Can boards oversee big companies?

How well do boards oversee management?

What are the four main reasons that stop boards from effectively overseeing management?

It’s one of the oldest questions in management literature: how well can boards really oversee management?

“Often not well” is the increasingly popular answer.

A new paper published in the Academy of Management Annals tries to summarise the reason by analysing nearly 300 other papers. It concludes: “For most boards, there are significant barriers at the director, board and firm level that prevent them from being effective monitors.” 

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The paper, “Are Boards Designed to Fail? The Implausibility of Effective Board Monitoring”, lists the challenges that trip up boards. Among the most important:

  1. Boards don’t have enough information to monitor executives. They can’t get it, they can’t process it and they can’t share it; most businesses are just too complex.
  2. Boards are asked to monitor businesses without second-guessing the CEO. Indeed, most boards have a strong culture of trusting the CEO’s judgement.
  3. Boards suffer from the normal biases of group decision-making – nobody wants to rock the boat.
  4. Board members usually have other demanding jobs. They often hold senior management positions themselves and, if not, they may sit on several boards.

The researchers say these problems are so crucial – and appear so often – that boards simply aren’t very likely to properly monitor management.

The paper’s recommendations: stop expecting boards to be “all-encompassing monitors”, and stop automatically blaming them when businesses go wrong.

Instead, simply expect them to offer their strategic advice and business connections, to help with big decisions like mergers – and to fire the CEO when things go really wrong.

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September 2016
September 2016

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