hearing the bad news from their teams at the time of the crisis:

“I believe both of them still to be honorable people so I am left with the conclusion that they were being misinformed or not adequately informed. I think this is probably, you know, good news travels a lot faster than bad, so I don't think the bad news was reaching them” (former nonexecutive director, Irish pillar bank).

Similar concerns were expressed by a Canadian director about significant losses by some banks in the ABCP (Asset-Backed Commercial Paper) debacle that shook Canadian markets in 2007.

“So there were a couple of banks who got quite caught up in the Asset-Backed Commercial Paper problem and other like situations, which caused write-offs and, you know, in some cases in the hundreds of millions of dollars…Their guys were doing all this stuff, but the CEO didn't have a clue, you know, what was happening…the transgressions that led to the excessive risk taking were not by and large at the level of the executive management, they were in the wholesale operations, people who would never, never came under the label of ‘executive’” (nonexecutive director, Canadian big 5 bank).

Part of the problem can be IT systems, particularly in complex businesses such as banks, where there are numerous legacy systems that do not interface readily. This makes it difficult to gather full information, even in core areas, as a Canadian director explained:

“The biggest problem we have is counterparty risk at the all-bank level, to know your gross and net exposures against any given counterparty if you have got systems stitched together in different countries” (nonexecutive director, Canadian big 5 bank).

In Ireland, problems with information appear to have been acute at the time of the crisis, making it difficult or even impossible for many directors to assess exposures vis-à-vis the risk appetites they had agreed. As a former director of a major bank noted, “It wouldn't have been transparent to us, which would have been a weakness in the information, that the actual lending into the property sector was much greater than we were ever aware of.”

Compounding these issues, directors in both countries observed that information is often poorly presented, making it difficult for them to prepare effectively in the short window available. While this seems like a relatively trivial issue, the volume of information and the complexity of the content can mean that key information remains buried in the detail, and therefore missed in the board's decision making. This heightens the need to present data in a succinct and accessible format that draws board attention to important information. As a former Irish director remarked, “I don't want 25 pages, I just want the half dozen points that are going to make the difference…and [pillar bank] to this day, is not good at that.” Underscoring the prevalence of this issue, a senior Canadian regulator noted having seen many board presentations that were not designed with the ultimate users in mind, saying, “I don't know how they expect board members to understand.” And if members don't understand, it is difficult for them to be effective.

Board Structure and Process

At a practical level, nonexecutive directors must have the opportunity to challenge and contribute in strategically important areas if they are to influence outcomes in any material sense. This means that the processes in place to facilitate debate and decision making, together with the structure and size of the meeting, are of fundamental importance.

Discussion and Summary

There is a growing recognition that director behaviors are relevant to board effectiveness and that, alongside structure and composition, the way the board actually works is important (Halton 2014; Roberts, McNulty, and Stiles 2005; Leblanc 2003; Forbes and Milliken 1999). As outlined above, the commonalities and differences in the experiences of bank directors and others in Ireland and Canada highlight a number of factors in and around the boardroom that influence director behaviors and, when not working well, signal a threat to board effectiveness.

A central starting point is the skill of the chair in leading the board (O'Higgins 2009; Roberts, McNulty, and Stiles 2005). The chair sets the tone and ensures that voices are heard, and his or her choice of when to speak and what position to take can significantly influence others. A balanced approach, neither dominant nor passive, is essential if the value of the board is to be realized. As a Canadian director observed, “If you can get a chair who is a bit like the orchestra leader and is not playing a particular note, that's probably not a bad place to be.” The chair's success however, is significantly dependent on the CEO and the balance of the relationship between them. Separately and together, they shape director behaviors through their leadership in a number of key areas (Halton 2014; Daily, Dalton, and Canella 2003; Shen 2003; Pettigrew and McNulty 1995).

A fundamental issue under their control is the quality and flow of information around the board table, because when directors do not have the knowledge or understanding they need, their ability to prepare well and apply independent judgment is constrained, often leaving them unwilling or unable to challenge or contribute. Gaps in information, for example, were noted by the directors of major Irish banks and associated with poor outcomes for some banks in a crisis that nearly crippled the banking system. While the chair may be held formally responsible for ensuring that the board is informed, the CEO ultimately controls the information flow, and his or her lead determines the level of openness of the executives. As a Canadian chairman remarked, “At a bank or anywhere else, you'll never know anything the management doesn't want you to know.” This acute imbalance means that needs must be proactively managed, by the chair and the CEO, in order to ensure that adequate information is provided on a timely basis and in a user-friendly format.

