Study Links Boardroom Team Dynamics with Profitability
Case Western Reserve University management researcher finds corporate finances reflect how well board members play as a team
Source Newsroom: Case Western Reserve University
Newswise — CLEVELAND—A board of directors can better accomplish a company's goals when the members function well as a team, according to a management researcher who studied what makes boards effective and good for the bottom line.
Solange Charas, a PhD from Case Western Reserve University’s Weatherhead School of Management, summarized her research in a recent post—The Key to a Better Board: Team Dynamics —in the Harvard Business Review Blog Network.
Charas, who has 25 years of consulting and executive management experience, surveyed 182 randomly chosen directors with an average of 12 years of board experience for companies with market values of $2 million to $78 billion.
The directors were asked to rate their interactions based on various characteristics, such as engagement, active listening, solidarity, openness and ability to have power and influence. They were also asked what their boards’ interactions would have to be like to maximize their effectiveness. Then she measured the gap between those two scores.
Charas, who runs a New York management consulting firm, found that boards with smaller gaps between the two scores tended to oversee companies that are more profitable.
"I have personally worked with over 25 board teams in this research process, and the results are consistent—improve boardroom dynamics, and overall board creativity, innovation, satisfaction and outcomes are enhanced,'' she said.
Charas said most companies mistakenly rely on the “same old approaches” to finding board directors by recruiting friends and others thought to have appropriate experience and expertise. But teamwork can suffer, especially if each board member is a high-profile, successful executive used to intense competition and possibly uncomfortable with teamwork outside of his or her own organization, she said.
"My recent research provides evidence of what directors (and academics) have intuitively known for years, but have been unable to verify: Namely, that the quality of board members’ interaction is crucial to board success," Charas said.
Her research arrived at three key findings:
Cultural intelligence (CQ) of directors, meaning their predisposition to working well in teams and relating well to others, is critical;
The quality of board-level team dynamics is highly correlated with firm profitability; and
Boards able to work effectively as a team can have a significant impact (up to eight times better) on the bottom-line than boards not as team-oriented.
Charas also has researched team dynamics among senior managers using a sample from more than 120 publicly traded companies, concluding that the quality of the team explains 20 percent of a firm’s profitability, and that a team’s effectiveness can have a 400 percent greater impact on the bottom line than any one executive.
When comparing team dynamics between boards and management teams within the same company, there is a 75 percent chance that they will be about same, she said.
“In other words, team dynamics is contagious,” she said. “Dynamic-healthy teams generate dynamic-healthy teams at levels below them in the organization, and dysfunctional teams generate dysfunctional teams,” Charas said.
Although her research focused on for-profit company boards and executives, Charas said the findings are just as valid for non-profit boards and senior management teams.
Here are some high-level management tips from Charas:
Rethink your recruiting criteria: Two rules of thumb: 1. Recruit the best-qualified candidate to your board and C-suite—which may mean recruiting a “stranger” not a “friend.” My prior research shows that recruiting “strangers” or the best qualified (not necessarily a “known quantity”) to boards/C-suites tends to generate higher levels of governance quality and team effectiveness. 2. Screen directors and executives for high levels of CQ to ensure that the director/executive has the skill and motivation to work well with the existing board/C-suite.
Determine your team’s dynamic: If it’s healthy, great! If it’s weak, there’s work to be done to best position the board/C-suite to meet its fiduciary requirement to the shareholders–that is, to have a positive bottom-line impact. Make sure you source a validated assessment tool that is administered by a third-party and is non-biased.
Get “team enabled”: If there are gaps in your team dynamics, then “facilitated enablement” or “team coaching” by a third party can do wonders. Transforming a weak dynamic team to a strong dynamic team is not investment intensive, improvements manifest quickly (within three to six months), and the financial benefits are significant (improving bottom-line performance 4 percent to 20 percent).
Her research was essential to her recent PhD dissertation and defense at the Weatherhead School of Management. Charas measured board dynamics, in part, with an assessment tool developed by Tony Lingham, an associate professor of organizational behavior at the Weatherhead School. His Team Learning and Development Inventory (TLI) shows that a two-hour team coaching session to address the gaps identified by the TLI can improve team dynamics scores by 50 percent to nearly 200 percent within months, and the improvements proved sustainable.
Editors and reporters note: The Solange Charas article in Harvard Business Review Blog Network is available at this link: