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Flattery will get you everywhere: commentary with James Westphal

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Image: James WestphalA study finds much to question about the way directors attain special influence in the corporate world by gaining seats on multiple boards.

According to a survey of 760 directors reported in the Academy of Management Journal, that success has a lot more to do with boardroom conformity, flattery, and favours than with activities on behalf of shareholders, such as providing advice to company executives or actively monitoring or controlling their decision-making.

In fact, board members with a penchant for monitoring and control are highly unlikely to rise to prominence in the corporate-board interlock network, the new study suggests.

“The most efficient means of gaining board appointments and achieving a central position in the board interlock network is to engage in a high level of ingratiation toward fellow directors who control access to board positions (i.e., directors who serve on the nominating committee or as CEO of another firm), while avoiding involvement in decision control,” conclude the study's authors, Professors James D. Westphal of the University of Michigan and Ithai Stern of Northwestern University.

Their findings, they continue, suggest how current director-selection processes “contribute to the frequent failure of boards to adequately control management decision-making and behaviour, which in turn has been implicated in a variety of adverse organizational outcomes, including ill-conceived acquisitions and alliances, the failure to initiate timely strategic change, accounting scandals, and white-collar crimes.”

Adds Westphal: “A common argument against shareholder democracy is that shareholders lack sufficient information or expertise to choose who runs their company.” It seems ironic, then, that “board members who gain the most influence are not those most involved in company governance but those most adept at currying favour with fellow directors.”

In addition to uncovering basic flaws in director selection, the study also brings to light continuing discrimination against board members who are women or ethnic minorities. Both groups, the study finds, are rewarded significantly less than white males “for any given level of advice-giving or ingratiation, and they are punished more for any given level of monitoring and control behaviour.”

Comments Westphal: “We hear a lot about the low representation of women and ethnic minorities on boards. What our results suggest is that discrimination continues even after they get there.”

The study's findings derive from survey responses of 760 outside directors at 300 companies randomly selected from a popular index of large and mid-sized U.S. industrial and service firms. Survey questions focused on three categories of behaviour over the previous 12 months:

  • ingratiation of each of the director’s fellow board member;
  • monitoring and control of company management; and
  • provision of advice and information to management.

Questions included the following:

  • Ingratiation: “In speaking with [director], to what extent do you point out attitudes and opinions you have in common?” “How often have you complimented [director] regarding [his/her] contributions to the board?” “Have you done a personal favour for [director]?”
  • Monitoring and Control Behaviour: “How many times did you constructively criticize a strategic proposal put forth by management?” “To what extent have you exerted control over management decision-making?”
  • Provision of Advice and Information: “In board meetings, how many times have you provided input or advice on strategic issues at the request of the CEO?” “In board meetings, how many times have you provided information about the strategic actions, policies, and/or practices of other firms?”

"Being a woman or a member of an ethnic minority substantially reduces the chance of obtaining a seat on another board where a fellow director is CEO or a member of the nominating committee."

Having obtained a profile of each director's board activities and interactions with fellow directors, Westphal and Stern monitored over the course of the following two years which directors received appointments as an outside director at a particular board where a fellow director served on the nominating committee or as CEO. They controlled for a number of factors that can move directors to recommend peers for boards, such as friendship, management experience, elite social status, or high level of social interaction.

Of the 760 survey participants, 169 received at least one appointment to be director of a company where a fellow director was CEO or served on the board's nominating committee. Of 131 women participants, 20 received such an appointment, while 11 of 81 ethnic minorities were appointed. Findings included the following:

  • The more the directors engaged in monitoring or controlling management, the less their chance of a gaining a position on another board where a fellow director was CEO or on the nominating committee.
  • In contrast, providing information and advice to management increased by a moderate amount the chance of gaining such a position.
  • But considerably more pronounced was the effect of ingratiation. Westphal sums up the effect on a hypothetical director named Fred: “All it takes is a little buttering up of Fred over the course of year – a couple of compliments above the norm, an extra personal favour, one less disagreement on strategy; add them up, and the chance of a board appointment where Fred is CEO or on the nominating committee goes up more than 70 per cent. Provide advice and information seven times a year instead of twice a year, and the chance of an appointment to Fred's board goes up too, but only by about 30per cent.”
  • Being a woman or a member of an ethnic minority substantially reduces the chance of obtaining a seat on another board where a fellow director is CEO or a member of the nominating committee. And ingratiation or advice-giving are less effective means of gaining further appointments for these groups than they are for white males.
  • Membership on the board of a high-performance company has little or no effect on the likelihood of getting a position on a fellow director's board, a further demonstration, the authors suggest, “that director labour markets fall short of the meritocratic ideal articulated economists.”

September 2011.