Building on the level of openness, the degree of trust and candor around the board table drives the dynamic and shapes the board norms, the unwritten rules of behavior (Feldman 1984; Alderfer 1986; Pettigrew and McNulty 1995; Stiles 2001). In practice, these norms regulate nonexecutive input by requiring that it facilitate collective decision making, and is constructive and presented in a way that does not undermine or threaten management's authority (Halton 2013, 2014; Roberts, McNulty, and Stiles 2005). When the board dynamic is not healthy, operating norms become distorted, isolating directors who fail to comply and thereby limiting their ability to influence the situation (Jensen 1993; Lorsch and MacIver 1989; Alderfer 1986). It is not always clear however, when norms have become distorted, or to what degree. Board behaviors are nuanced, and power is claimed in subtle ways, often playing on a degree of ambiguity around the scope of the nonexecutive role. This suggests a need for careful review of the operation of these norms to ensure that they do in fact support the best interests of the organization. A commonly cited view, for example, is that challenge must not be disruptive, which makes prima facie sense in light of the board's need to act collectively. However, disruptive thinking is widely accepted as a legitimate approach to business innovation and change, and thus a valuable antidote to groupthink and herd mentality—problems associated with the banking crisis in Ireland (Nyberg 2011).

This suggests that disruptive challenge, when warranted, has a place in the boardroom (Halton 2013). Critically, the challenge must be task-oriented and aligned with the director's duty of care, and the nature and level of the challenge must remain constructive and proportionate to the issue at hand. The experiences of Irish directors in the banking crisis provide support for this argument. Once the impending damage of existing strategies became apparent, the behaviors of many directors changed and challenge became much more intrusive and persistent. For example, a corporate secretary of a major Irish bank remarked on the significant change in the boardroom dynamic, noting that: “There was far more regular challenge and very direct and open debate about a lot of topics.” Arguably, the asset-backed commercial paper (ABCP) debacle in Canada had a similar effect on behaviors, and thereby prepared banks better for the global financial crisis, as comments of the chair of the Global Risk Institute for Financial Services suggest:

“It is probable that the Canadian financial system was better prepared for the crisis because it had been through the ABCP mini-crisis the year before. So people's antennae were up” (Cantor 2014).

The practical arrangements in place for the board and its meetings also have an important role in director effectiveness. Experiences suggest that the size of the meeting matters, and on bigger boards, productive discussion is impaired (Pozen 2010). Equally, the balance between executive and nonexecutive directors is important. In sectors such as banking, where opacity and information asymmetry can be acute issues, having a strong executive representation on the board can be of significant value when the board is working as it should. However, when dysfunction occurs—for example where the dynamic is not open—nonexecutive directors can find themselves hamstrung by inadequate information and distorted norms, with the result that they cannot successfully influence decision making to any real degree.

Reliable mechanisms to facilitate collective nonexecutive input are therefore essential. Findings suggest that informal nonexecutive interactions often fail to bear fruit in the formality of the boardroom. In contrast, formal in-camera sessions without management present provide an effective tool through which to test ideas and build support among colleagues. As Lorsch and McIver note, “When the 8 or 10 outside directors on a board agree on an issue, it is difficult for any but the most intransigent CEO to resist” (1989, 95). Finally, getting the basics right around agenda planning and management is integral to a productive board environment. In particular, it is essential to have clarity of purpose in relation to each item on the agenda, eliminate unnecessary presentations, provide adequate time for substantive debate, and resist the temptation to be drawn into interesting issues that are not of strategic importance.

Conclusion

As discussed above, constructive challenge and contribution, underpinned by independent judgment and adequate preparation, are important to director effectiveness and to ensure that the board adds value in its corporate governance role. But these behaviors are dependent on a complex array of interrelated factors that can facilitate or constrain them. This chapter looks inside the boardroom to examine the influences at work there, in particular through the chair and CEO, and the relationship between them. When working well together, these key players can promote the openness and trust needed for a healthy board dynamic, and develop a culture of informed debate essential to good decision making and board effectiveness. When there is an imbalance in this relationship, board norms become distorted and nonexecutive input is stymied.

However, board behaviors do not begin and end in the boardroom, and the study from which the above findings are taken shows that many other factors are at play. While this chapter illustrates some elements of the landscape, further explanation is needed to develop the full picture. What is clear, is that a joined-up approach is needed between policymakers, regulators, shareholders, and boards in order to create conditions that promote the right behaviors and enhance board effectiveness.