Corporate governance decision-making model: How to nominate skilled board members, by addressing the formal and informal systems

Abstract

This research study focuses on the problems involved in nominating board members based solely on rules and regulations, which neglect the affective dynamics of board behaviour and board process. For example, choosing board candidates who are independent (not part of a company's management), a rule imposed by the Toronto Stock Exchange (TSX) guidelines, may ensure that an organisation remains listed on this lucrative exchange. However, it does not ensure that the candidates have the necessary knowledge or are well versed in the company's business activities to effectively serve on a particular board. Having independent board members does not ensure that they ask tough questions of themselves or of management or that they have an extensive network from which to draw for advice on strategic issues. These are equally important areas of board governance that cannot be ignored when choosing candidates for the board, and these questions should not be suppressed in favour of concentrating solely on formal concerns such as independence. Information about board characteristics can provide management theorists with a broader range of ‘informal’ variables that can contribute to the decision-making process. Board characteristics assist the board in operating as a team, improving the efficiency of the board. Selecting board members with the most suitable and effective characteristics for a particular board ensures that directors are spending their limited time on the company's most important challenges. This research was carried out in several stages in order to gather both qualitative and quantitative data. In this research there was a significant relationship for values and decision-making and no relationship for TSXFormal and decision-making, which is consistent with the literature, suggesting there must be a change in executives’ values to ensure changes in behaviour. A corporate governance model was developed. This model helps in ensuring that boards populated with board members who have knowledge and values (skills matrices) are more aware of the detrimental effect that groupthink can have on the decision-making process. Several executives mentioned the ability of board members ‘to apply due diligence’ to strategic decision-making. This means that directors apply their experience and expertise to better understand issues and bring these to bear upon the decision-making process. Additionally, knowledge, values and groupthink (skill matrices) may be used both when nominating new board members and as an annual evaluative tool. Businesses are continually diversifying and board members need to continuously embellish their skill set and knowledge in order to adapt. However, the finding and the development of this corporate governance model are significant as they mark the start of how board characteristics can be operationalised. What is needed is more balanced research that looks at both the formal and the informal system. In doing so, more articulate measures of board decision-making process will evolve. The business environment is ever changing and dynamic; research in these areas will convey the interrelationship between the formal and informal system. Nevertheless, this research is unique as it has investigated the formal and informal system using both primary qualitative and quantitative data analysis and therefore provides much needed information about the characteristics requisite for nominating board members.