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Kellogg School Corner | It pays to curry favour

Kellogg School Corner | It pays to curry favour
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First Published: Sun, Jun 22 2008. 11 47 PM IST

Illustration: Malay Karmakar
Illustration: Malay Karmakar
Updated: Sun, Jun 22 2008. 11 47 PM IST
Diversity of opinion, frank feedback, aggressive management and oversight that creates shareholder value. Ideal qualities for a board of directors, right?
Not so fast, according to research co-authored by Ithai Stern, assistant professor, Kellogg School of Management, and professor James D. Westphal of the University of Michigan.
Illustration: Malay Karmakar
A lot of lip service is paid to these ideals in the business world, but when it comes to board governance, too often the real dynamics reward conformity rather than competence, says Stern, a management and organizations expert.
He says their findings show that the most sought-after US corporate board members are those who curry favour with fellow directors, not those who are active in standing up for shareholders or taking the strongest positions with respect to oversight.
“In fact, our findings indicate that directors who engage in monitoring and control behaviour are effectively punished in the director labour market,” says Stern, who, along with Westphal, has produced the article, Flattery will get you everywhere (especially if you are a male Caucasian). It appeared in the April 2007 edition of the Academy of Management Journal.
The article’s subtitle indicates the key variables that the authors say often determine corporate fortunes: “How ingratiation, boardroom behaviour and demographic minority status affect the likelihood of gaining additional board appointments at US companies.”
Those who were most likely to enjoy additional board appointments, the study found, were people willing to flatter and perform favours for their fellow board members. At the same time, the authors write, “avoiding involvement in decision control” was another key factor in whether a person would be more likely to gain other governance roles.
Stern says the results of this research also indicate that board members who are women or members of ethnic minorities are actually punished more for any given level of monitoring and control behaviour—precisely the kinds of actions a diligent director might be expected to take in overseeing a company.
These data are telling, says Stern, and reveal what may be an even deeper-rooted problem associated with the professional advancement of non-Caucasian leaders.
“While we hear a lot about the low representation of women and ethnic minorities on boards, our results suggest that discrimination continues even after they get there,” he says. Interestingly, Stern adds, the most efficient means of gaining board appointments is to engage in a “high level of ingratiation towards fellow directors who control access to board positions, while avoiding involvement in decision control.”
In other words, to get ahead and stand the best chance of extending your board memberships, keep a lower profile, don’t make waves, and keep smiling. Being a male Caucasian also significantly boosts one’s chances for governance success, according to Stern and Westphal.
The study, which tested hypotheses with original survey data from 760 outside directors at large- and medium-sized US firms, found that the keys to board success often involved strategies that seem to run counter to strong governance oversight. Among the findings were the following:
• The more that directors engaged in monitoring or controlling management, the less their chances of 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 the chance of gaining such a position by a moderate amount.
• Even more powerful, however, was the beneficial effect of ingratiation.
• Being a woman or a member of an ethnic minority substantially diminishes 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 giving advice are less effective strategies for obtaining additional board appointments for these minorities than they are for white males.
• Membership on the board of a high-performance company has little or no effect on getting a position on a fellow director’s board; another indication, suggest Stern and Westphal, “that director labour markets fall short of the meritocratic ideal articulated by...financial economists”.
By “rewarding high levels of social influence behaviour” rather than behaviour considered effective for corporate governance, director labour markets limit diversity and discourage aggressive oversight, conclude the authors.
Equally troubling, Stern and Westphal note, such effects are “exacerbated by social discrimination in the director selection process” itself, even before people have a chance to lead in the boardroom. This situation creates “perverse incentives that amplify” agency costs—such as those frictions between shareholders and management in corporate governance—rather than dampen them.
The study’s findings provide new evidence for a long-held contention: When it comes to the corporate boardroom, diversity has a long way to go.
Send your comments to kelloggscorner@livemint.com
This column is contributed by staff writers of the Kellogg School of Management, Northwestern University.
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First Published: Sun, Jun 22 2008. 11 47 PM IST